Stories like this leave me frustrated: why was it so important for Enron to boost this quarter's earnings by $12 million? I can understand why Richard Cheney and the rest of the Halliburton crowd would change their accounting procedures and conceal the change in order to boost earnings by $100 million: $100 million can have a significant impact. But $12 million? In the context of a company as large as Enron? Why?
Posted by DeLong at September 17, 2003 08:05 PM | TrackBackFT.com Home US: Three former senior Merrill Lynch bankers were indicted on Wednesday for allegedly facilitating a Nigerian barge deal that let Enron inflate its income by $12m. Daniel Bayly, former head of global investment banking, James Brown, former head of strategic asset lease and finance, and Robert Furst, the bank's then-relationship manager for Enron - are charged with conspiring to commit wire fraud and falsify records. The indictment also alleges they lied to Congress and the SEC about the transaction....
The indictment alleges that Merrill Lynch temporarily bought Nigerian power barges from Enron in 1999. The transaction should not have been considered a true sale under accounting rules because Enron had allegedly promised to buy the barges back at a higher price. The justice department previously indicted Andrew Fastow, Enron's former chief financial officer, for allegedly partly engineering the barge deal. Ben Glisan, the energy trader's former treasurer, last week became the first Enron executive to be given a prison sentence.
The indictment said: "By facilitating Enron's deception, Merrill Lynch solidified its status as a 'friend' of Enron and thereby positioned itself to receive an increase slice of the lucrative deals that Enron dispensed to financial institutions"...
If I were to guess, it was less to increase Enron's value but instead allowed managers to meet some goals and collect some bonuses.
Posted by: Rob on September 17, 2003 08:21 PMBy itself, the $12 million doesn't matter. But when lumped together with the proceeds of maybe a dozen similar scams, it starts to make a difference.
Remember, this is Enron we're talking about...
Posted by: Charles Dodgson on September 17, 2003 08:38 PMI think Charles has the explanation. If you want to cook your books, you're safer cooking your books a little bit at a time, rather than in one fell swoop.
Posted by: Walt Pohl on September 17, 2003 09:20 PMWalt-
Is that what they teach in book cooking 101? I would think that numerous suspect transactions would be more noticible that the big banana. It makes me want to buy bonds.
In Robert Bolt's play "A Man for All Seasons", Sir Thomas More asks one of his prosecutors, a former friend wearing the chain of office of Attorney-General for Wales: "Our Lord asks, What profiteth it for a man to gain the whole world and lose his soul? - but for Wales!" (quoted from memory)
Posted by: James Wimberley on September 18, 2003 01:22 AMPerhaps the individual transactions were kept small so that the accountants could justify to themselves and others that the deviation from GAAP accounting was acceptable because the transaction was not "material."
Posted by: Emily on September 18, 2003 02:28 AMEmily is probably right. Considering it was Enron, the approach might have been the auditors' idea in the first place. They wouldn't have to look at 'numerous suspect transactions', only the ones their sampling picked up.
Posted by: Doug Murray on September 18, 2003 04:01 AMEmily is probably right. Considering it was Enron, the approach might have been the auditors' idea in the first place. They wouldn't have to look at 'numerous suspect transactions', only the ones their sampling picked up.
Posted by: Doug Murray on September 18, 2003 04:02 AMEmily is probably right. Considering it was Enron, the approach might have been the auditors' idea in the first place. They wouldn't have to look at 'numerous suspect transactions', only the ones their sampling picked up.
Posted by: Doug Murray on September 18, 2003 04:05 AMI don't know the timing, but if the $12 million was the difference between beating a quarter's earning estimates by a penny, and missing them by a penny, it might have been a very important $12 million for the stock price, given the irrationality of the market regarding such matters.
Posted by: matthew wilbert on September 18, 2003 04:48 AMI've heard that the reason for the market's sensitivity to missing/making earnings estimates by a penny or so is due to the assumption of book-cooking. The idea is that corporations manage their earnings; if they were going to beat the estimates by a comfortable margin this quarter, but were worried about the next quarter, they'd shift some of the earnings.
The conclusion of this argument is that, when a company misses the estimate, it is despite a considerable amount of cooking of the books. It's not so much that they were short by a penny, as that they're believed to be (under the accounting games) to be short by much more.
Posted by: Barry on September 18, 2003 04:57 AM"Emily is probably right . . ."
"Emily is probably right . . ."
"Emily is probably right . . ."
If the Eron people had really been clever, they would have tripled their reported profits by the simple expedient of posting them in the Comments section of Prof. DeLong's weblog . . .
Posted by: rea on September 18, 2003 09:12 AMThen, too, while it was only $12m -- a drop in the bucket for Enron as a whole -- it was more than enough for any single manager to make his quarterly numbers, thereby earning a bonus and/or not making himself a candidate for ouster, given the company's notorious "up or out" way of grooming its executives.
Posted by: kit on September 18, 2003 09:57 AMCharles probably has the answer. Personal management goals likely drove this decision. I once saw the general manager of a European division of a Fortune 500 company cancel all Christmas parties in a good business year because he was afraid he'd miss his division's profit target, and hence his large bonus. I know of a company which currently is deferring the start date of all new hires to Oct 1 to meet the CEO's headcount target for his quarterly bonus. Neither of these was a good business decision, but was driven by the incentives the executives were given.
Posted by: Z on September 18, 2003 10:45 AMWith Enron, it's a million here and a million there and pretty soon we'll be talking about real money. For the Federal government, it used to be a billion here and a billion there. Under Bush, the expression will change to a trillion here and a trillion there.
Posted by: Hal McClure on September 18, 2003 10:58 AMWith Enron, it's a million here and a million there and pretty soon we'll be talking about real money. For the Federal government, it used to be a billion here and a billion there. Under Bush, the expression will change to a trillion here and a trillion there.
Posted by: Hal McClure on September 18, 2003 11:01 AMConsider it a kind of induction rite. "We'll commit a small crime together, which binds us. If either of us betray the other in the future, the other has a way of getting the betrayer in trouble as well. " Unstated: "Later we'll ask for bigger stuff."
Posted by: rvman on September 18, 2003 02:05 PMMore evidence of the essential holiness of the power of free, unregulated corporations to bring about nirvana here on earth.
Posted by: non economist on September 18, 2003 09:59 PM