Wednesday, July 20, 2005

EndWrong: The Enron Tale

Here's a little story I got to tell, about three conniving execs you knew so well....

The Enron debacle continues to fascinate Americans and business historians alike.

Personally, I'm thrilled the "Smartest Guys in the Room" will soon be on DVD.

If you haven't seen it, see it.

And if you haven't read the book, read it.

The Enron scandal, paradigmatic of the self-imploding Modern Corporation, will be the stuff our children's history books will be made of.

I guarantee it.

You already know the details.

The Enron fallout stands as the biggest bankruptcy in US history.

Once the 7th largest corporation in the USA, aggresssive accounting and corporate deception sunk the oil and gas Titanic in 2001.

I could spend days on end without sleep analyzing Enron's financial statements, which are filled with creative terms like special purpose enitites and other numerical obscurities a Wharton grad would have a field day scrutinizing.

Special Purpose Entities?

Do they even teach this stuff in business school?

Mike has been reminding me that SPE's (limited partnerships that tanked and Enron kept hush about) were Enron's way of hiding loans and shfiting things off the balance sheet.

The end result, of course, was higher earnings.

Or phantom growth, as I like to put it.

Let's be honest with ourselves.

Nine out of 10 companies on the Street tweak numbers -- they have to.

With detail-famished analysts on the other side of the phone, and unprecedently less patient shareholders awaiting their quaterly fix, it is now or never.

Shareholders don't want Billy Buttercup -- they don't care if the CEO is a "nice guy."

They want profits.

Let me give you an example.

Pro-forma earnings.

Their preponderance on Wall Street is especially troubling.

Pro forma numbers are Wall Street's equivalent to looking at a house before its been fully built.

Who is to say a missing brick or two won't topple the whole edifice down?

In fact, some cynics call pro forma earnings (which are technically earnings given ahead of schedule without taking into consideration things like restructuring costs, interest, and depreciation) "earnings without the bad stuff."

The plenitude of analysts touting pro-forma numbers needs to stop.

In the capital markets, the donkeys chase after the Information carrot.

What is especially troubling about Enron is the degree to which they manipulated their numbers.

The Smartest Guys in the Room were the most nefarious.

The film portrays the Enron execs as Greek heros drowning in their own hubris.

And the cathartic lesson is this: one lie begets another.

That's what ultimately floored Enron.

Mendacity, self-perpetuating in nature, is a ticking time bomb.

The Enron saga, in other words, tells us as much about business chicanery as it does about amorality and herd behavior.

Yep, I think Nietzsche would've liked this one.

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