Red Flags in Enron's Reporting of Revenues & Key Financial Measures
Bala G. Dharan
Harvard Law School; Berkeley Research Group LLC; Rice University
William R. Bufkins
Organization Analytics; University of Houston - C.T. Bauer College of Business
July 23, 2008
In this article, we analyze forensic warning signals that appeared in Enron's financial statements in the years 1996-2001, in which Enron's revenues increased over 1000%, from $13.3 to $138.7 billion in 4 years and 9 months. Enron's phenomenal revenue growth resulted in it achieving the number 6 rank on the Fortune Global 500, surpassing the world's largest companies, including General Electric, Royal Dutch/Shell, DaimlerChrysler, Toyota and ChevronTexaco.
Such growth attracted the attention of Wall Street, the media and heads of state, propelling Enron into the class of Fortune's most innovative and admired companies. Inexplicably, when analysts and business writers started digging deeper into Enron's remarkable ascendancy and its financial statements, the realization that Enron's profitability was microscopic compared to its revenues meant that the quality of its earnings was non-existent.
As Enron raced ahead in revenues through perilous waters without the requisite number of lifeboats in the form of adequate corporate controls and a compensation system that rewarded dealmakers and executives lavishly with cash upfront for ill-conceived business ventures and phantom cash flow. CEO Jeff Skilling's abrupt resignation in August, 2001 accelerated the decline of Enron's stock price, resulting in bankruptcy at the end of the 3rd quarter of 2001.
Indeed, since executive compensation is strongly correlated to company revenue size, Lay's and Skilling's obsessive compensation driven culture without appropriate governance and controls was a determinative factor in Enron's ultimate collapse.
Number of Pages in PDF File: 21
Keywords: Enron, Corporate Governanceworking papers series
Date posted: July 24, 2008 ; Last revised: November 4, 2008
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