-----Original Message-----
From: [EMAIL PROTECTED]
[mailto:[EMAIL PROTECTED]]On Behalf Of Steve Brant
Sent: January 19, 2002 10:42 AM
To: Triumph of Content List
Subject: FW: On the Enron Debacle
This is from the discussion list for students of management guru W. Edwards
Deming...an interesting perspective that basically comes from looking at the
question "What's the purpose of a business?" (ie. to make money or to
provide a product of service that customers want?)
Steve Brant
-------------------------------------
Steven G. Brant, Business Futurist
Founder and Principal
Trimtab Management Systems
315 West 33rd Street, Suite 11B
New York, NY 10001
212-947-5705; 212-947-5706 (fax)
[EMAIL PROTECTED] http://www.trimtab.com
"It is because we have at the present moment
everybody claiming the right of conscience
without going through any discipline whatsoever
that there is so much untruth being delivered
to a bewildered world." - Gandhi
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From: "Jonathan Siegel" <[EMAIL PROTECTED]>
Reply-To: <[EMAIL PROTECTED]>
Date: Thu, 17 Jan 2002 05:18:44 -0500
To: <[EMAIL PROTECTED]>
Subject: On the Enron Debacle
Resent-From: [EMAIL PROTECTED]
Resent-Date: Sat, 19 Jan 2002 08:56:41 -0500 (EST)
One of the remarkable things about the current Enron bankruptcy is that
it helps illustrate the extreme limits of what can happen when a
measurement is substituted for a purpose. The goal of Enron managers was
to increase the perceived value of their stock price by growing accrued
book revenues, and they did this, for a time, very well. Their method
was to turn their small utility company into a de facto trading company,
functioning as a kind of brokerage while remaining legally a utility.
Their secret weapon was the fact that while a brokerage is only allowed
to report its commission, a small percentage of a trade, as its revenue,
a legal utility is permitted to report the entire selling price of a
commodity on its top line, and to report the buying price as an expense.
The consequence was that Enron, while doing far less actual business
than many brokers, was able to report far higher revenue than any. And
simply by keeping a network of buying and selling going on,
continuously churning trades back and forth in cooperation with various
entities, they were able to report ever increasing amounts of revenue
quarter after quarter, ending up with a top line that permitted them, on
the basis of these "revenues," to claim themselves the seventh largest
company in the United States.
What is astonishing about Enron is that its business model was largely
open and public for many years. Their auditors reported the basis of
their revenue claims in every quarterly report. Independently of whether
or not some of their transactions were illegitimate, the simple fact is
that it ought to have been a fairly simple matter for an analyst,
reading their accounting methods, either figure out how to compare their
real business to an ordinary brokerage, or at least to know what
questions to ask to be able to make such a comparison. Their business
was not only much less than their stock price or debt load reflected, it
was obviously so.
But because Enron had a new accounting method, analysts believed this
meant it had a new business process. And given the ever-increasing
reported revenues, the Enron's "new" business model was presumed to be
unquestioningly effective. Perhaps we, as a society, have become so
accustomed to associating the act of running a business with the act of
making money - or rather, the act of booking revenue in accordance with
the arts of accountancy -- that corporate analysts appear not to have
had an institutional framework capable of distinguishing between an
accounting trick and a business process, between a revenue stream and
the production of value. And this is not the first time for this
particular failure. For example, the shares of Priceline.com and other
online travel agencies, who had used a similar accounting gimmick,
plummeted when they were required to report only their commission as
revenue, despite the fact that this accounting change meant no
meaningful difference in their actual business.
Presumably, under the Enron model, the ideal business would be some sort
of virtual or computer casino that operates at even money connected to
an equally virtual network of affiliated computer gamblers. Such a
business would be able to churn money in and out endlessly, and would be
able to generate an infinite revenue stream with no actual operations,
assets, products, customers, or profits to inhibit its growth. Enron
came very close to meeting this ideal. Unfortunately; it had a small
actual business buried in its operations, which had real stakeholders
and creditors. This imperfection was in no small part the source of its
trouble. Perhaps future businesses will avoid this mistake.
I cannot help but suspect that the ideal described in the preceding
paragraph represents a kind of classic, a pure model, a kind of holy
grail of American business culture that perhaps represents what American
business could be if left to its devices and what it appears, given
current trends, to be questing after and trying to become. Certainly the
ideal of the virtual business - a business in which the job of senior
management largely revolves around finance and in which operations, if
any, are so automated as to take care of themselves - has long been an
ideal of American management. The advent of the computer and the
internet has greatly enhanced our ability to achieve this ideal, at
least temporarily. Whether this holy grail is attainable or whether,
attained, it can heal us is quite another matter. Enron, after all,
appears to have drunk quite deeply from the cup, although perhaps one
could argue that, due to its imperfections, its quest came close but
ultimately missed the mark.
If our aim is to make money, and "making money" is defined as
accountants define it, then the chief business of a manager really and
truly ought to be to devise accounting tricks. Messing oneself with
products, customers, and operations really and truly is a distraction
from such a goal; and a smart manager should find a way to avoid being
distracted. If money is ones goal, it stands to reason that the less
ones time is taken up with distractions from thinking about money, the
more successful one will be. Hard as it is to believe sometimes,
especially after cases like Enron, managers and analysts are not
dummies. They do what is rational in the circumstances they are faced
with, however irrational those circumstances may be.
Whether a society, an economy, or even a company can be sustained on
such a basis is another matter. But there is no question that
individuals can. Indeed, current accounting rules provide many
opportunities for clever individuals to make quick money off of other
people's losses. Enron, sadly, is quite an example of this. I fear our
society will offer many such opportunities, quite heavy ones, in years
ahead.
Jonathan Siegel
