How Enron Cooked Its Revenues
By DAN ACKMAN
W hen I heard that the University of Texas had
a 300-pound freshman nose tackle, I asked
the folks at Enron about him. They said no,
the kid weighs 3,000 pounds. How is that
possible, I asked, and they said it's because they
weighed him on Neptune.
This is the story with Enron. Everything it said
was true, so long as you realize it kept its books
and records on another planet.
Most of the attention lavished on Enron's
accounting has focused on its balance sheet and
its offshore partnerships. But the locomotive that
powered Enron's rising share price was a revenue
picture that was out of this world. Revenues were
reported using a technique that is, while possibly
LEGAL, wildly misleading.
Over the past five years, Enron reported an
increase in revenues from $13.3 billion in 1996 to
$100.8 billion in 2000. Had it not gone bankrupt,
Enron was slated to double its revenues again.
Already ranked the seventh largest company in
the United States, Enron might have challenged
Exxon Mobil for the top slot.
Companies of this size simply do not grow that
fast. Enron's reported rate of growth in annual
sales over five years was 57%, while Cisco, one of
the great growth stories of all time, reported a 41%
rate. This apparent growth was possible only
because Enron used totally different accounting
rules than other companies.
Enron had a natural gas pipeline, but more than
90% of its business was from what it called
wholesale services and other people call trading.
Enron booked trades at their gross value, not their
net value, as is done with other securities trades.
Enron would put a buyer together with a seller,
take "delivery" of the contract for one fleeting
moment and book the entire "sale" as revenue.
To be fair, some of Enron's competitors, such as
Dynergy, account for revenue the same way. The
tactic may be legal, but few investors - and few
Wall Street analysts - understood it. When
Merrill Lynch sells on behalf of a customer 10,000
shares of Wal-Mart stock for, say, $500,000,
Merrill would consider as revenue the commission
on the sale or the spread between the bid price
and the ask price - perhaps $500. But Enron
doing the same deal - albeit with an energy
futures contract - would say it had revenue of
$500,000.
Enron's reported sales figures appear even more
incredible on a per-employee basis. In 2000,
Enron had 19,000 workers. Thus, per employee,
its revenues were $5.3 million - more than three
times the rate of Goldman Sachs and more than
eight times the rate of Microsoft. Citigroup's was
$469,748 per employee, IBM's, $283,333
These numbers should have at least raised
questions on Wall Street, but did not: Nearly every
major analyst covering Enron recommended that
clients buy the stock, even weeks before the
collapse.
In addition, Enron's financial reports were
notorious for their inscrutability. You searched in
vain for any clear explanation of the most basic
aspect of its accounting.
A dollar booked by Enron was simply not
comparable to a dollar booked by other firms. This
accounting was the most basic Enron deception.
Its performance looked unbelievable, and it was.
Ackman writes Top of the News for Forbes.com
Original Publication Date: 1/25/02
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