In line with my annual financial independence goals for this year I pressed on with the reading list. “the smartest Guys in the room” is about rise and fall of Wall street darling an American corporation called “Enron”, which took down auditing company “Arthur Andersen”.
…Skilling also had tendency to oversimplify, and he largely disregarded –
indeed, he had an active distaste for – messy details involved in executing a
plan. What thrilled Skilling, always, was the intellectually purity of an idea,
not the translation of that idea into reality.
…When you use conventional accounting , you book the revenues and
profits that flow from the contract as they come through the door. But under
the mark-to-market method, you can book the entire estimated value for all
years on the day you sign the contract. Changes in that value show up as
additional income or losses in subsequent periods. ..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 and sold to customers…On
January 30, 1992 the SEC told Enron that it would not object to the use of
mark-to-market accounting beginning that year…to celebrate Skilling brought in
champagne: champagne to toast accounting change.
…Skilling had imported from his consulting days: an elaborate
peer-review system. At McKinsey, Skilling had served on the powerful committee
that assessed the performance of all consultants worldwide. One of the first
things he did upon joining Enron was set up a similar system, officially called
the Performance Review Committee (PRC)…over the time, its goal distorted, and
the PRC had more to do with manipulating the system than with honestly
evaluating talent. Employees called it “rank-and-yank”.
Twice a year every employee (except Skilling) from managing director
down to secretary, underwent individual review. It began with extensive written
“feedback reports” from bosses and colleagues that assessed their performance
on five sets of criteria. The real
action took place at string of marathon sessions held at local hotels, where
panels would debate and rank each employee on scale of 1 to 5 – 1 being the
best and 5 – the worst. Most of ranking
categories involved collaborative qualities, such as “teamwork/interpersonal”
and “communication/setting direction”. What really counted was the bottom line.
If they were making money and being total
jerks to people, we had always forgive them for that. They might be a 5 in teamwork but if they were
a 1 in earnings, they were a 1. ..Still it was not all just about money. It was
also about friendship. Executives simply refused to tell the truth about weak
members of their team with whom they were friendly….It became a question of who
could argue better, who could debate better and, in some case, who could shout
the loudest. Those rated a 1 got huge bonuses. A ranking 2 or 3 could cost vice
president a six-figure sum. Because
Skilling insisted that the ranking be distributed along a curve, at least 10
percent of the workforce had to be placed in the bottom group, marked for
execution… Predictably the sessions got ugly. ..As Skilling and his defenders
saw it, the PRC produced the best of Enron, rewarding brains, innovation, and
dedication. But many thought it brought out the worst of Enron: ruthlessness,
selfishness, and greed”.
This type of methodology is
wide spread in a lot of industries in nowadays and indeed nothing has changed
in last 20 years. In the weak organization, it even got perverted where bottom
line is no longer important, you could
hide behind teamwork, doing nothing.
Arthur Andersen were brought down by its treatment on Enron. The Arthur
Andersen early moto was “think straight, talk straight”. Once in the firm’s
young and lean years, Andersen auditors told
railway company client that it had to change a certain accounting
practice, to the detriment of reported profits. When the company’s president
demanded that the firm reverse itself or lose account, Andersen famously
retorted that “There is not enough money in the city of Chicago” to make him
change the firm’s decision. Anderson lost the account. Months later the
railroad company was bankrupt. Consulting spoiled it, consultants generated far
more money than their accounting counterparts and had far more status. The
pressure to generate fees was intense, and so was the pressure to hold on to
clients. Andersen abandoned its old moto “think straight, talk straight”, its
new slogan was “simply the best” 0 those who kept their clients happy,
especially the handful of clients Andersen labelled its crown jewels. Enron was
one of them. In 2000 alone, Enron paid
Arthur Andersen $52 million, over half for consulting services. It is a fascinating story about Corporate America.
Where are the Enron
people now?
Only one in jail with imminent release, only two others went to jail but
free now:
Andrew Fastow (CFO) sentenced
in for six years, served only 5 and half (November 7, 2006 - May 16, 2011 ),
with the rest as house arrest. Fastow is
sentenced to six years in prison, four years less than his plea agreement
stipulated in January 2004. Works as principal at KeenCorp with headquarters in
Rotterdam, Zuid-Holland, the Netherlands (Western Europe).
Richard Causey (CAO) sentenced
for 5 and 1/2 years, served under 5 years (January 3, 2007 - October 14, 2011).
New York times described the Chief Accounting Officer: " an unlikely
character type to be playing such a profound role in a major fraud case".
Running his own financial advisory services since 2011, providing advice to
small business owners and investors on accounting and finance related matters.
Jeffrey Skilling sentenced for
24 years and four months, currently serving. Under the agreement with federal
prosecutors, Skilling could be released as early as this year. (December 13, 2006 - now) His sentenced
reduced by 10 years when he agreed to stop challenging his conviction and
forfeit roughly $42 million that will be distributed among the victims of the
Enron fraud. He paid his lawyers $20 million dollars.
What is other take
from the book about Enron?
It is ironic that in in 1995 Enron is named "America's Most
Innovative Company" by Fortune. The firm goes on to win this award for six
consecutive years. Bethany McLean printed article in 2001 in Fortune "Is
Enron overpriced", which the book says: "was the first in a national
publication to openly question the company dealings". In 2000 Forbes wrote: "No company
illustrates the transformative power of innovation more dramatically than
Enron. Over the past decade Enron's commitment to the invention--and later
domination--of new business categories has taken it from a $200 million
old-economy pipeline operator to a $40 billion new-economy trading powerhouse.
"
A lot of people from all walks of life made money on Enron – accountants,
lawyers, writers, analysts, judges.. all the expenses on investors and employees
who lost they life time savings.
This is a reality of modern corporate and finance worlds – every learning,
sprawling system at your expense.
The book highly recommended, especially for the people who are not risk averse
in the investments.
Loved reading it
ReplyDeleteKeep up the great work!!