The Enron Fraud & the “Not So Smart Guys” In the Room

“It’s good to learn from your mistakes.
It’s better to learn from other people’s mistakes.”
Warren Buffett

“More money, it has been noted, has been
stolen with the point of a pen than at the point of a gun.”
Warren Buffett

This weekend I watched the documentary Enron: The Smartest Guys in the Room. See the bottom of this post for a link to YouTube

I have seen it once before, a few years back. But this one is definitely worth watching again.

After finishing the movie I ordered the books The Smartest Guys In the Room and Power Failure: The Inside Story of the Collapse of Enron, both of which I have not read before. Still waiting for the books to come!

So, take a look at the documentary and maybe read some (or both) of the books if you haven’t already done that.

Here is Enron’s annual report for fiscal year 2000. In the annual report Jeffrey K. Skilling (President and CEO) together with Kenneth L. Lay (Chairman) began the shareholder letter in the following (kind of pretty optimistic) way.

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Below is an overview and discussion of Enron’s net income compared to a calculation of owner earnings (Source: FWallstreet.com). From this its clear that net income not really match owner earnings.

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A great book is Financial Shenanigans: How to Detect Financial Gimmicks & Fraud In Financial Reports written by Howard M. Shilit and Jeremy Perler. In the book the authors discuss the Enron case awarding Enron for “Most Outrageous Financial Shenanigans”, see image below.

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The discussion of the Enron case in Financial Shenanigans and the financial shenanigans is summed up as follows.

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The Enron Scandal

Here is some background about what came to be known as the Enron scandal. (Source: Wikipedia)

“The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure.

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, by the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron’s board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.

Enron shareholders filed a $40 billion lawsuit after the company’s stock price, which achieved a high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron’s $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldCom’s bankruptcy the next year.

Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Enron’s auditor, Arthur Andersen, was found guilty in a United States District Court, but by the time the ruling was overturned at the U.S. Supreme Court, the company had lost the majority of its customers and had ceased operating. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.”

The (Smartest) Guys in the Room

In his 2003 letter to shareholder Warren Buffett recommended the book The Smartest Guys in the Room, written by Bethany McLean and Peter Elkind.

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Another book written about the Enron collapse is Power Failure: The Inside Story of the Collapse of Enron.

“Power Failure is the electrifying behind-the-scenes story of the collapse of Enron, the high-flying gas and energy company touted as the poster child of the New Economy that, in its hubris, had aspired to be “The World’s Leading Company,” and had briefly been the seventh largest corporation in America.

Written by prizewinning journalist Mimi Swartz, and substantially based on the never-before-published revelations of former Enron vice-president Sherron Watkins, as well as hundreds of other interviews,Power Failure shows the human face beyond the greed, arrogance, and raw ambition that fueled the company’s meteoric rise in the late 1990s.” (Source: Amazon.com)

There has also been a documentary made about Enron and its demise.

“Enron: The Smartest Guys in the Room is a 2005 documentary film based on the best-selling 2003 book of the same name by Fortune reporters Bethany McLean and Peter Elkind, a study of one of the largest business scandals in American history. McLean and Elkind are credited as writers of the film alongside the director, Alex Gibney.

The film examines the 2001 collapse of the Enron Corporation, which resulted in criminal trials for several of the company’s top executives during the ensuing Enron scandal; it also shows the involvement of the Enron traders in the California electricity crisis. The film features interviews with McLean and Elkind, as well as former Enron executives and employees, stock analysts, reporters and the former Governor of California Gray Davis.

The film won the Independent Spirit Award for Best Documentary Feature and was nominated for Best Documentary Feature at the 78th Academy Awards in 2006.” (Source: Wikipedia)

So, never forget to “Ask why”.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. This article is informational and is in my own personal opinion.

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