This book goes in great detail on the collapse of Enron. One of the best books on Corporate Scandals and probably the best after Barbarians at the Gate. It is hard to believe that a Fortune 50 company could ever make such a mess of its finances and tries to cover it up with accounting fraud & bogus deals.
At the heart of the collapse of Enron are a set of people with diverse characteristics. Some are driven by personal greed. Some are driven by fame. some just thought any amount of fraud is okay if it gets new business. Some are over confident that the empire they built can outlast every disaster, Some are just incompetent. And there were few good men who tried to save Enron until the last day.
Keeping the people reasons apart there are some bad business decisions and financial gimmickry that led to Enron’s downfall.
A. Mistakenly applying Mark-to-Market accounting used by Investment banks to an old world asset-heavy Energy business. It simply allowed Enron to book 20 years of Energy contracts revenue in the first year itself. It was just the revenue booking without actual cash inflow. This inflated the P&L but brought in little cash. (SEC approved it!)
B. Enron sunk billions of dollars into bad projects in countries it was never familiar with. That was hard cash burnt for the bad projects. There was hardly any revenue coming in. From the start Enron was on a collision course with two competing businesses. One showed billions of revenue on paper with hardly any cash. Other suck up all the cash but got no revenue. It was a disaster in the making
C. Obviously with no real revenues and expenditure going through the roof Enron would have collapsed long back. What kept the lights still on is its accounting creativity. Enron hid its debt off the books by simply transferring its debt to a bogus SPV and showing part of it as revenues!. It got into murky deals with banks and showed loans from them as revenues. It was living off its credit cards in a lavish way. All that was needed to bring Enron down was a bad credit score. It did happen and Enron was downgraded to junk bond category. Enron went bankrupt in 6 weeks after it was down graded.
The story of Enron is probably a corporate almanac on how not to run a business. Every body who is into business should read this book to really understand what went wrong when something goes wrong.
It was all the business villainy in one single company. Auditors helped Enron do accounting fraud to get more consulting business, Investment Banks gave better stock ratings to Enron to get more advisory fee, Banks gave loans and showed it as revenues simply to get even more loan deals, politicians turned blind eye to receive more election funding. The people who lost everything in the end are Enron’s employees and the people who invested in Enron stock. It was the entire American corporate rot in one single story.