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The Smartest Guys In The Room: The Amazing Rise And Scandalous Fall Of Enron
The book, the smartest guys in the room: The amazing rise and fall of Enron was written by Bethany McLean and Peter Elkind. The book talks about how one of the largest companies in the United States of America rose and collapsed as a result of a systematic, institutionalized and creative fraud committed by its executives and other members in the financial field. The purpose of this character driven and meticulously researched book is to lead the reader deep into the past of one of American largest company, Enron and behind the scene’s unscrupulous actions by different stakeholders within the company that resulted in it going under.
My position in this review is that greed, deceit and arrogance are the source of major source of all wrongs in Current American businesses and this fact mirrors the authors exposure of creative human drama that prove to be the major source of Enron scandal.
Brief overview of the book
The book which is a collection of facts gives the reader a clear picture of the meteoric rise of Enron and a dramatic fall from an approximately US$70 billion company to being bankrupt. The book praises Enron as one of the biggest narratives in the corporate America and success was exhibited to be based on deception and illusory. The book illustrates in details the full story of its down fall and the greed that contributed to it. It examines the corporate culture where the behavioral aspects of the executives played a big role in the collapse of the company. The impact of the collapse of the company exposes the responsibility of accountants, lawyers and investment banks that directly benefited without keenly looking at the details that lead to the great profit making, questions key issues of corporate governance such as performance being pegged to the prices of stock, use of mark to market accounting system that assisted in hiding the losses and show the creative accounting methods such as off the balance sheet schemes used in hiding huge debts. The book also tells of the top executives who include Chairman Kenneth Lay, chief executive officer Jeff Skilling and the chief finance officer Andrew Fastow, the coveted salaries and bonuses and the complicity of lawyers and accountants, stories of disappointed shareholders and employees who lost their jobs and makes a clear description of the culture of obtaining big deals especially new markets and industries which later led to subsequent failure to succeed in its objectives and to financially contribute to the company.
The book has achieved its objectives by clearly indicating that shady deals and corporate culture played a key role in plunging Enron to bankruptcy. The authors also question high valuation of Enron although they do not touch much on how the flamboyance by members of the executive contributed to the collapse of the firm.
Brief overview of Enron
Enron Corporation was an American company whose base was in Enron complex, Downtown Houston in Texas. Before its collapse in 2001,Enron had an estimated 22,000 members of staff .The company was one of the world leading companies in natural Gas, electricity, pulp and paper and communications. In 2000, Enron claimed revenue of approximately $101 billion and was named by fortune as America’s most innovative company, a position it held for a consecutive six years. Towards the end of 2001,it was discovered that Enron’s reported financial conditions was sustained significantly by systematic, institutionalized and artistically planned accounting fraud which has since been known as the Enron scandal. Enron scandal raised concerns on the accounting practices in many companies in USA and played a major role in the establishment of Sarbanes-Oxley act of 2002.
There are several factors presented in the book that played key role in the collapse of Enron.
Mark to market accounting
When Skilling, the chief financial officer joined the company, he adopted mark-to –market accounting where he stated that it would show the company’s real economic worth. As such, Enron became the first non financial company to use mark-to –market accounting for long term and complex contracts. This accounting method called for signing of long term contracts and the income projected as the present value of net cash flow of the future. The feasibility of these contracts and their costs were not easy to judge. Due to large inconsistency in matching the profits and cash, investors were given false reports. When utilizing this method, income from projects increased financial earnings. In future years, profits could not be included and so additional and new income was included from new projects to develop additional growth to impress the investors. The method had potential pitfalls but the method was approved by America Securities and Exchange Commission in its trading of the future contracts of natural gas on January 30th 1992.Enron continued to get future profits although most of the deals.............
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