Enron was, by 2000, the seventh-largest company in the United States by revenue, and had been named America's Most Innovative Company by Fortune for six consecutive years.
The accounting technique at the center of it was mark-to-market, adopted for its energy trading business with SEC approval in 1992 and then applied far beyond it.
Under mark-to-market, an asset is valued at its current market price rather than its historical cost. For a traded commodity this is reasonable. For a twenty-year contract in a market that does not exist, it means the company estimates the future value of the contract and books the estimated profit immediately.
The Blockbuster deal is the clearest illustration. In 2000 Enron signed a twenty-year agreement with Blockbuster to deliver video on demand over Enron's broadband network. The technology did not work, the pilot failed, and the deal was dissolved within months. Enron had already recognized more than a hundred million dollars in profit from it.
Losses, meanwhile, were moved off the balance sheet into special purpose entities — the partnerships run by Andrew Fastow, with names taken from Star Wars — which were capitalized in part with Enron's own stock, meaning the hedges collapsed if the share price fell.
Three mechanisms kept this in place for years.
Complexity as protection. When a structure exceeds an evaluator's cognitive budget, the evaluator does not conclude that it is suspicious. They substitute a proxy: the auditor signed it, the analysts cover it, the credit rating is investment grade. Nobody reconstructs the cash flows, and the cash flows were the tell — Enron reported large profits and never generated the corresponding cash.
Anchoring on headline figures. Reported earnings became the number everyone worked from, and the number was an estimate of the future.
And social proof. The share price rose, and a rising price is evidence in itself, which makes skepticism costly. Analysts who questioned the company risked losing access and looking foolish.
The unravelling began with a question. Bethany McLean's Fortune article in March 2001 was titled Is Enron Overpriced?, and its content was not an accusation but an observation: that nobody could explain how the company actually made money.
That question — asked plainly, in print, by someone willing to look ignorant — is what the next chapter is about.
Cross-ref: Defense — Follow the Cash, Not the Narrative