Posted on 02/03/2002 8:05:07 AM PST by FlameThrower
LIVING BY THE NUMBERS
Enron was a laboratory experiment: a test of post-modern accounting and, by extension, of post-modernism itself. The lessons from its failure might well be worth the cost.
In the real world, a company has real assets, liabilities, incomes and outgoes. And it lives or dies by these numbers -- or, rather, by the underlying realities that the numbers supposedly reflect. The numbers, themselves, merely communicate to managers, owners and prospective owners a snapshot of the underlying reality.
In the old fashioned view, a company's worth is merely the market's measure of its success or potential success in its business. The company sells goods or services and generates income. Managers increase share price by tending to the underlying business: selling more goods or services or selling them at higher margins.
Post-modern thought elevates "the text" over its referent. In fact, post-modernism denies that objective truth exists at all; there are merely politically empowered assertions about it. The text may be sovereign but its meaning is indeterminate. It is anchored to no bedrock reality. Its meaning shifts with the ebb and flow of the eternal interpretive struggle.
In the post-modern world, one need not tackle underlying, objective realities. Why bother, when you can work directly on subjective interpretations? Thus, the nation's first post-modern president, a year after stepping down, still struggles to establish his "legacy". All prior presidents worked publicly to accomplish something during their terms. Perhaps, secretly, they also hoped it would some day be cherished as a legacy. The post-modern president strove openly, publicly, directly for a legacy. And few thought it strange.
In the same way, Enron's post-modern hotshots built share price by directly manipulating the numbers, not the reality those numbers purported to reflect. Reading their 10Q, written after they were caught, what strikes one most is their agnosticism about the real world.
From Enron's 10Q:
"[F]our SPEs known as Raptor I-IV (collectively, Raptor) were created in 2000... As part of the capitalization of these entities, Enron issued common stock in exchange for a note receivable. Enron increased notes receivable and shareholders' equity to reflect this transaction. Enron now believes that, under generally accepted accounting principles, the note receivable should have been presented as a reduction to shareholders' equity (similar to a shareholder loan)... [resulting] in no net increase to shareholders' equity.... As a result of these errors, shareholders' equity and notes receivable were overstated by a total of $1 billion in the unaudited balance sheets of Enron at March 31, 2001 and June 30, 2001."
This is an astonishing narrative. To translate it: "We created $1 billion of equity out of thin air simply by setting up entities under the control of one of our senior officers and having them issue us IOUs in exchange for some stock certificates we printed up." Generally accepted accounting principles? How about some common sense?
Enron also set up multiple entities, nominally independent, in which to dump debt and bad investments. The goal: to get liabilities off the books and replace them with paper revenues and equity. "There's a sucker born every minute," as the man said. But the sucker in these transactions was Enron, itself. Off the books or not, Enron still effectively guaranteed the value of those assets and the repayment of those debts.
All the junk shunted off into SPEs with strings attached were, in the real world, still Enron's problems. And they came home to roost. There is a simple way to describe this financial chicanery: they swept their problems under the carpet. Enron's Corporate Secretary made the following note to assist her in preparing the minutes of a Finance Committee meeting: "Does not transfer economic risk but transfers P&L volatility"'. Could there be a clearer statement of the disconnect? In the post-modern world in which Enron's management operated, a world bounded by the accounting documents, the problems magically vanished. In the real world, they lay in wait, building towards critical mass.
The hotshots who managed this shell game lived -- and then died -- by the numbers. I doubt if they ever realized, until it was too late, that they were involved in massive frauds.
Only in literary studies and philosophy can one ignore the existence of the real world forever and get away with it.
In a way, Enron's demise is reassuring.
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