The failure of Enron in the early 2000’s is one of the largest bankruptcies in US history (with Lehman Brothers in 2008 as the largest). Its accounting scandal led to Enron’s bankruptcy as well as the dissolution of Arthur Andersen, one of the big five accounting firms. Shareholders were wiped out, and tens of thousands of employees left with worthless retirement accounts.
Today the name “Enron” still evokes a reflexive repulsion, a feeling that these were simply bad people doing illegal things. But, we think, that’s in the past. Surely we’ve evolved as a society, and by thinking hard enough, you or I can avoid these problems.
In reality, when you dig into the details, Enron’s downfall is the predictable mixture of human greed, poorly structured incentives, and lack of sanity checks when everyone has their fingers in the pie. You might be surprised to learn that most of Enron’s accounting tactics were not technically illegal at the time – they were actually publicly celebrated for being financial innovations. Shareholders, employees, investment bankers, and accountants all benefited from the situation and enabled Enron for years. They only stopped when it became untenable.
The Smartest Guys in the Room, by former Fortune reporter Bethany McLean, is a fantastic recounting of the rise and fall of Enron. It shows how, layer by layer, the fragile house was constructed until it became impossible to sustain.
In smaller ways, we too are subject to the same pulls as Enron managers and employees. The warning – if we were put into the same situation, we might not have behaved any differently.
In this Smartest Guys in the Room summary, learn:
- The key conditions that enabled Enron’s corruption and allowed stakeholders to look the other way
- The financial maneuvers that allowed Enron to disguise its fundamental financials
- Practices to avoid in your own life