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The tale of Enron is a story of human weakness, of hubris and greed and rampant self-delusion; of ambition run amok; of a grand experiment in the deregulated world; of a business model that didn’t work; and of smart people who believed their next gamble would cover their last disaster—and who couldn’t admit they were wrong.
“Enron knew they were crooks. But they thought they were profitable crooks.”
He felt that a business should be able to declare profits at the moment of the creative act that would earn those profits. Otherwise businessmen were mere coupon clippers, reaping the benefit of innovation that had been devised in the past by other, greater men. Taken to its absurd extreme, this line of thinking suggests that General Motors should book all the future profits of a new model automobile at the moment the car is designed, long before a single vehicle rolls off the assembly line to be sold to customers. Over time this radical notion of value came to define the way Enron presented
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When the initial deals are cut and all the potential profits are immediately posted, a company using mark-to-market accounting appears to be growing rapidly. Wall Street analysts applaud, and the stock rockets upward. But how do you keep that growth rate up?
On January 30, 1992, the SEC told Enron that it would not object to the use of mark-to-market accounting beginning that year. On getting the word, Skilling was ecstatic. He quickly gathered his troops in the conference room of the thirty-first floor, where his group had its offices. To celebrate, he brought in champagne: champagne to toast an accounting change!
Lol,these guys had every intention of committing fraud.
no company can prosper over the long term if every employee is a free agent, motivated solely by greed, no matter how smart he is. No company can function if it only hires brilliant MBAs—and sets them against each other. There is a reason companies value team players, just as there’s a reason that people who get along with others tend to do well in corporate life. The reason is simple: you can’t build a company on brilliance alone. You need people who can come up with ideas, and you also need people who can implement those ideas and are well compensated for doing so.
Trading was rapidly becoming the company’s biggest profit center. At the same time, Skilling was firmly established as the company’s resident genius. “Everyone believed what he said because he hadn’t been wrong,” recalls one ECT executive. “It was death if he raised his voice. He was brilliant at asking questions. He made people feel inadequate. People spent days getting ready for a meeting with him.”
In Vietnam, for instance, one accountant says that Enron spent some $18 million trying to build a power plant, only to see the project canceled. Yet Enron International often booked such costs as an asset on the balance sheet, in what came to be known around the company as “the snowball.” Usually the rationale was that there was no official letter saying the project was dead, so therefore, officially, it wasn’t.
A second problem: the assumptions Enron made to justify its deals assumed that nothing would ever go wrong. Of course, the banks financing the deals were making the same assumption; this was a mania, after all. But building energy projects in poor countries—often run by dictators and where capitalism was still a new concept—was absolutely fraught with peril, and it was absurd to believe that everything would play out according to plan.
“There are lots of visionaries,” says one longtime friend of Kinder’s. “There are very few people who can actually run a company.”
It is business wisdom that many of a company’s best deals are the ones it doesn’t do. That was never the belief at Enron, a place that was defined by deal making.
But it wasn’t just Wall Street’s nervousness that caused Skilling to skirt the truth about its core business. This was Enron’s dirty little secret: a company built around trading and deal making cannot possibly count on steadily increasing earnings.
Even before the dawning of the 1990s bull market, a new ethos was gradually taking hold in corporate America, according to which anything that wasn’t blatantly illegal was therefore okay—no matter how deceptive the practice might be.
While Enron’s reported earnings were growing smoothly, the business didn’t seem to be generating much cash—and you can’t run a business without cash. In fact, Enron had negative cash from its operations in the first nine months of 2000.
There were other warning signs. Enron’s debt was climbing rapidly—$3.9 billion of debt was added on the balance sheet in the first nine months of 2000 alone—which didn’t make sense if the business was as profitable as Enron was claiming. It was also clear that Enron was selling assets and booking the proceeds as recurring earnings. In fact, publicly filed documents showed that nearly 40 percent of Enron’s earnings in 1998 and 1999 came from gains on sales of assets rather than from ongoing operations.
To accept these arguments is to embrace the notion that ethical behavior requires nothing more than avoiding the explicitly illegal, that refusing to see the bad things happening in front of you makes you innocent, and that telling the truth is the same thing as making sure that no one can prove you lied.
