Enron is a great example of what happens when you have the facade of good compliance and good corporate governance, but there's no substance behind it. Let's start with the company's directors and management. From the outside, Enron's board of directors was extremely impressive. There were mostly company outsiders giving them an objective and independent point of view, where that was exactly why they were brought on. They also held significant equity stakes in the company, which was supposed to align their interest with the public shareholders. And in addition, the board met regularly. The audit committee which is a subcommittee of the board of directors was charge with overseeing Enron's financial reporting and disclosures. And they were equally impressive. They were comprised of also well respected individuals. So what exactly was Enron? Well, Enron was initially an energy trading company based in Houston, Texas. They matched buyers and sellers of natural gas. And then they expanded into coal, electricity, metals, weather, yes you can actually trade weather. They were trading anything arguably related to energy, and then they expanded even more, and even more, and even more. They ended up keeping certain of their new business ventures off of their balance sheet which is supposed to provide a snapshot of a company's assets, liabilities and capital. Enron also transferred some of the entities to shell companies called SPEs, or special purpose entities, in order to hide debt. The reason for these decision was simple, to the extent that Enron loss money, they didn't want to incur losses on their actual financial statements. The financial statements that analysts would look at and review. They also sold entities with agreements to buy them back shortly thereafter so that they could record a profit in a particular quarter or at a particular year's end. Enron went to great lengths to further the illusion of success. They actually built a fake trading floor designed to trick investors into thinking that business was booming. For several years, Enron led a tour of its headquarters including the sixth floor trading room. And they led that tour for Wall Street research analyst that came to town for a company's annual meeting. The room which was initially built for Enron energy services was full of desks, chairs, computers, telephones and other equipment. But long before the energy services business was actually operational, CEO, Ken Lay would bring staff in from other floors and instruct them to actually pretend that they were working. Other staff was told to call the trading room and try to create some sort of buzz that real work was taking place when there was no work to be done. This scene was all rehearsed and in fact, very well rehearsed. One former employee stated, quote, it was an elaborate Hollywood production that we went through every year when the analyst were going to be there to impress them, to make the stock go up. Another employee said, they asked us to go alternately, in like hour shifts, and sit, and pretend that we lived, and worked there. And another employee said, quote, we held a rehearsal with Skilling and Lay the day before. And Skilling said he wanted to play the Paul Newman character in the movie, The Sting when the analysts came through. And remember, Skilling and Lay were the CEOs of the company. For a while, the ruse worked. Arthur Anderson was the company's accounting firm. They reviewed and approved certain questionable transactions in book keeping practices. Enron's revenue grew significantly. So in 1995, their revenue was less than $10 billion. In just five years later, in 2000, it was over $100 billion, and during this time Enron received numerous accolades. It was regularly cited as a great company in the press and in numerous industry reports, and it was loved by Wall Street stock analysts. But should it have been?
