Enron's Dirty Little Secret: Waiting for the Other Shoe to Drop

Abstract

How is it that Enron, allegedly the seventh-largest company in the U.S., didn't pay any income tax for four out of the last five years? In this short commentary piece, I argue that the tax Code got it right and the accountants got it wrong. Using the MIPS transaction (a debt/equity hybrid) and an off-balance sheet partnership as examples, I argue that in Enron's case, the tax Code did a better job of measuring income than the accountants. The reason Enron didn't pay any income tax is because it didn't have any real income. On a more cautionary note, however, the article suggests that the tax bar must move quickly towards effective self-regulation if it wants to avoid the current problems facing the accounting industry.

JEL Classification: k2, k4, m4