Lessons from Enron's Debacle.

• Author: Marshall, Jeffrey
• Position: Business Briefs

Once a company's accounting is in doubt, its future is, too. Few more potent examples have surfaced in recent years than the collapse of Enron Corp. last fall and the failed acquisition efforts by its far smaller Houston rival, Dynegy.

For years, Enron had amassed something of an aura, building itself into a powerhouse trader of energy contracts at a time when shortages offered huge trading profits. Its rise came quickly: the company grew from a local Houston natural gas utility with $5 billion in revenues in the late 1980s to a $150 billion colossus last year. In the process, its chairman and guiding light, Kenneth Lay, became a noted corporate celebrity and a political mover, and Enron planned to spend $100 million over 30 years to put its name on the new Houston stadium.

But it's clear now that Enron played a little fast and loose with its financial systems, and didn't feel obliged to clue in analysts about what it was doing. Little matter: Most cut the fast-growing company a great deal of slack in terms of its reporting -- filings included some labyrinthine explanations that few could follow -- and didn't regard its lack of transparency as a problem. Indeed, jealous energy industry rivals were quick to emulate what the company was doing, the result of what one industry analyst calls "Enron envy."

It's now apparent that billions of dollars in debt that could have hurt its credit ratings or hampered its growth were kept off the balance sheet "through tangled webs of transactions with dozens of related entities" The Wall Street Journal noted in an analysis. "As the financial demands became greater and the transactions more complex, Enron officials began creating and heading some of the entities, raising serious conflict-of-interest questions."

The sudden departure of CEO Jeffrey Skilling last summer was an ominous portent, but what really set events in motion was the disclosure of the size and financial exposure created by Enron's outside trading partnerships. Years ago, Enron had elected to allow company officials -- most prominently, former CFO Andrew Fastow -- to take key roles in outside partnerships that Enron persistently refused to consolidate on its own balance sheet. When the company announced a $618 million third-quarter loss tied in large part to those...