Just when I thought there was nothing new to say about Enron, along comes Malcolm Gladwell.The New Yorker scribe’s latest article, “Open Secrets,” appeared in the Jan. 8 issue of the magazine and has caused a bit of a stir on the Internet. Several tax, accounting and legal blogs that I regularly troll made at least passing reference to the story, and I was surprised to see outgoing links to the commentary scattered among the postings on gossip site Gawker.com and in a column from ESPN’s “Sports Guy,” Bill Simmons.
There’s no doubt the piece of writing is worth a read -- even if you find yourself disagreeing with Gladwell’s kinda-sorta call for legal leniency when it comes to the case of former Enron chief executive Jeffrey Skilling, the commentary makes for the stuff of interesting dinner conversation.
The central tenet of the nearly 7,000-word article explores the question of whether Enron’s ultimate financial unraveling was a puzzle (a situation where there is a simple, defined answer if enough information is available), or a mystery (a situation that requires “judgments and the assessment of uncertainty,” and where there is not enough, too much, or inadequate information to reach a conclusion).
Gladwell posits that Enron’s failure was due to a mystery -- the result of voluminous legal filings that buried the company’s shady accounting shifts where no analyst, nor investor, was likely to look. That point that the signs were there, and that Enron was likely engaging in foolhardy risk taking had been made before. It was in 2002 that Richard Lambert, editor of London's Financial Times, wrote, "The signs were there for anyone who cared to look. The fact that Enron executives had for some time been selling their shares for all they were worth was public information. So were the company's links with the obscure off-balance-sheet partnerships that were subsequently to trigger its downfall."
While Gladwell’s piece repeatedly ask what laws Skilling broke that should result in keeping a pillar of Houston society behind bars into his 70’s, Gladwell does gloss over the side deals between Enron executives that were used to hide poorly performing assets and to launder loans as income. Not all of them were structured illegally, but many of them were, which Enron never disclosed publicly. And it was Skilling who prosecutors said secretly guaranteed that those shady partnerships, designed by the company’s chief financial officer Andrew Fastow, would never lose money in Enron assets.
But the broadly, and to me, more useful point of Gladwell’s take is the point of whether disclosure illuminates, or obfuscates, the true financial picture. For years, it seems that Enron delighted in finding new ways to obfuscate. That’s something worth noting as Big GAAP-Little GAAP, XBRL technologies and the like continue to be developed. Less isn’t always more, especially for investors at the bottom of the information food chain.
Gladwell’s story is available on line at www.newyorker.com/printables/fact/070108fa_fact.
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