It’s still a question asked at many-a-cocktail party: What actually happened at Enron? What did they do that resulted in such devastation? Surely those that lost their entire nest egg must wonder how no one could have known that the Enron was building a house of cards. The fact is, most of us common folk still don’t understand. But we really want to understand Enron, just as badly as we want to understand the motivations behind the latest celebrity sex scandal. Future accountants owe it to their social lives to know how to explain the specifics of “What Happened at Enron.”
Innovation or Arrogance?
Enron executives famously called themselves the “smartest guys in the room.” In fact, their ideas were indeed innovative, even brilliant. During the late 90’s and early 00’s, the economy was booming. Normally, an economic boom is associated with increased production and consumer spending. However, during this time, the economy was booming due to deregulation and frenzied investment in the dotcom industry. Enron, with good intentions, participated in the frenzy by offering new financial instruments that benefited from deregulation. Derivative financial instruments had been around awhile. Commodities, such as wheat and livestock, were bought and sold on the market as a way for investors to make tidy profits. These futures contracts guaranteed prices so farmers, buyers, and other players in the market weren’t devastated by changing market prices for the products they bought and sold.
Enron had what was initially a good idea. Use this concept and apply it to the new commodities of the time such as data transmissions, insurance risk, television advertising. As many innovative ideas go, it failed the first time around. And Enron, not so smart in risk management, had invested billions into the venture, having “shot its load” so to speak. Admitting failure would have been devastating to its stockholders. But instead of try-trying again, like good inventors do, Enron decided to hide the failures with subsidiary businesses, where they further confused investors by creating deals that essentially turned the proceeds from loans into profits, boosting its revenue and equity with notes payable.
What’s the Auditor’s Excuse?
It is still unclear how much Enron’s auditor, Arthur Andersen, knew about the incorrect recording of debt, revenues, and equity. The now-infamous document shredding at Arthur Andersen certainly doesn’t help its case. But it’s likely not just a story of greed. The new economy at that time did create a lot of accounting question marks. How to account for new financial instruments Enron had created? And the labyrinth of subsidiary companies and transactions certainly made following the money mind-boggling. The brilliant top-of-their-MBA-class young minds at Arthur Andersen did not want to be the first to raise their hand and say, “Er…I don’t get it.” Of course, the money was flowing, so no one wanted to point to out that the Emperor had no clothes…heck, everyone was naked. It was the new black.
Bad People or Bad Decisions?
Enron did some good things, but took such large risks in doing them, they didn’t allow for failure. Most now know that they teamed with Blockbuster to develop streaming media, several years before Netflix successfully delivered the service. The venture failed, perhaps because it was just slightly before its time, but also because Enron just hates elbow grease. Instead of working out the kinks, Enron decided again to hide the failure.
As it turns out, if Enron had put its nose to the grindstone and not thrown so much money to their new ideas, they might have indeed been the smartest guy in the room. Instead, they created a culture of Machiavellian employees, from top to bottom, where everyone knew true value wasn’t being created. They all decided to take what they could while it lasted without regard to the consequences to their fellow man. After all, the guys at the top were doing it, so it must have been okay.
McLean, Bethany and Elkind, Peter; The Smartest Guys in the Room
About Sara Huter
Sara Huter has over 15 years experience in the banking and energy industries, and over 10 years as an adjunct professor. Her work has been published for BusinessBee.com, the International Directory of Company Histories, the Encyclopedia of Business Insights: Global, EHow.com, and Examiner.com. Find out more about Sara at her Google+ Profile.