Recently finished reading two books related to the Enron scandal – ‘Conspiracy of Fools by Kurt Eichenwald’ and ‘The Smartest Guys in The Room by Bethany McLean and Peter Elkind’.
The book mentions the following
- How the company decided to use ‘Mark-to-Market’ accounting to show enormous profits up-front, but did not correspondingly show losses when investments did not materialize in the way expected
- How the CFO constructed special financial instruments to off-load negative growth or losses that were kept outside the main books of Enron
- How the board and senior management blindly trusted the reports from the CFO, who also operated these vehicles using family members and paying himself a lot of money on the side – creating a clear conflict of interest, which was never examined
One of the questions that came to my mind while reading this book was ‘While all this was happening, what were the CEO, the COO and the Board doing’? How was it possible that nobody decided to take a look at the details. How could the CEO and COO simply sign off on statements that were not even audited properly. Was it not required that senior executives do some random review to understand the situation?
The feeling one gets on reading the book is — the need to always show good results and get good stock valuation, at whatever cost.