Optimising financial processes

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Enron – Making a drama out of an accounting crisis!

I am very pleased to welcome a guest blog post today from Irina Predescu. Irina graduated from London School of Economics last year and has since immersed herself in the world of business risk, financial control, finance processes and compliance. She is too young to remember the events described below first time around . . . . .

Making a drama out of a (accounting) crisis!

This December saw the anniversary of the Enron scandal. 11 years after the company’s collapse was a key catalyst for the SOX legislation, some might think Enron is a thing of the past. Recently however, it struck me to see how this topic still resonates with today’s wider audience, not so much via the Wall Street Journal or Fortune articles, but through the means of entertainment.

Albeit Enron remains a symbol of wilful corporate fraud and seems enclosed in the twilight zone of corporate financial accounting and reporting, it is likely that most younger people would have heard of it via the eponymous comedy-drama, written by Lucy Pebble. Premiered in London in 2009 and later opening on Broadway, 3 years on, “Enron” is still being enacted in places you would least expect.

Whilst in Cambridge, UK, 2 weeks ago, I attended a stage rendition of the Enron script at the Amateur Dramatic Club. To my surprise, the venue was full and teeming with youngsters. Even today, the Enron story seems captivating enough to convince 20’s- year olds to spend a sober Saturday evening immersed in it.

  Above 3 ‘raptors’ (shadow companies) ready to feed on Enron’s debt

For those who have not seen/ read it yet, this tragicomedy humorously condenses the final decade of Enron’s existence into an epic tale of corporate irresponsibility and sheer gluttony. It starts with the company’s implementation of the mark-to-market accountancy model. Devised by Jeffrey Skilling, the now infamous president of Enron, this strategy allowed the company to book profits on the day deals were signed, helping the company to report huge revenues despite running at a loss.

The whole performance revolves around the tragic figure of Jeffrey Skilling, balancing the protagonist’s personal drama with moments of savage humour. Grabbed by the dialogue I found myself laughing many times, still I could not help thinking that the play’s pungent sarcasm is not a result of Pebble’s overabundant imagination, but rather a mere proof of well conducted research. As connoisseurs of the Enron affairs can confirm, the script endeavours to gather many of the iconic events that lead to the collapse and resultant media frenzy.

The main characters purposely imitate the real-life protagonists and their number is reduced to 4:

Kenneth Lay (CEO) – Enron’s pater familias with friends on Capitol Hill (and the White House!), he is the one who pulls the ropes from a distance
Claudia Roe (executive) – a fictional character, she is an amalgam of the various women who questioned Skilling’s overreaching ambition e.g. Sherron Watkins, also known as the ‘chief whistleblower’ in the company  
Jeff Skilling (president) – the man with the ideas, the company prophet who everyone tries to emulate: “We can send energy through the air in nothing but numbers.”
Andy Fastow (CFO) – Skilling’s loyal scheming partner, he creates hedging vehicles to hide the company debts and to make money for himself

There is also a long list of minor characters: accountants, lawyers, journalists… ‘useful idiots’ and accomplices in the Enron fraud who get immortalised in a ridiculous manner. Two Lehman Brother bankers are portrayed as a couple of servile, voracious Siamese twins, desperate to put their hands on any contract with Enron, regardless the consequences. Of course, Lehman now have their own chapter in the biography of corporate risk.

Sadly, 90 minutes of limelight (the length of the play) can only reveal the tip of the iceberg with regards to the egos, arrogance, greed and intricacies that prevailed once at Enron

– Ken Lay’s nickname was ‘Kenny Boy’ and it was assigned him by none other than the president of the US. His main preoccupation, just months before the Enron crash, was deciding on a configuration for the new corporate jet.

– The hedges meant to protect Enron stocks, were named ”raptors” after the dinosaurs in Jurassic Park

– At the end of the ‘90s, the company did decide to trade bandwidth and bet on weather

– The Enron project which contributed to the 2001 Californian state blackouts bore a name inspired by Star Wars, Death Star, and caused a lot of amusement within the company

– During California’s electricity crisis, Jeff Skilling did make the following joke: “You know the difference between the state of California and the Titanic? At least when the Titanic went down, the lights were on”. At a different press conference, Jeff also said that: “We are the good guys in California. We are on the side of the angels.”

– Skilling used to say about himself  “I am fu**ing smart”, words that the financial industry apparently took for granted. For most of the 1990s, financial analysts, bankers and journalists were glazed over and toed the line imposed by this maverick, avoiding stupid yet necessary questions regarding the company’s earnings and balance sheet.

At the end of the day (and of this blog post), with regard to corporate financial innovation, if the story seems too good to be true, then it probably is! ask why

As younger generations start to find out more about accounting scandals via plays and drama, I can only hope they also research the topics and discover to what extent these are fictional or real. Entertainment can sometimes lose its funny, relaxing glow once it bears too much resemblance to reality.

What will be the next accounting scandal to take centre stage?

Thanks for reading!

Thank you Irina for this timely and amusing take on this key event in the history of financial assurance.