Scope 2 Corporate Accounting, Enron and Arthur Andersen – A Cautionary Tale

January 25, 2015, by Don Bain

Renewable Energy Certificates, RECs, in the voluntary green power market are not additional. They do not result in emissions reductions, as reported in rigorous, peer-reviewed research.1

Using voluntary green power RECs to produce a so-called market-based emissions factor and calculate Scope 2 emissions as written in the new WRI/WBCSD GHG Protocol Scope 2 Guidance is a misrepresentation of corporate greenhouse gas (GHG) emissions performance.

So what are we, GHG professionals working for corporate clients, to do?

This is where the cautionary tale of Enron and Arthur Andersen comes in. For those of you who are not familiar, Enron was a publicly-traded company who developed, traded and sold natural gas, electric power and other things. Enron declared bankruptcy in 2001 after accounting fraud was revealed.2 Arthur Andersen, the public accounting firm responsible for auditing Enron’s books, dissolved in 2002 because of the damage the Enron scandal caused to its professional reputation.

At the center of the Enron accounting problems were a series of transactions known as off balance sheet transactions. Off balance sheet transactions are business transactions whose consequences are not reflected in the company’s statement of assets and liabilities, or balance sheet.

Calculations of Scope 2 emissions using location-based or grid-average emissions factors are designed to be consistent with nature’s non-negotiable (due to her laws) balance sheet. Scope 2 emissions calculated using market-based emissions factors are off balance sheet transactions.

Off balance sheet transactions are permitted under U.S. GAAP and international accounting standards, as Scope 2 emissions calculated using market-based emissions factors are permitted under the new Scope 2 guidance. The rank and file accounting professionals3 inside Enron and Arthur Andersen were plying their trade according to standards to the end.

Off balance sheet transactions are not inherently bad. It is only when they are used to misrepresent performance to stakeholders do they become a liability, or in the case of indicted Enron executives using them to hide liabilities from shareholders, a crime. Arthur Andersen’s demise was a failed reputation and the perceived failure to discover and disclose the Enron misrepresentations.

The analog in GHG accounting is the potential use of Scope 2 emissions calculated with market-based emissions factors to misrepresent the emissions performance of a company. Unlike the rank and file accounting professionals in Enron and Arthur Andersen who were dutifully accounting for off balance sheet transactions according to the standards and who did not know of the misrepresentation, we can anticipate how Scope 2 emissions calculated from market-based emissions factors will be used.

Enron was considered a darling of Wall Street and an innovator in business practices, until news of the scandal broke and the public (and the rank and file accounting professionals) found out what was going on. The company and accounting firm were quickly destroyed and many people were hurt.

Think carefully about the reputation risk to your clients and your firm when Scope 2 emissions calculated with market-based emissions factors are used to misrepresent corporate emissions performance. If our counterparts at Enron and Arthur Andersen had full knowledge of the off balance sheet transactions at Enron, I bet they would have intervened and the companies would be around today.


1 Gillenwater, M., X. Lu, M. Fischlein, 2014. “Additionality of wind energy investments in the U.S. voluntary green power market,” Renewable Energy, Volume 63, Pages 452–457.; and

Gillenwater, M., 2013. “Probabilistic decision model of wind power investment and influence of green power market,” Energy Policy, Volume 63, Pages 1111-1125.

2 The Enron scandal contributed to the passage of the Sarbanes-Oxley Act of 2002, also known as the “Corporate and Auditing Accountability and Responsibility Act.”

3 A few executives were indicted on charges of wrongdoing. There was no evidence presented suggesting the hundreds of accounting professionals, the “rank and file,” knew of the problems.

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