When Jeff Skilling took over as President and Chief Operating Officer of Enron in June of 1990, he did so only after insisting that the company convert from conventional accounting principles to a method preferred by his former employer, McKinsey & Co.
In 2001, hedge fund manager Richard Grubman said to Skilling, “You are the only financial institution that can’t produce a balance sheet or cash flow statement with their earnings.” By October of that same year, Enron had begun its death spiral in a historic collapse that would pull the giant accounting firm Arthur Andersen down with it.
The key to Enron’s failure was the mark-to-market accounting method, where anticipated revenues and profits are entered into the company’s books before they are ever received. The system allowed Enron to conceal losses and to inflate profits for nearly 11 years before its house of cards came crashing down.
On Thursday (Oct. 8), nearly seven years into his administration, Gov. Bobby Jindal (R-Iowa, R-New Hampshire, R-Anywhere but Louisiana) rolled out a new accounting formula with an alarmingly familiar ring to it.
Jindal, like Skilling, is a McKinsey alumnus.
Commissioner of Administration/Surrogate Gov. Kristy Kreme Nichols announced that the state, instead of having a deficit of $141 million as claimed by State Treasurer John Kennedy, will suddenly have a surplus of $178.5 million, a gaping difference of $319.5 million.
Nichols did not reveal how the $178.5 million was arrived at but Kennedy said the administration is switching to a cash balance form of accounting instead of the modified accrual basis employed by state governments. “If we use the methodology we have always used,” he said, “we don’t have a surplus. We have a $141 million deficit.
“The commissioner says the calculation has been inaccurate for years and it needs to be changed,” he said. “They have to explain why we have been doing it wrong all these years and why the Revenue Estimating Conference is doing it wrong.”
Nichols, an appointed state employee, was less than deferential to Kennedy, a statewide elected official when she sniped back at Kennedy, saying, “I’m surprised the treasurer is not reporting this.” She added that Kennedy is obligated to report available revenue. “He should probably do a review of the accounts to ensure there are no more outstanding revenues he is not reporting.”
Kennedy and Jindal have been at odds for years over fiscal policy, so it was no surprise to see Kristy Kreme, with her super-sized ego, get a little mouthy with the state treasurer. After all, she bolted from a House Appropriations Committee hearing on the Office of Group Benefits on Sept. 25 to take her daughter to a One Direction boy band concert at the New Orleans Smoothie King Arena where she watched from the comfort of Jindal’s executive suite.
Just as Enron misrepresented its finances for years, it now appears that the Jindal administration may be attempting the same tactic, prompting one political observer to say, “If cooking the books isn’t malfeasance, what is? The bond rating agencies and others rely on the CAFR (Comprehensive Annual Financial Report), where the year-end position is officially reported in decision making and they are not going to like this.”
Another Jindal critic asked rhetorically, “What happens when a state ends a fiscal year with a deficit of $141 million but the administration of the day pretends that there is actually a surplus of $178 million? I don’t think there is any precedent for such a thing ever happening anywhere. This is starting to sound like Enron!”
Odd as it may seem to make that comparison, the similarities between Jindal and Enron run much deeper than the latest developments surrounding the new accounting methods. Here are some points about Enron lifted from The Smartest Guys in the Room: the Amazing Rise and Scandalous Fall of Enron (Penguin Books, 2003), a probing book by Bethany McLean and Peter Elkind about the failed energy company: http://www.goodreads.com/book/show/113576.The_Smartest_Guys_in_the_Room
- The Deutsche Bank once described Enron as “the industry standard for excellence.” Jindal boasted of instituting the “gold standard for ethics” in Louisiana.
- When the chief accounting officer of Enron Wholesale expressed concern about wholesale electricity sales, she was reassigned. When another employee questioned Skilling on his claim that Enron was going to make $500 million, she was laid off that same day. When state employees or legislators complain or do not vote with the administration, they are teagued.
- Pollster Frank Luntz said instability and chaos were defining features at Enron and the six company reorganizations in just 18 months were a “running joke” and that Enron’s lack of discipline was “destructive and demoralizing.” Jindal’s penchant for reorganization and reform has created a similar atmosphere within state government.
- Enron sold assets and booked the one-time proceeds as recurring earnings. Nearly 40 percent of Enron’s 1998 and 1999 earnings came from sales of assets rather than from ongoing operations. Jindal over the past several years has sold state property, buildings, and entire agencies and turned state hospitals over to private entities.
- Both Skilling and Jindal are alumni of the blue-chip consulting firm, McKinsey & Co., which wrote the Enron business plan and as far back as 1986, advised AT&T there was no future in the market for cell phones. McKinsey also was an advocate of mark-to-market accounting practices.
- Both Skilling and Jindal thought—and think—like a consultant. Skilling felt that a business should be able to declare profits at the moment of the signing of an agreement that would earn those profits. But just because traders were reporting earnings under mark-to-market accounting, it did not necessarily follow that the money was in hand. See this link: http://theadvocate.com/news/10494146-123/jindal-budget-surplus-questioned
- A Wall Street banker said of Skilling: “He’s either compulsively lying or he’s refusing to recognize the truth.” Another banker worried that Enron executives were not carrying out their fiduciary duties and questioned “sweetheart deals” negotiated by them.
- Skilling believed that social policies designed to temper the markets were “wrongheaded” and counterproductive. “Wrongheaded” has been a favorite term invoked by Jindal whenever he has suffered setbacks at the hands of the courts on issues ranging from education reform to a revamp of state retirement plans.
- When asked a question he didn’t like, Skilling, in a tactic learned from his days at McKinsey, responded by dumping “a ton of data on you.” Jindal’s one outstanding skill is to spew statistics and factoids in rapid-fire fashion that can overwhelm and confuse challengers.
- Skilling, like Jindal, was considered brilliant and extremely articulate. He, like Jindal, always seemed to have the right answer and whenever he was asked about problems it was always someone else’s fault.
- Skilling displayed no remorse for his own actions, nor did he have any sense that he hired the wrong people or emphasized the wrong values. (See above.)
- Enron founder Ken Lay saw himself as a business visionary, much as Jindal portrays himself as a policy guru. Lay traveled the world to offer his wisdom on everything from energy deregulation to corporate ethics to the future of business. (Ditto)
- At the end, Enron employees’ accounts were frozen even as top executives were walking away with fortunes.
- Efforts by Enron and Arthur Andersen to avoid reporting $500 million in losses “only pushed the problem further off and added another tangle to the fragile web of accounting deceptions.” Do we really need to elaborate here?
- Enron executives accepted the argument that wealth and power demanded no sense of broader responsibility which in turn led them to embrace the notion that ethical behavior requires nothing more than avoiding the explicitly illegal, that refusing to see the bad things happening in front of you makes you innocent and that telling the truth is the same thing as making sure no one can prove you lied.
- Enron’s mission was nothing more than a cover story for massive fraud, much as Jindal’s administration is being exposed almost daily as a sham. The story of Enron, like that of Jindal, was a story of human weakness, of hubris and greed and rampant self-delusion, of ambition run amok, of a business model that didn’t work and of smart people who believed their next gamble would cover their last disaster—and most of all, of people who couldn’t—or wouldn’t—admit they were wrong.
- Enron once aspired to be “the world’s greatest company” but rather became a symbol for all that was wrong with corporate America, exposing Lay’s flaws as a businessman that could no longer be hidden behind Enron’s impressive but misleading façade and Skilling’s glib rhetoric.
- Despite Enron’s efforts to camouflage the truth, there was more than enough in the public record to raise the hackles of any self-respecting analyst (read: reporter). Analysts (read: reporters) are supposed to dive into a company’s financial records, examine footnotes and even elbow their way past accounting obfuscations. Their job, in short, is to analyze (re: report).
In the end, of course, Enron crumpled under the weight of its own corruption and mismanagement, destroying thousands of lives and even taking down one of the big five accounting firms in the process.
The Jindal administration with each passing day, with every revelation of some new scandal (the Edmonson Amendment, CNSI, the Murphy Painter fiasco, et al) and with each new flawed policy (the Office of Group Benefits debacle), is looking more and more like a train wreck that will adversely affect Louisiana citizens for years to come.
Just call it Enron East.
Excellent writing and reporting, Tom. This is a very big deal with far-reaching implications, just one of which is that if John Kennedy is right, the current budget will have to be cut, as soon as possible, by $141 million.
Mr. Kennedy is the State Treasurer. Ms. Nichols’ insinuations about his competence are petty and unprofessional at best.
It is odd that Nichols would declare war on the Treasurer in print! If this is damage control to repair DOA’s (her) image, it sure isn’t working.
TA, thanks for the Enron comparison and McKinsey connection. Should open a lot of closed minds and eyes!! Then, again, maybe not.
Could not agree more, Mr. Winham. If Treasurer Kennedy is right on his hypothesis (conversion from modified accrual to cash basis), that’s got to be one of the most incredible moves yet for any administration of a state budget to practice. It might be applicable for a really small town or village of, say, 500 or so people, but for a state budget with annual revenues of $25 billion??? When I took governmental accounting in the spring semester of 1987 (near the end of former Gov. Edwards’ 3rd term), Dr. Dan Kyle used to joke in classes about the latest in a series of jams in which he said that the Edwards administration had placed then-Commissioner of Administration Stephanie Alexander. If Dr. Kyle were still teaching governmental accounting at LSU, I’m sure he could have a field day with this crew!!
Also, if anyone would like to watch it, Treasurer Kennedy provided an excellent presentation to the BRPC last week entailing his take on the whole OGB fiasco. Here’s a link if anyone wants to watch his presentation in its entirety (as well as a brief Q & A with the media afterward): http://www.lspripoff.com/Kennedy_BRPC_OGB.htm.
Great article, Tom. If people didn’t know better, they’d think you pay these Jindal folk to provide you with the material they so readily drop in your lap!!
Robert, thanks for the link to Kennedy’s presentation to the BRPC, which is most enlightening. The Baton Rouge press have no excuse. Every legislator should be forced to watch the video.
You’re quite welcome, June, and I’m glad you found it useful. I thought Treasurer Kennedy gave a well-researched and straightforward presentation, and I agree that every legislator (every OGB member for that matter) would benefit from watching it because it relays history, how we got where we are, and most importantly, a blueprint for remedying the situation.
Kennedy is on the up-and-up. One of his concerns about the budget, I’m sure, is the state’s bond rating, which neither Gov. Jindal nor acting-Governor Nichols seem to care about at all.
I liked Kennedy’s suggestions about where we go from here with OGB. The legislature needs to step up and do its job.
Wow! Just wow!
Another brilliant well-written and well-documented article by Tom Aswell.
Tenneco did the same prior to ENRON with their subsidiary Case Tractor. Tenneco was large enough to survive the S@$% Storm but cost them and their employees greatly. Jindal needs to go stay with Nagin and Dollar Bill in Oakdale for the rest of his life.
More propaganda from the hallowed halls.
Reblogged this on The Daily Kingfish and commented:
COOKIN’ THE BOOKS, ENRON STYLE
Brilliant, breathtakingly brilliant. World class reporting and writing.
Are you paying attention, FBI, Attorney General Caldwell and the “stupid” people at RNC?
Great article and appropriate comparison.
Once again, I come to LouisianaVoice.com, to find the truth about the miserable state of affairs in Louisiana. Meanwhile, Jindal is in Florida, or somewhere—anywhere, I don’t care—leaving in charge a totally self absorbed Kristy Kreme who doesn’t even have the decency to at least act like she gave a damn about the damaging effects of their policies on real people. I sincerely hope that her snippy remarks about John Kennedy come back to bite her. What would these folks have to do before the AG or FBI stepped in and investigated?
Has anyone noticed that when the governor is out of state the Lieutenant Governor is supposed to be on official status? Lt. Gov. Dardenne, where are you? Kristy Kreme does not get to be in charge according to the state constitution. Which Jindal has shredded. Guess the rules of law don’t apply to these people.
This is a good question. I lost all respect for Jay Dardenne when he voted against the Stelly Tax Plan. It’s disappointing to see him usually in the lead in the next governor’s election. Of course it would be even worse if Scott Angelle got elected.
Enron is the perfect analogy. Who would ever have expected…? At least some of us fully expected some sort of cooking of the books by DOA to mask the budget disaster. Nichols’ arrogant mouthing off to Kennedy is stunning. I don’t say such a thing often, but Jindal’s skirted the edge between legal and illegal for so long that I hope he has crossed the line and goes to prison. If the state leadership and citizens ever have the will, it will take decades to repair the destruction wreaked by the Jindal administration on institutions and programs in Louisiana.
The real problem is: no one with any authority in our state or federal government seems to care or be concerned with the exception of John Kennedy. Meanwhile, we the people are and will be significantly impacted and we have no way to do anything about it until election time. Our senators and congressmen appear to just look the other way.
Staggering.
As soon as the Commissioner is challenged, she cannot explain and show why she is right; she must attack someone else. It is all mere “take your eye off the ball” stuff.
It doesn’t work anymore.
And, if she were right, the state accounts and financial reporting would have to be adjusted for the entire seven years they have been in office, since, apparently, they have been DOING IT WRONG FOR SEVEN YEARS!
I am Very Concerned.
WOW, just WOW. Both Ms. Kreme and Mr. Jindal are “Delusional” with a capital “D.” He, for thinking he has any chance of becoming President and her for blindly following him. He must have promised her one heck of a job in his fantasy, make-believe Presidential Cabinet for her to pull a stunt like this.
Speaking of Enron…lil booby announced a new methanol plant will be coming to Braithwaite in Plaquemines Parish. The company building the plant, or rather redoing the old AMAX Nickel Plant is called C.C.I. Castelton Commodities International.
http://www.theneworleansadvocate.com/news/10495841-123/12-billion-methanol-plant-to
The Chairman of the company is William Reed II. In his bio on the company website it says this about Mr. Reed:
blockquote>From 1999 – 2003, Mr. Reed was a Senior Vice President and Head of Trading at American Electric Power (“AEP”) Energy Services, which grew to be one of the largest energy trading and marketing companies in the United States during his tenure. Before joining AEP, he was a Director of Power Trading at Enron Corporation.
From The Advocate article Moret said:
The use of incentives and FastStart, the state’s workforce training program, also add to that edge, Moret said.
So why do i think this adventure will suck up some state dollars and then somehow nothing will ever come of it.
Oops, I messed up my blockquote.
Thanks again for a piece that just knocks it out of the park! This needs as wide a dissemination as possible. It needs to get picked up by the national media. Can’t Politico, Huffington Post, Truth Dig and others print this?
Best. Column. Ever. 5 stars!
This is a really excellent post, Tom. Please allow me to reinforce what you have already said so well:
Jindal has given so much away in Corporate Welfare that he hasn’t been able to balance the books for several years. But he can’t have a yearend deficit or he won’t be able to say in his daily campaign speeches that he balanced the budget every year in Louisiana.
You wrote: A Wall Street banker said of Skilling: “He’s either compulsively lying or he’s refusing to recognize the truth.” Many conservatives live in a fantasy world using “facts” made up by Faux News or conservative talk radio.
You wrote: Jindal’s one outstanding skill is to spew statistics… According to a reputable source, Jindal has a photographic memory which is why he can spew statistics so effectively. If true, it also explains why he did so well in school, establishing a reputation for being smart, but actually does and says so many “not-smart” things. The Texas expression is “All hat and no cattle!” I think it also explains his short career with Mckinsey: He can’t actually figure things out.
You wrote: Skilling displayed no remorse for his own actions. Jindal has been described as a sociopath because of his callous disregard for disabled children, the dying, state employees and all of the citizens of Louisiana. And his acting as if the constitution, ethics rules and other laws do not apply to him. Skilling may have been one of the very successful sociopaths in business. Very successful because they have no empathy for the people they crush on their way to the top and feel no need to follow rules. This comment also applies to the ethics issues a few paragraphs further down.
You wrote: …people who couldn’t—or wouldn’t—admit they were wrong. One of your early Louisiana Voice posts noted one of Jindal’s middle school teacher’s observations that he is incapable of admitting that he is wrong.
But most important, don’t blame what has happened in Louisiana just on Jindal. Jindal has been a pretty effective conservative Governor by cutting civil service employment (no matter the cost in dollars or service), privatizing public education and demonizing teachers to the extent possible, privatizing Group Benefits and our unique state wide system of public health care hospitals (both of which were very efficient) and distribution of billions of corporate welfare every year. The legislature went along with all these ALEC driven changes because they also lived in the conservative fantasy land. Jindal’s bullying just expedited the changes they really thought would be improvements. At least some of them are waking up to the reality that these policies don’t work and never have. They benefit the 1% at the expense of the 99% of the rest of us. To repeat, what has happened in Louisiana is why the pendulum of political philosophies should start swinging back from fantasy based conservatism toward reality based policies. Or more to the point, why we should vote out any office holders who are not moving away from conservatism and away from support of Jindal’s actions.
[…] Jindal’s latest accounting ploy bolsters disturbing perception that his administration is quickly … […]
I hope I see the day when Kristy, Jindal and many others in this administration have egg all over there face and stripes on there clothes!!!
This is an excellent article, just outstanding. The hairs on my neck stood up as I read it. The parallels are very scary. I do hope Mr. Kennedy stays on top of this and doesn’t let this BS accounting trick become the norm.
After listening to our treasurer speak, I wonder what it would take to get Treasurer Kennedy to run for governor?
[…] Jindal’s latest accounting ploy bolsters disturbing perception that his administration is quickly … […]
[…] Jindal’s latest accounting ploy bolsters disturbing perception that his administration is quickly … […]
[…] Jindal’s latest accounting ploy bolsters disturbing perception that his administration is quickly … […]
What’s it going to take to get FOX, CNN, or MSNBC to start running these stories on Jindal? When is someone from the Democratic Party going to call him, his administration, his affiliations, & their shenanigans out on national television? I’m impatiently waiting for the day it happens!!