The Nature of the Enron Scandal: Special Purpose Entities (SPE)
A Special Purpose Entity, or “SPE/SPV”, is also referred to as a “bankruptcy-remote entity” whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt. These subsidiary corporations are designed to serve as counterparty for swaps and other credit sensitive derivative instruments and can also be called a “derivatives product company”.
Enron used SPE’s to hide troubled assets, which had materially dropped in value, thus removing the debt or loss from its books. In exchange for transferring assets to the SPE, Enron was entitled to a part of the company. Thereby, Enron would use the SPE to borrow money without incurring any liability on its books, but at the same time report the borrowings as earnings.