Currently reading through The Smartest Guys in the Room book, also listed to the Acquired podcast about Enron. Not super crazy to read how people act, mainly because I see it a lot on the job.
In terms of what they did accounting wise, could anyone give an explanation as to how it worked?
Also, does anyone work somewhere now were they employ shady accounting?
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“Mark-to-market accounting allowed the company to write unrealized future gains from some trading contracts into current income statements, thus giving the illusion of higher current profits.”
https://www.britannica.com/topic/mark-to-market-accounting
Not today, CFTC, not today.
I don't know much about the particulars of Enron; however, I don't think that mark to market was the shady part of their accounting practices and it's still used today. Again, haven't spent much time and it seems like a pretty complicates shell game, but I think it was setting up a lot of shell companies to hide debt off of their financials, engaging in a bunch of undisclosed related party transactions, and funneling value out of the corporate structure without disclosure that got them in trouble.
"however, I don't think that mark to market was the shady part of their accounting practices and it's still used today"
Well, Sarbanes-Oxley act was passed as a result of Enron (and others) shady accounting practices. One of which was definitely mark to market accounting.
From wiki:
"However, when Skilling joined the company, he demanded that the trading business adopt mark-to-market accounting, claiming that it would represent "true economic value". Enron became the first nonfinancial company to use the method to account for its complex long-term contracts."
"For one contract, in July 2000, Enron and Blockbuster Video signed a 20-year agreement to introduce on-demand entertainment to various U.S. cities by year's end. After several pilot projects, Enron claimed estimated profits of more than $110 million from the deal, even though analysts questioned the technical viability and market demand of the service. When the network failed to work, Blockbuster withdrew from the contract. Enron continued to claim future profits, even though the deal resulted in a loss."
Their abuse of mark to market accounting was absolutely a major shady part of their accounting practices.
Yeah - don't disagree. My understanding is that their methodology for estimating mark-to-market reporting was out of bounds and shady. Just saying that the mark-to-market accounting itself wasn't the shady part.
I think the biggest issue was them basically disguising debt / loans. It took months and dozens of forensic accountants to unwind their financial obfuscation so don't expect anyone to be able to articulate the exact structure of the fraud. But on a high level they had off-balance sheet transactions that they were entering into in which they were basically taking on a christ load of debt but burying it on the books of some related party entity that they didn't have to consolidate onto their own books. They were also taking what amounted to regular old loans (in huge amounts) from financial institutions but classifying the transactions in a way that allowed them to not recognize the true nature of the debt / liability. In addition they booked a ton of "profits" from mark-to-mark accounting that never really occurred and they got to a point, after doing this for so long, where the true level of debt the company had and their true cash burn became irreconcilable with their reported financials, at which point they basically had to acknowledge the disparity and seek out rescue financing or a rescue acquirer but once potential partners became aware of their true financial picture they all balked and walked away.
There are a few good articles out there that explain it in plain English but the bottom line is they took a lot of liberties with all of their accounting methodologies for so long that they got to the point where the business was basically failing but their reported financial position was extremely robust and the company was a wall street darling because of it.
https://www.nytimes.com/2002/02/17/business/enron-s-many-strands-financ…
This was their real issue. One thing not mentioned is they collateralized most of these off-book loans against Enron stock. So it was ponzi-esque in the sense it all worked until the stock went down. Hence why the began pushing M2M accounting way beyond the pale and expanding into new areas like asset development, broadband, and retail energy to project growth and keep the stock up. Plus bullying banks by threatening to stop using them for their capex loans if they didn’t give them good stock coverage, and turning Arthur Anderson into a shill that gave them cover for all these off-book debts.
I’d argue its a classic tale of hubris. Had they just stuck to gas and power marketing and not pursued this aggressive growth into areas they had little expertise in, they’d probably be around today. Just like their competitors Mirant/NRG, Vistra, and Dynergy are.
Yet another example of why a single minded focus on stock price as the only metric by which to judge a company's success or health is a rot eating away at modern economies.
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