What the world is now awakening to is
that the Enron Corporation was not much of a company, but its executives
made sure that it was one hell of a stock.
In recent years, Enron came to exemplify the productivity miracle that
new technologies were thought to have bestowed on astute companies across
America. Now in bankruptcy, with the odor of scandal all around it, Enron,
once an innovative energy company, has instead become an indictment of
the anything- goes approach to business that characterized the late 1990's.
The bull market euphoria convinced analysts, investors, accountants and
even regulators that as long as stock prices stayed high, there was no
need to question company practices.
"Enron is the prime example of all the things that were allowed to
go wrong during the stock market mania," said William Fleckenstein,
president of Fleckenstein Capital, a money management firm in Seattle.
"This wall got built brick by brick in broad daylight in the 1990's
by companies doing whatever they had to do to make their numbers, being
willing to sacrifice the long-term well-being of the company so that the
executives could get rich."
And the Enron insiders became rich indeed. Thanks largely to munificent
stock option grants, which they turned into shares, they sold $1.1 billion
worth of stock from 1999 to mid-2001.
Mostly on the strength of the highflying shares, Enron executives were
able to convince investors, bankers, analysts, accountants, debt-rating
agencies and even Enron's own employees that its promise was real, its
financial results genuine and its growth never-ending. Never mind that
the way it accounted for trades, as is common at energy trading companies,
made its revenues appear to be far larger than the economic reality of
its business.
Now the spotlight in the Enron follies is trained on the nation's capital.
But the story of the company's rise and fall, and the retirement savings
its workers lost,
inevitably leads back to Wall Street.
Enron's executives were surely smart enough to know that once they had
convinced bankers, brokers and accountants of the company's strength,
all parties could pretty much be counted on to keep the myth of solidity
alive, even after problems arose. When questions were first raised about
partnerships that should have been listed in financial statements, true
believers could be relied on to drown out naysayers.
Naturally, given the millions of dollars Wall Street firms generated selling
Enron's shares and bonds to investors, analysts were among the most vociferous
defenders of the company, even after its stock began to fall. David N.
Fleischer, who followed Enron for Goldman, Sachs, recommended it until
Oct. 17, the day after Enron disclosed that it had lost $618 million in
the most recent quarter and that because earlier financial statements
had been inaccurate, it was lopping $1.2 billion off its net worth. Even
with the stock at 68 cents, Mr. Fleischer currently rates Enron a market
performer.
Across town at Lehman Brothers, Richard Gross continues to rate Enron
a strong buy. Raymond C. Niles at Salomon Smith Barney did change his
rating on Enron from buy to neutral, but not until Oct. 26, when the stock
closed at $15.40. During the previous 12 months, Enron had traded as high
as $84.63.
Of course, if a company wants to mislead its investors, analysts and accountants,
there is probably little that can be done to stop it. Arthur Andersen,
Enron's auditor, has said that it was misled.
But what is becoming evident about Enron is the decidedly ephemeral nature
of its operations and its revenues. Beginning as a mundane natural gas
pipeline company in the 1980's, Enron had morphed into a financial services
firm by
the late 1990's. It traded things like oil, but created new markets to
trade oddities like weather and bandwidth.
Because Enron operated in a largely unregulated arena and because of the
way energy trading firms are allowed to account for their operations,
the company recorded revenue that made the economic status of its business
appear larger
than it really was. Under accounting rules, when an energy trading company
trades electricity or gas, it can count as revenues the whole amount of
every transaction rather than simply the profit or loss, as a brokerage
firm does.
It is similar to the way Priceline .com counted as revenues the whole
sale price of plane tickets sold online rather than just commissions,
as traditional travel agents do.
That is largely how Enron, a relative newcomer to the trading of commodities
and related financial instruments, was able to produce $101 billion of
revenue in 2000, up from $40 billion in 1999. By comparison, Goldman,
Sachs, a highly regulated firm with a long history of trading in the field,
generated $6.5 billion in trading revenue last year.
Enron appears to have done nothing wrong in accounting for trading revenues,
unlike its almost certainly improper accounting for dealings with entities
off its balance sheets. But the larger-than-life revenue numbers allowed
Enron's executives and other advocates to promote the idea that its operations
were far grander than they were, worthy of a ranking near the top of the
Fortune 500.
To a Wall Street obsessed not with earnings but with revenue growth, the
performance propelled Enron's shares into the stratosphere, enriching
executives and investors. "The way these revenues were accounted
for at
Enron essentially made them pro forma revenues, which have little basis
in reality," one institutional money manager said. "Yet the
size of the revenues allowed the company to expand its balance sheet by
piling on debt. That is why the company unraveled so quickly."
The moment that rival trading firms and other customers at Enron began
to lose confidence in the company, its business dried up. But its onerous
debt of at least $31 billion remained, forcing it to make the largest
bankruptcy filing
in United States history.
Mr. Fleckenstein and some other investors are concerned that other bombs
like Enron's may be ticking, but that investors will have little help
in spotting them before they blow. The combination of aggressive accounting
- like Enron's method of shifting big obligations off its balance sheet
- and a conflicted auditing firm, he said, are not limited to Enron. Aggressive
accounting has become much more common in recent years, and as auditors
have increased
their consulting business among the companies whose books they vet, their
willingness to sign off on debatable practices has grown.
And as investors know only too well, analysts on Wall Street cannot be
relied upon to dig deeply into companies' books. Eager to help their firms
generate business selling securities to investors - and reap their own
rewards in bonuses - Wall Street analysts have made a habit of missing
corporate misdeeds altogether or ignoring what they see.
"Enron proves how meaningless financial statements have become,"
Mr. Fleckenstein said. "Until someone makes sure that financial statements
have meaning, we will never get this problem behind us."