Finance
by Bethany McLean and Peter Elkind
How did Enron fool Wall Street?
In 2000 Enron was one of America's most admired companies, a Houston pipeline business reinvented as a trader of energy and much else. By December 2001 it was bankrupt. Fortune journalists Bethany McLean and Peter Elkind trace how the people running it made the numbers say what they wanted.
Hear a sample · read by Laura
Jeff Skilling fought to use mark-to-market accounting. Enron could book the whole expected profit of a long contract the day it was signed, based on its own forecasts. Earnings looked wonderful, but the cash came later or never, so every quarter needed bigger new deals.
Andy Fastow, the chief financial officer, set up private partnerships, among them LJM, that did deals with Enron while he ran them. They bought assets Enron wanted off its books and helped it hit its targets. The board waived its own ethics code to allow it, and Fastow made millions.
Enron rewarded people for closing deals, valued on their own projections, whether or not the deals ever made money. Staff were ranked against each other and the bottom group pushed out. McLean and Elkind show a culture that prized looking clever over asking hard questions.
Enron's auditor, Arthur Andersen, signed off on the accounts while earning huge fees from the company. Banks invested in Fastow's partnerships and helped design Enron's deals, and most analysts kept telling clients to buy. The people meant to ask hard questions were doing well out of not asking.
Paper profits
Enron booked all the profit it hoped a deal would make over many years on the day it signed.
Hidden debt
Enron's finance chief, Andrew Fastow, hid debt in side companies that he ran and made millions from.
Share price
Everything was run to keep the share price climbing, because the deals and the pay depended on it.
Rank and yank
Staff were ranked every year and the bottom group pushed out, so colleagues fought each other.
Watchdogs
Enron's auditor, Arthur Andersen, and the big banks went along while the fees kept coming.
A story from the book
On a call with analysts in April 2001, fund manager Richard Grubman asked why Enron, unlike other financial firms, hadn't released a balance sheet alongside its earnings. Skilling swore at him on the call. The insult got around, and it made more people wonder what Enron didn't want to show.
One thing to try
Take a company you own or admire and open its last three annual reports. Write down its net profit and its cash flow from operations for each year. If profits keep rising while the cash doesn't, find out why before you buy more.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. The Smartest Guys in the Room comes with a Spot the Trap case to make it stick.
Get the whole book on KnotdOpen in the appHow did Enron fool Wall Street? In 2000 Enron was one of America's most admired companies, a Houston pipeline business reinvented as a trader of energy and much else. By December 2001 it was bankrupt. Fortune journalists Bethany McLean and Peter Elkind trace how the people running it made the numbers say what they wanted.
Profit on the day you sign; The CFO's partnerships; Paid on the deal; Nobody looked closely.
Take a company you own or admire and open its last three annual reports. Write down its net profit and its cash flow from operations for each year. If profits keep rising while the cash doesn't, find out why before you buy more.
Yes. Knotd has the key ideas from The Smartest Guys in the Room in a few minutes, in plain words, plus a Spot the Trap case to test them. It's one of 250+ non-fiction books in the app.
Thinking, Fast and SlowDaniel Kahneman
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