Journalist Bethany McLean
Feature
Lies, damn lies & dodgy dealings
by Matt Nippert
The US journalist whose story lifted the lid on the multi-billion-dollar Enron scandal is modest over the success of the Oscar-tipped documentary based on her book, The Smartest Guys in the Room, now screening in New Zealand.
With her long brown hair, Bethany McLean, 36, is striking. But, looking around at all the beautiful people having power breakfasts at this swish cafe in New York, you’d struggle to pick her face as the one that launched a thousand lawsuits. Yet, here she is, having played a trailblazing role in uncovering the corporate scandal that has come to define an era of free-market excess, hoping and waiting for the phone call that might get her into next week’s Oscar ceremony in Hollywood. To understand where she finds herself now, it’s best to take a short step back in time.
In August 2000, it was the best of times for Enron. The stock price of the Texan energy company hit a record high, and annual revenue over the previous year had doubled to over $130b. Enron was crowned the world’s “most innovative company” by Fortune magazine for a fifth consecutive year. The company's net worth of $100b surpassed New Zealand’s entire Gross Domestic Product.
Fast-forward 16 months to the worst of times for Enron. On December 2, 2001, with a stock price valued in cents not dollars, the firm filed for bankruptcy. Around 4500 jobs and $100b in investors’ money was wiped out almost instantly. Criminal proceedings in the four years since have resulted in 20 convictions for fraudulent activity, and last month the trial of Enron’s two bigwigs – founder and chairman Kenneth Lay and former CEO Jeff Skilling – began in a Texas courtroom.
This dramatic collapse hit corporate America like "an earthquake”, according to Rob Norton, executive editor of Fortune between 1995 and 2000. “It’s probably had greater effect on the regulation of United States business than anything since the Great Depression,” he says. Its influence extended beyond corporate and into popular culture – Playboy magazine ran a “Women of Enron” special, featuring the newly unemployed.
What occurred between Enron's best and worst of times, and what has happened since, is where McLean comes in. A journalist with Fortune, she was asked to dig into the company’s accounting reports. In attempting to discover how Enron made its money, she found its financial statements “on the dim side of opaque”.
Recounting her investigations, McLean says she discovered numerous discrepancies. “Enron was incredibly profitable, but cash flow was always negative. Debt on the balance sheet was growing rapidly. This was supposed to be a profitable company, so why was it growing so fast?”
Her questions hit a sore point. Then-CEO Skilling called her “unethical” and hung up in the middle of an interview, and Lay called McLean’s editors to urge that her story be killed.
Nevertheless, McLean’s story, “Is Enron Overpriced?”, ran in March 2000. It described the company as a “black box”. No one inside or outside the company could adequately explain to McLean how it was earning such enormous profits. Although not the silver bullet (fraud and criminal behaviour would emerge later), her story was the first criticism of Enron to appear in the mainstream business press.
Later, after the company was subjected to further scrutiny, considerably more debt was uncovered off the balance sheet, hidden inside paper entities designed, basically, to redefine loans as revenues. Traders had systematically inflated expected revenue from questionable long-term deals, which involved incentives giving them a percentage of the estimated take.
The length of time it took to discover this dishonesty, says Norton, was partly due to the effervescent optimism of the late 1990s. “There was a general feeling among the investment community that the trees grew up to the sky.”
It was also during his tenure at Fortune that Enron owned the title of “most innovative company”, an award determined from surveys of hundreds of leading businesspeople. A little sheepish now, Norton says, “They all thought Enron was great.”
McLean, on reflection, reckons that the title wasn’t too far from the truth. “But I don’t think we realised, then, exactly how innovative they were.”
Still, questions remain: how much did Lay and Skilling know? And why did leading analysts and regulators take so long to cotton onto a company that has now become a byword for accounting shenanigans? McLean thinks that more than a few bad apples contributed. “It wasn’t just corruption, it was the depth of corruption. The Wall Street bankers, the accountants, the ratings people, everyone nodded and winked and no one added it all up.”
And a lack of basic maths among scrutineers may also have been a factor: it’s almost rocket science trying to read the books of large companies. Norton recalls asking for Dow Chemicals’ entire tax return to be delivered to his office. The height of the stacked folders that arrived exceeded seven feet. “You could make a good argument that there are only a few thousand people in the world who understand the entirety of the balance sheet and profit and loss statements of big multinational corporations.”
McLean, although not understanding Enron in its entirety, had an advantage over colleagues. As one of the few journalists who majored in mathematics at university, she isn’t intimated by statistics. “If you’re not scared of numbers,” she says, “nothing in finance will scare you.”
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