Enron

Through the late 1990s, Enron was one of the most admired companies in America — Fortune named it America's most innovative company six years running. On paper, it had transformed from a regional pipeline operator into a sprawling energy-trading giant, reporting consistent, ever-growing profits that impressed Wall Street year after year.

Much of that reported profit didn't reflect cash actually coming in the door. Enron used aggressive accounting techniques, including mark-to-market accounting on long-term energy contracts, to book projected future profits immediately, and moved enormous amounts of debt off its own balance sheet into a web of off-books partnerships and special-purpose entities, many run by Enron's own executives. To the market, the company looked lean and consistently profitable. In reality, it was carrying billions in hidden liabilities.

The structure held together as long as Enron's stock price kept rising, because much of the off-balance-sheet financing was collateralized by Enron stock itself. When doubts began to surface in 2001 and the stock started falling, the entire structure that had been hiding the debt began unwinding at once — each piece of bad news making the next disclosure worse. The company filed for bankruptcy in December 2001, at the time the largest bankruptcy in US history. Thousands of employees lost their jobs and much of their retirement savings, which had been heavily invested in Enron stock. Arthur Andersen, one of the largest accounting firms in the world, collapsed alongside it for its role auditing the books.

Enron's failure wasn't a single bad decision. It was a financial structure built specifically to make the underlying numbers illegible to the people who were supposed to be checking them — and it worked, until growth could no longer outrun what it was hiding.