Amanda Iacone (Bloomberg Law): Big Tech AI Spree Revives Accounting Devices That Toppled Enron
Enron Corp. exploited US accounting rules to hide from investors and lenders hundreds of millions in debt it had bundled into off-balance sheet entities — obligations that contributed to one of the biggest corporate collapses in US history.
Twenty-five years later, new risks have emerged as some of the world’s most valuable companies create similar financing vehicles that can mask how much debt they’re taking on, as the technology industry looks to spend more than $3 trillion to power artificial intelligence systems.
Tech companies are leaning on these arrangements to package debt tied to billions in assets with an uncertain return — including chips, servers, and energy equipment — while spreading those risks among developers, vendors, and lenders. Substantial infrastructure costs tied up in the financing structures aren’t flowing through the parent company’s financial statements, offering unaware investors a rosier view of performance and leverage.
“The accounting treatment itself is in fashion. But what if one of these companies was a house of cards and was propping itself up with this accounting treatment?” said Tom Selling, technical accounting consultant. “To me, that’s the risk.”
Alphabet Inc. and Meta Platforms Inc. each have turned to vehicles known as variable interest entities (VIEs) as part of the financing mix needed to construct data centers and related energy infrastructure.
The nature of the financing deals give tech companies the option to walk away, for a price, if they don’t ultimately need the data capacity in the future. High-powered computer chips underpinning those investments have an uncertain shelf life. Development of more powerful chips or demand that falls short could render the complexes obsolete.
Whether corporate managers consolidate these arrangements, or record another entity’s debt on the balance sheet, is one of the most difficult judgment calls in accounting. Auditors highlighted Meta’s assessment whether to consolidate its Louisiana data center, noting the “significant judgment” involved.
