Enron – The Beginning of The End Of Accounting Scandals

Belated Happy Labor Day for those of you reading from the US. I’ve been away for a few days in a rural part of the State of Michigan, enjoying the last weekend of the summer. As such, I didn’t do much e-mailing or blogging. Actually, even my Blackberry ran out of juice and I had left the recharger at home. It was a good omen, meant to encourage me to recharge my own batteries and refill my mental repositories.

While Rosie, my Rottweiler, chased a tennis ball through the grass, I finished the two books I had brought along.

“Bury My Heart At Wounded Knee,” is Dee Brown’s “eloquent, fully documented account of the systematic destruction of the American Indian during the second half of the nineteenth century.” I picked up the 30th anniversary edition in paperback because of all the publicity over the HBO special. I read it before, in high school, but it’s a very detailed account and worth reading more than once. Coincidentally, during my weekend away, I visited a Pow-Wow held by the Pokagon Band of the Potawatomi Indians. Very interesting stuff and couldn’t have been more timely for me.

The second book was, “The Smartest Guys In The Room.” Bethany McLean and her Fortune colleague Peter Elkind exposed the corrupt business practices of Enron officials. The book was the result of Ms. McLean’s reporting on Enron for the magazine and she is widely acknowledged as being the first journalist to question Enron’s inflated stock price with her article in the March 5, 2001 issue of Fortune magazine entitled, “Is Enron Overpriced?”.

I had avoided reading the Enron book for a while and have not yet seen the documentary that was nominated for an Academy Award. I felt that I already knew the story and didn’t need to relive it. But the book provides an encyclopedia of facts, figures, names and dates and so, for me, it was a must read. I was right, though. I did already know the story. During my career, I have seen all the shenanigans described in the book, some more than once.

I hadn’t finished reading the first few chapters before I shivered with the recognition that I was reading about the type of guys (and a couple of women) I already knew or had known so many times in so many other places. By the time the scandal peaked, almost all of the top Enron guys (and the main women) had been married more than once and, in some cases had found their next spouse at the office. Affairs were de rigueur at Enron, it seems, and executive secretaries, for example, rose to lofty heights on the basis of their “relationship” with their boss or another key executive.

Then there was the story of Lou Pai, the “key architect of Enron’s trading operation,” according to the authors. Pai liked strip clubs and strippers and ended up divorcing his wife and marrying one of the working girls he visited frequently. It’s also noted that much entertaining of Enron executives, their customers and Enron executives by their bankers and others was done at strip clubs. I am sure this information was in the book to add some sizzle, but I found it rather banal. What trading operation or group of traders is not known for this proclivity and how many firms have faced gender discrimination lawsuits because this type of entertaining most often excluded the women executives?

But would it surprise you to know that this practice still goes on – in the Big 4?

Big 4 Blind Item – Which Big 4 firm does not prohibit their partners from entertaining at strip clubs and even allows them to claim it as a reimbursable expense? More than that, the expense frequently gets billed back to the client, lumped in with other travel expenses!

Why does this still happen? Because the firms are fraternities that do not readily discipline their members for activities that, in the end, are about “doing business.” Doing so would embarrass the partner and make the partner feel “singled out.”

And as far as billing the “entertainment” back to the client… Well, in some cases it’s a way to give the client what he wants, even when the client’s own company prohibits such activities from being charged on an expense report. The Big 4 firm launders the XXX expense.

Oh, there are many more examples of how Enron-like behavior, both personal and professional, has not stopped. It’s going on quietly, albeit less densely, in many other companies and will continue as long there are people driven by money to succeed (and have fun) at any cost. Over the next several days, I’ll provide some more examples, ripped from the day’s headlines, to prove my point.