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.