ROBERT BRYCE. Pipe Dreams: Greed, Ego, and the Death of Enron. New York: Public Affairs 2002. 394 pages. $27.50.
What more appropriate book to review in an issue on professional ethics than the story of the corruption and downfall of Enron? In Pipe Dreams, Robert Bryce traces the history of a modest company that became an energy-trading giant, and then in a series of acts of hubris by its executive officers, overreached itself and went bankrupt, thereby ruining the lives and retirement nest-eggs of thousands of loyal employees. Bryce, an investigative reporter who has worked for such Texas newspapers as the Austin Chronicle and the Texas Observer, interviewed more than two hundred people and employed more than 1,800 print sources in gathering information for this book.
Bryce's essential thesis is that Enron went bankrupt "because its leadership was morally, ethically, and financially corrupt" (12). Bryce details how Enron's downfall began when CEO Ken Lay and Chief Operating Officer (COO) Rich Kinder allowed Jeff Skilling (later to succeed Kinder as COO) to talk them into changing their accounting method from cost accounting to mark-to-market accounting. Bryce defines the two systems as follows:
For example, assume Enron was a Venetian company that had signed a contract to sell another company one boat each year for ten years, with each boat costing $100. Under [cost accounting] rules, Enron would have only been able to record the $100 debit (and credit) for the sale once each year.
But under mark-to-market accounting, Enron could estimate the total value of the ten-year deal at any price it chose. So although total revenue was projected at $1,000, Enron could slap a net present value on the deal of, let's say $800, and enter that $800 debit in its ledger right away. The deal gets completed by the entry of an $800 liability on Enron's balance sheet (62).
While mark-to-market accounting (apparently a widely accepted and perfectly legal form of corporate accounting) was not in and of itself responsible for the collapse of Enron, what it allowed its executives to do was to hide enormous debts from ill-fated ventures into such areas as metals and water trading, while appearing to post tremendous profits that drove the stock up and allowed those same executives to make tens of millions of dollars by selling their stock options at top prices. While Rich Kinder was in charge (he was COO from 1990-1996), he was a stickler for making sure that Enron had real cash flow and cash reserves; when Skilling took over, that requirement went by the wayside and making deals became paramount.
Almost none of the principle players in the Enron debacle emerge unscathed. Ken Lay comes off either as being in collusion with the fraud or as one of the most detached and/or ignorant corporate heads in history. Jeff Skilling is depicted as the supreme egotist whose only real interest was in making deals, with little concern for whether those deals were good for the company. …