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Visionary's Dream Led to Risky Business
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Enron's profits were a mirage.
The company claimed that it earned $979 million in 2000. But $630 million of that came from improper accounting involving LJM and other partnerships, investigators for the company's board concluded. Another $296 million in "profit" came from hidden tax-cutting transactions, not normal business operations.
Take away the accounting tricks and the company was making little profit, if any.
Enron used the bewildering complexity of its finances to hide its true nature. Some people had nagging suspicions. But like the cowed townspeople in the children's story, few questioned the emperor's new clothes.
"It's so complicated everybody is afraid to raise their hands and say, 'I don't understand it,' " Louis B. Gagliardi, an analyst with John S. Herold Inc. in Norwalk, Conn., said last year.
Enron's arc toward scandal and bankruptcy exposed the failure of watchdogs at every level. Its board defaulted on its oversight duties. Outside accountants ceded their independence and violated their profession's rules. Outside lawyers approved misleading deals and failed to vigorously pursue a crucial allegation of accounting misdeeds. Wall Street analysts led a cheering section while their firms collected enormous banking fees from the company. Regulators were overwhelmed by Enron's complexity. The media were blinded by its image of success.
Nobody looked inside the company and saw what wasn't there.
After Skilling gave Kaminski the assignment involving the LJM partnership in June 1999, the researcher and a member of his team worked through the weekend to check and recheck their analysis. On Monday morning, Kaminski was confident that it was a bad, even dangerous, deal for Enron. He told his immediate boss, Chief Risk Officer Richard Buy, that the Rhythms NetConnections-LJM partnerships venture should not go forward.
Kaminski described the deal as "heads the partnership wins, tails Enron loses."
Enron could not make the deal without the approval of its outside accounting firm, Arthur Andersen LLP.
But accountants there had the same reaction as Kaminski. Andersen partner Benjamin Neuhausen e-mailed his colleague David B. Duncan, head of Andersen's Enron audit team, to complain about Fastow's proposed role in LJM:
"Setting aside the accounting, idea of a venture entity managed by CFO is terrible from a business point of view. Conflicts galore. Why would any director in his or her right mind ever approve such a scheme?"
