Question by amcenicola: How did Enron use SPE’s to hide large amounts of debt?

Best answer:

Answer by werner.herzog
A special purpose entity is a company that is created by a parent company, usually to carry out a specific, limited purpose, such as the securitization of a set of assets. An SPE may be set up as a corporation, partnership, LLC, or trust. Enron created lots and lots of SPEs. As long as Enron technically controlled no more than 50% of an SPE, Enron was not required by accounting rules to consolidate the SPE’s assets and liabilities, so any debts belonged to the SPE and did not show up on Enron’s books. The simplest way Enron hid debt in the SPEs was by selling assets to the SPEs, which had borrowed money in order to purchase the assets. The problem was that Enron was liable to repay the loans taken out by the SPEs. So, basically, Enron was making a sale to itself, showing a profit on its books, and hiding the corresponding loss in the SPE. These false profits (sorry) covered up Enron’s actual business losses.

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