The Phenomenology of Enron Accounting

Institute for Energy, Law & Enterprise

University of Houston Law Center

Bill Bufkins

Dr. Michelle Michot Foss

Special Problems Research Project
Fall 2002
Study Purpose

Recalling Enrons repeating theme Why? Why? Why? from its television

commercials not so long ago, the focus of this study will be to review Enrons financial

statements to answer the important questions concerning what surely is the most publicized

corporate collapse and business scandal in history. Because, as opaque and impenetrable as

Enrons financial statements have been characterized, they do provide very clear, obvious, in

your face data that illustrates major disconnects from reality. The business media and

investment banker tainted Wall Street analysts were in denial over Enrons financial

fundamentals, which just didnt add up, regardless of how much debt was hidden in special

purpose entities.

Early in 2001, shortly after Jeff Skilling was promoted to President & CEO of Enron,

perceptive analysts and business reporters were already questioning some of these obvious

financial statement disconnects and distorted price to earnings multiples.

This study is a basic review of published financial statements and the important financial

measures and ratios that are linked to key value drivers that are used by analysts to develop stock

valuations. Organizational and compensation issues, as well as key events will also be used to

shed light on why things happened the way they did. Certainly, inescapable corporate

governance themes and government regulation issues will be raised throughout this paper. Many

comparisons will be made with peer companies in the energy industry to highlight Enrons

financial metrics and obvious red flags.

Background & Issues

The year 2001, the first year of the 21st century, ushered in two of the most bizarre events

of Hegelian world-historical proportions: the September 11th Al Qaeda attacks on the World

The Phenomenology of Enron Accounting 2 W. Bufkins - 1/27/2004

Trade Center and the Pentagon, and in the inexplicable collapse of Enron, both of which

dominated front page and television news for months on end. Both events represented a

civilizational wake-up call for the United States, the Western world and the new Bush

administration. Although smaller in scale than the bombing of Pearl Harbor and the 1929 stock

market crash, these events ushered in a new and perplexing era. The tech stock and dot.com

market collapse had already ushered in a new period of bewildering economic uncertainty

decline as investors and employees with 401ks saw their life savings vanish.

Then came Enron, propped up by the media as one of the worlds innovative and admired

companies, struck an iceberg and sank like the Titanic. Fortune magazine had characterized

Enron in August, 2000 as one of the 10 stocks to last the decade... that should put your

retirement account in good stead and protect you from those recurring nightmares about stocks

that got away.1

Enron and the Titanic had many similarities; both were inherently flawed structurally and

managerially. The Titanics inferior hull riveting was as fragile as Enrons byzantine, complex,

house of cards off balance sheet financing, mark-to-market accounting, and booking

unrealized profits infrastructure. Like the Titanics inadequate number of lifeboats and reckless

decision to race through iceberg infested waters to beat a Transatlantic crossing record, Enron

obsessively and compulsively clawed its way to the top of the Fortune 500 list by pushing the

envelope far beyond its inherent limitations.

Enrons cryptic financial statements and increasingly arrogant investor relations style

ultimately revealed a byzantine, complex accounting infrastructure and flawed business model

designed to obfuscate the inherent weakness of its financial underpinnings. The resulting

massive accounting scandal and implosion that Sherron Watkins predicted came true. In the end,
1
David Ryneck, 10 Stocks to Last the Decade, Fortune Magazine, August 14, 2000.

The Phenomenology of Enron Accounting 3 W. Bufkins - 1/27/2004

Enrons culture became twisted and inherently malignant, succumbing to extreme greed, driven

by reckless pressure to become something it wasnt number 7 on the Fortune 500 list bigger

in revenues than preeminent corporate supermajors General Electric, Citigroup,

ChevronTexaco and IBM.

Like the Titanic, the human tragedy is all too well known a devastating loss for Enron

employees and shareholders as Enron stock plunged to less than a dollar, with collateral damage

extending to firms such as Dynegy, Reliant Energy, El Paso and Williams who modeled

themselves in various degrees after Enron, and the McKinsey consulting firm approach. Last but

not least, the accounting profession received their wake-up call with the collapse of Arthur

Andersen, the worlds preeminent public accounting firm, who was supposed to assure that

Enrons accounting practices and financial statements conformed to GAAP and SEC regulations,

in the interest of shareholders.

The tale does not end with Arthur Andersen, since deal hungry Wall Street investment

bankers contributed their fair share to dishonest analyst recommendations with regard to Enrons

stock. Commercial bankers such as Citibank and JP Morgan Chase also contributed to

facilitating deals that concealed debt from Enrons balance sheets.

The combined visionary thought leadership of Enrons Ken Lay and Jeff Skilling enabled

them to mastermind the deregulation of natural gas and electric power industry, and build a

company that ultimately raised Lay and Skillings status as innovators to near Jack Welch

levels. Had Enron, thought leader of energy deregulation, and preeminent as the dominant

player in energy trading, become a reich" that would last 1000 years? At the least, Enron had

the makings of the right stuff to make it into a sequel of Collins and Porras celebrated opus

The Phenomenology of Enron Accounting 4 W. Bufkins - 1/27/2004

Built to Last2. And Enron had achieved this as the tech stocks and new economy stocks had

entered into a steep decline. When Skilling inexplicably resigned in August, 2001, this was the

ill omen that started the dramatic slide of Enron stock to $33 a share, down from a high of $83.

As Professor Bala Dharan stated in his testimony to Congress, How could this tragedy

have happened while the companys management, board of directors and outside auditors were

supposedly watching over for employees and investors?3

The Implications of Revenue Size

But Enron did make it to the top 10 of the Fortune 500, displacing such preeminent

corporate giants as General Electric, Citibank and ChevronTexaco. Enron was indeed one of the

fastest growing companies in the world, increasing in revenue size by 942% from $13.3 billion

in 1996 to $138.7 billion in 2001. This hyper-growth attracted a lot of Wall Street attention,

propelling Enron into the ranks the most innovative, admired companies of the fin de siecle.4

The following chart provides shows Enrons growth, driven by Skillings trading operation.

Enron Operating Revenues 1996 - 2001

$160.0
$138.7
$140.0
$120.0
$100.8
$ in Billions

$100.0
$80.0
$60.0
$40.1
$40.0 $31.3
$20.3
$20.0 $13.3

$0.0
1996 1997 1998 1999 2000 2001

2
James C. Collins and Jerry I. Porras, Built to Last: Successful Habits of Visionary Companies, 1994.
3
Bala Dharan, Enrons Accounting Issues - What Can We Learn to Prevent Future Enrons, Presentation to the
U.S. House of Representatives Committee on Energy and Commerce, February 6, 2002.
4
Nicholas Stein, The Worlds Most Admired Companies, Fortune, October 2, 2000.

The Phenomenology of Enron Accounting 5 W. Bufkins - 1/27/2004

 The following two charts compare Enrons relative revenue size of within the global

energy industry and all global corporations. Notice that Enron is placed squarely in the middle

of the four supermajors Enron is larger than Royal Dutch/Shell and ChevronTexaco, but

smaller than ExxonMobil and BP.

2001 Global Energy Industry Revenue Comparison

Revenues in Billions - Fortune 500 Rank in Parentheses

ExxonMobil (2) 191.6

BP (4-Global) 174.2

Enron (5) 138.7

Royal Dutch/Shell (8-Global) 135.2

ChevronTexaco (8) 99.7

Total Fina Elf (15-Global) 94.3

American Electric Power (13) 61.3

Duke Energy (14) 59.5

El Paso (17) 57.5

ConocoPhillips (18) 57.0

RWE (53-Global) 50.7

PDVSA (66-Global) 46.3

Reliant Energy (26) 46.2

ENI (71-Global) 44.6

Dynegy (30) 42.2

Aquila (33) 40.4

Reposol YPF (94-Global) 39.1

Suez (99-Global) 37.9

Marathon Oil (43) 35.0

Mirant (52) 31.5

TXU (58) 27.9

$0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200

$Billions

The Phenomenology of Enron Accounting 6 W. Bufkins - 1/27/2004

 It is also interesting to see how Enron stacks up among the top companies ranked by

Fortunes Global 500 in the following chart. In this list, Enron is already larger than such

behemoths as Citigroup, Toyota, General Electric and DaimlerChrysler proof enough that the

time had come when Ken Lays Napoleonic vision of being the worlds leading company (not

simply the worlds leading energy company) was being realized.

Fortune Global Top 15 Companies by Revenues

$250.0
219.8

$200.0 191.6
174.2 177.3
162.4
Billions

$150.0 135.2 136.9 138.7

120.8 125.9
112.0
94.3 99.7 101.2 105.8
$100.0

$50.0

$0.0
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The Importance of Revenue Size

Revenues are a measure that carries a lot of weight because it is an indicator of success

and economic size, in the same way GNP determines the stature of a nation state. Revenue size

is extremely important for the prestige of the company, its influence in the marketplace, its

ability to command the attention and respect of the media, investors, customers, banks, Wall

Street, and the most talented employees from Ivy League business schools. Revenue size also

can help leverage a companys image in terms of branding as well as the political influence and

goodwill it can project on a local, state, federal and international level.

The Phenomenology of Enron Accounting 7 W. Bufkins - 1/27/2004

Enrons Revenues

Enrons financial statements are however, revealing in many ways. At first glance, it

might seem that Enron was on an extended merger and acquisition binge, especially since several

large mega-mergers had taken place in the energy industry, i.e. ExxonMobil, BP Amoco,

ChevronTexaco, ConocoPhillips, etc. No, Enron was not growing on this scale by acquisition. It

simply grew by the phenomenology of mark-to-market accounting.

One of the central accounting issues with regard to Enrons, and other similar companies

engaging in energy trading, is the methodology of mark-to-market accounting, which allows a

company to book revenue based on the total amount of an entire transaction that includes the

entire cost of the gas or electricity being sold, rather than the fees charged for simply brokering a

deal or sale, like a brokerage firm. This phenomena of generally accepted FASB accounting

standards, especially as applied to energy trading, results in a gross distortion in reporting

revenues. mark-to-market accounting also allows companies to book the present value of a long-

term 10 or 20 year deal as revenues, which includes unrealized gains or losses. Since there are

often no quoted prices, it is difficult to calculate a valuation, so companies are free to develop

and use discretionary methods based on their own assumptions and methods.5 In the case of

Enron, under the extreme pressure to beat earnings estimates, it is no wonder revenues grew the

way they did, especially since incentive plans were based on the hypothetical total net present

value of the deal, not the actual cash flow that would result from the deal. It is easy to see from

the above income statement on the Cost of Goods Sold line that the larger Enrons revenues

became, especially in 2000 and 2001, Cost of Goods Sold became proportionally larger and

profits proportionally smaller.

5
C. William Thomas, The Rise and Fall of Enron; when a Company Looks too Good to be True, it Usually Is,
Journal of Accountancy, April, 2002.

The Phenomenology of Enron Accounting 8 W. Bufkins - 1/27/2004

 If Enron had used the traditional accounting standards which would have calibrated

revenues to a proper size, it would not even be perhaps a $10-15 billion company. Of course,

Jeff Skilling knew this, which is why he was instrumental in converting his Enron Gas Services

group to mark-to-market accounting in 1992 with the approval of the SEC, 9 months after he was

hired. With the SEC approval in place, Enron became the first company outside the financial

services industry to use mark-to-market accounting. This event marks an early turning point,

since it was the beginning of a change in focus to revenue growth, rather than cash flow and

profitability, sewing the seeds of Enrons decline and fall. It was also the genesis of the

acceleration of the transformation of Enron to a trading and financial deal-making company and

the asset light ideology that Skilling fomented.6

Enrons stock peaked at $90.56 in August 2000 as revenues were on their way to the

$100 billion mark by year end. In reality, Enron was not as large or a profitable as it claimed. In

a New York Times article, How 287 Turned Into 7: Lessons in Fuzzy Math,7 reporter Gretchen

Morgenson describes Enron, as the master of obfuscation in its financial statements in which

the accounting envelope was pushed beyond the absolute limits of reality using mark-to-market

accounting. The article states that if Enron had used accounting methods that brokerage houses

use in recording fees made on each trade, Enrons revenues would have been $6.3 billion,

entitling it to number 287 on the Fortune 500, between Campbell Soup and Automatic Data

Processing.

6
Robert Bryce, Ibid, p. 64-68.
7
Gretchen Morgenson, How 287 Turned Into 7: Lessons in Fuzzy Math, New York Times, January 20, 2002.

The Phenomenology of Enron Accounting 9 W. Bufkins - 1/27/2004

 It is easy to see the math used in this calculation. From the income statement, the Cost of

Goods sold is merely subtracted from the operating revenue, as indicated in the table below.

Fuzzy Math Calculations of Enron Real Revenues

Item 1997 1998 1999 2000 2001
Operating Revenues $20,273 $31,260 $40,112 $100,789 $138,718
Less Cost of Goods Sold $17,311 $26,381 $34,761 $94,517 $133,762
Estimated Real Revenues $2,962 $4,879 $5,351 $6,272 $4,956
% Real Revenue Growth 64.7% 9.7% 17.2% -21.0%
Projected Fortune 500 Rank 287 342
Actual Fortune 500 Rank 7 5

In making the same Fortune 500 comparison for 2001, we would find Enron at number

342 on the list, between Ryder Systems and CNF. This would result in Enron dropping from

number 287 to 342 on the list. How can this happen when Enron supposedly grew another 38%

in Operating Revenues in the first 9 months of 2001, which moved it up to number 5 on the real

Fortune 500? As the above table, indicates for 2001, although Operating Revenues increased

38%, Cost of Goods Sold increased 42%, reducing the gross margin between Operating

Revenues and Cost of Goods Sold, resulting in a decline of $1.32 billion, from $6.272 billion to

$4.956 billion. When looking at this row of numbers since 1998, it would appear that Real

Revenues steadily increased from 1998 to 2000. Since the year 2001 reflects only 9 months of

data, it would appear that the $4.956 billion is consistent with the 1998 2001 values. In fact

prorating the $4.956 billion by adding a hypothetical 4th quarter, would result in approximately

$6.6 billion, which is very close to the $6.3 billion for 2000. To provide some additional

perspective on this, it is useful to compare Enrons business unit data to show that the NYT

Fuzzy Math calculations are plausible.

The Phenomenology of Enron Accounting 10 W. Bufkins - 1/27/2004

The following chart depicts revenues and operating income by business unit.

Trans & 12/31/2000

Line Item Dist Wholesale Retail Broadband Corporate Total
Total
$2,955 $94,906 $4,615 $408 $(2,095) $100,789
Revenues
% of Total
2.9% 94.2% 4.6% 0.4% -2.1% 100%
Revenues
Operating
$565 $1,668 $58 ($64) ($274) $1,953
Income (loss)
Op Inc as %
19.1% 1.8% 1.3% -15.7% 1.9%
of Revenues

As the chart indicates, Enrons Transportation and Distribution unit, with only 2.9% of

revenues is clearly the most profitable from an operating income perspective at 19.1%.

Wholesale, with 94.2% of Enrons revenues, is generating only 1.8% operating income.

This illustrates that the inflated revenues of Wholesale, the Enron trading operation, are

artificial constructs of mark-to-market accounting. The practices of booking capitalized 5, 10

and 20 year deals as revenues for one year, bogus round-trip trades and circuitous,

manipulative deals made during the California energy crisis, distort the picture even more.

This phenomena is not limited to just Enron. The ascendancy of other energy companies

with substantive trading operations has propelled several companies over the last several years

into the elite top 50 category, including the following:

2001 2001 2000 2000-2001

Company Revenue Fortune Fortune % Revenue
Rank Rank Increase
Enron $138.7 5 7 37.6%
American Electric Power $61.3 13 146 347.3%
Duke Energy $59.5 14 17 20.7%
El Paso $57.5 17 86 161.8%
Reliant Energy $46.2 26 55 57.6%
Dynegy $42.2 30 54 43.5%

The Phenomenology of Enron Accounting 11 W. Bufkins - 1/27/2004

 The notable standouts on this list are American Electric Power (AEP) and El Paso, who

rose from relative obscurity on the Fortune list to members of the elite top 20, steamrolling past

peer companies Reliant and Dynegy, and corporate giants such as Home Depot, Bank of

America, Boeing and AT&T. Reliant also surpassed SBC Communications and Dynegy grew

larger than Procter & Gamble. The basis of this hyper-growth, again, can be attributed to the

dollar value size of energy trading volume, and various degrees of accounting alchemy.

As Enrons grand strategy continued to unfold, by the end of the year 2000 perceptive

analysts and journalists began to dig deeper into Enrons opaque and impenetrable financial

statements, and asking questions that irritated Jeff Skilling in no uncertain terms. The celebrated

incident where Skill berated an analyst (calling him an asshole) during a conference call for

asking for a balance sheet, was another signal that did not go unnoticed, which led to a

deterioration of Enrons once cozy relationship with Wall Street8. Enron was also attracting

attention by a growing number of skeptics, who just didnt see the profitability numbers adding

up in Enrons financial statements.

As Enrons stock was on its way to reaching its high of $90 in late 2000, it appears as if

the investment community was still snowed by the level of media hype and market euphoria

surrounding Enrons triumphant ascendancy in size, stature and political influence. But Wall

Street Journal writer Jonathon Weil9 had broken open a story about Enron and other energy

marketers in the wake of the California energy crisis, who were artificially boosting their profits

by reporting unrealized, non-cash gains on long-term energy deals. Hedge fund manager Jim

Chanos of Kynikos Associates was among the first to take note of this, and took the bold step of

shorting Enron stock in November 2000. Chanos had also passed this information along to

8
Bethany McLean, Enrons Power Crisis, Fortune, September 17, 2001.
9
Jonathan Laing, The Bear That Roared, Barrons, January 28,2002.

The Phenomenology of Enron Accounting 12 W. Bufkins - 1/27/2004

Fortune reporter Bethany McLean, who published a story in March, 2001 entitled Is Enron

Overpriced?10 An analyst report came out in February from John S. Herold, Inc., in which Lou

Gagliardi and John Parry observed that Enrons trading profits had been steadily declining from

6.5% in 1995 to 2.7% by 200011. The question of earnings multiples was raised by these

analysts. Why should Enron be trading at 55 times earnings when Duke Energy and Goldman

Sachs were trading in the 20-22 times earnings? Indeed, at an analyst conference in February,

2001, Jeff Skilling proclaimed that Enron should be trading at $126, not at its current $73.

Enrons Profitability from the Income Statement

Enrons net income grew from $584 million in 1996 to $979 million in 2000, an average

of 16.9% per year. Net income declined to $225 million for the first three quarters of 2001. The

chart below indicates how miniscule Enrons profits were relative to revenues.

Enron Profits vs. Revenues

$ Billions

150 138.7

125
100.8
100
75
50 40.1
31.3
25
1.4 0.7 0.8 0.9 2.0 1.0 0.3 0.2
0
1998 1999 2000 2001

Operating Income Net Income Operating Revenue

10
Paul M. Healy and Krishna Palepu, Governance & Intermediation Problems in Capital Markets: Evidence from
the Fall of Enron, Harvard NOM Research Paper No. 02-27, August, 2002.
11
Robert Bryce, Pipe Dreams: Greed, Ego and the Death of Enron, August, 2002, p. 249-50.

The Phenomenology of Enron Accounting 13 W. Bufkins - 1/27/2004

Compared to the 164.6% per year average revenue growth rate for the same period, in which

Enron grew from $13.3 to 100.8 billion in revenues, profitability (net income) did not grow at

anything near the same rate as the table below indicates.

Enron Income Statement Summary 1996-2001

Filing Period 1996 1997 1998 1999 2000 2001
Filing Type 10-K 10-K 10-K 10-K 10-K 10-Q/3
Total Operating Revenue $13,289 $20,273 $31,260 $40,112 $100,789 $138,718
% Increase From Previous Yr 43.8% 52.6% 54.2% 28.3% 151.3% 37.6%
Cost of Goods Sold $10,478 $17,311 $26,381 $34,761 $94,517 $133,762
Cost of Goods Sold as % of Revenue 78.8% 85.4% 84.4% 86.7% 93.8% 96.4%
Income Before Tax $1,238 $565 $1,582 $1,995 $2,482 $981
Operating Income $690 $15 $1,378 $802 $1,953 $272
Op Income as % of Revenues 5.2% 0.1% 4.4% 2.0% 1.9% 0.2%
Net Income $584 $105 $703 $893 $979 $225
% Increase From Previous Yr 29% -82% 570% 27% 10% -77%
Net Income as % of Revenues 4.4% 0.5% 2.2% 2.2% 1.0% 0.2%

Yet, maintaining a 15% average earnings growth rate would probably satisfy most Wall Street

analysts a sustained 15% earnings growth rate has been a long standing benchmark for high

performing companies.

The Phenomenology of Enron Accounting 14 W. Bufkins - 1/27/2004

 The following chart compares major global energy companies ranked by their sales

revenues. Enron now occupies second place on the list, in which it catapulted itself over Royal

Dutch/Shell, ChevronTexaco and Total Fina Elf.

Global Energy Company Financial Comparison

% Return Return
2001 % from from Profit on on
Company Revenues 2000 Profits 2000 Margin Assets Equity
ExxonMobil $191,581 -9.0% $15,320 -14.0% 8.0% 10.7% 20.9%
BP $174,218 17.7% $8,010 -32.5% 4.6% 5.7% 10.8%
Enron $138,718 38.0% $225 -77.0% 0.2% 0.4% 2.3%
Royal Dutch/Shell $135,211 -9.3% $10,852 -15.0% 8.0% 10.0% 19.3%
ChevronTexaco $99,699 107.4% $3,288 -36.6% 3.3% 4.2% 9.7%
Total Fina Elf $94,312 -10.9% $6,858 8.0% 7.3% 9.0% 22.7%
American Electric Power $61,257 347.0% $971 264.0% 1.6% 2.1% 11.8%
Duke Energy $59,503 21.0% $1,898 7.0% 3.2% 3.9% 15.0%
El Paso $57,475 162.0% $93 -86.0% 0.2% 0.2% 1.0%
ConocoPhillips $56,984 7.5% $3,250 -14.0% 5.7% 5.1% 15.5%
RWE $50,664 19.2% $1,128 -7.1% 2.2% 1.5% 18.2%
PDVSA $46,250 -13.8% $3,657 -49.0% 7.9% 6.0% 9.9%
Reliant Energy $46,226 58.0% $981 119.0% 2.1% 3.1% 14.3%
ENI $44,637 -1.1% $6,941 30.0% 15.5% 6.0% 28.4%
Dynegy $42,242 44.0% $648 30.0% 1.5% 2.6% 13.7%
Aquila $40,377 39.4% $279 35.1% 0.7% 2.3% 10.9%
Reposol YPF $39,091 -7.5% $918 -59.1% 2.3% 2.0% 7.1%
Suez $37,933 18.6% $1,869 5.3% 4.9% 2.3% 14.6%
Marathon Oil $35,041 -1.5% $157 -61.8% 0.4% 0.3% 3.2%
Mirant $31,502 n/a $568 n/a 1.8% 2.5% 10.3%
TXU $27,927 27.0% $677 -26.0% 2.4% 1.6% 8.5%
AVERAGE $71,945 42.7% $3,266 1.0% 4.0% 3.9% 12.8%
10th%tile 35,041 -9.5% 225 -63.3% 0.4% 0.4% 3.2%
25th%tile 40,377 -3.0% 648 -39.7% 1.6% 2.0% 9.7%
50th%tile 50,664 18.9% 1,128 -14.0% 2.4% 2.6% 11.8%
75th%tile 94,312 40.6% 3,657 13.5% 5.7% 5.7% 15.5%
90th%tile 138,718 112.9% 8,010 43.5% 8.0% 9.0% 20.9%

Enron and El Paso are the least profitable companies at 2/10ths of a percent, which places them

both below the 10th percentile on the list. El Paso had the second highest increase in revenues,

while also having the highest decrease in profits. But Enron also had the second highest

decrease in profits, a negative 77%. So how can companies like Enron and El Paso record large

The Phenomenology of Enron Accounting 15 W. Bufkins - 1/27/2004

increases in revenues with plummeting profitability at the same time? This contrasts with

American Electric Power and Reliant Energy whose revenues increased by 347% and 58%

respectively, and their profits increased by 264% and 119%.

Duke, for example, is the most profitable of the energy traders, with a 3.2% profit margin

and was the only energy trader to report profits of $1.9 billion, placing it at the 44th percentile.

Duke was also the highest energy trader in return on assets (ROA) at 3.9%, while Enron again

was among the lowest at 4/10ths of a percent. Duke had the highest Return on Equity (ROE) for

energy traders at 15.0, while Enron was number 20 out of 21 on the list with ROE at 2.3%. Even

in the year 2000, when Enron reported its highest earnings, Lay and Skilling only managed to

generate ROE of 8.5%.

In terms of profitability compared to peer companies at similar revenue levels, i.e. Royal

Dutch/Shell, GE and Citigroup, Enron is completely outclassed. For example, Royal

Dutch/Shell earned $10.9 billion, 8% of its revenues compared to Enrons $225 million in 2001

or $979 million or 0.97% of revenues in the year 2000.

How Wall Street and the media could have remotely put Enron in the same league as

these companies is mystifying. Citing Enron as the largest bankruptcy in history because of its

revenue size, certainly phenomenology of Enrons accounting practices using mark-to-market

accounting were instrumental in creating this grand illusion. The practice of booking multi-year

year deals and unrealized gains up front, we now know is behind the alchemy of Enrons growth.

If we take a closer look at assets, we find that Enrons esoteric high revving deal-making

engine appeared to have a lot of horsepower, but not a lot of torque to generate profits. If we

look at the peer companies, Royal Dutch/Shell has similar revenues but 75.6% more in assets

than Enron, and produced $10.8 billion in profits. Duke, with 28% less in assets than Enron

The Phenomenology of Enron Accounting 16 W. Bufkins - 1/27/2004

managed to generate $3.2 billion in profit compared to Enrons $225 million in 2001. The above

chart seems to indicate that the companies with the higher assets are also are generating higher

returns on both assets and revenues.

Revenues per employee is another measure that puts Enrons financial metrics into

perspective. The following table provides a snapshot of comparisons. We see that Enron

generated one of the highest ratios of revenue per employee, at an astounding $6.7 million per

employee. But when it comes to profits, we see Enron generating only $10,922 per employee,

much less than the 25th% percentile of peer companies.

2001 Revenues and Profits Per Employee

Revenue per Profits (NI) per
Number of Employee Employee
Company Employees (millions)
Enron 20,600 $6.7 $10,922
El Paso 14,180 4.1 6,559
Mirant 10,000 3.2 56,800
Reliant Energy 16,353 2.8 59,989
Duke Energy 24,000 2.5 79,083
American Electric Power 27,726 2.2 35,021
ExxonMobil 97,900 2.0 156,486
ConocoPhillips 58,700 1.6 55,366
Royal Dutch/Shell 91,000 1.5 119,253
ChevronTexaco 67,569 1.5 48,661
Marathon Oil 30,671 1.1 5,119
AVERAGE 41,700 $2.0 $81,978
25th Percentile 18,477 1.6 22,972
th
50 Percentile 27,726 2.2 55,366
75th Percentile 63,135 3.0 69,536

As we can also discern from the above table, Enron was third from the bottom of the list in

profitability, e.g. net income, per employee, but was the obvious outlier when it came to

revenues per employee, ranking first place.

Clearly, as the previous table indicates, the companies with substantial energy trading

revenues seem to be generating very high multiples of revenues per employee, primarily from

the mark-to-market accounting effect. Enron, of course, was known for selling, buying and

The Phenomenology of Enron Accounting 17 W. Bufkins - 1/27/2004

reselling the same bunch of energy over and over again to boost trading volumes, which was

important for the perception of market share, which also contributed to inflated revenues.12

Price to Earnings Ratio

The price to earnings ratio is another key indicator used by analysts and investors to

determine whether or not a stock is over-valued, under-valued or priced correctly. In Enrons

case, the Herold firm analysts thought Enrons stock should have been trading at the 20-22 price

earnings multiple range, which is where Goldman Sachs, Merrill Lynch and Duke Energy were

trading, all of whom were more profitable than Enron.

Enron Stock Price to Earnings Ratio

Calculated using $1.22 earnings per share
Enron Stock Price $

140 $126
120
100 $85
$73
80 $61
60 $49
$37
40 $24
20
0
20 30 40 50 60 70 103
Price/Earnings Ratio
Note: $126 share price w as Jeff Skilling's prediction to analysts m ade in January, 2001
w hen Enron w as trading at $82 per share. $24 share price based on P/E Ratio of 20 w as
contrarian analysts' valuation

Indeed, if Jeff Skillings pronouncement ever came true that Enron should have been

valued at $126, that would have meant a price earnings ratio of 103, where some of the high

flying tech stocks like Nortel and Sun Microsystems were trading during before the tech bubble

burst.

12
Loren Fox, Enron: The Rise & Fall, August, 2002, p. 222.

The Phenomenology of Enron Accounting 18 W. Bufkins - 1/27/2004

Cash Flow

Enron had a cash flow problem. Not only was it apparent that Enron was not generating earnings

in sufficient quantity that an analyst or investor might expect from its revenues, but it was

continually running on the lean side of cash flow. Hence, Enron required considerable financing

to keep its engine running at those high rpms.

Enron Cash Flow 1997 - 2001

Item 1997 1998 1999 2000 2001
Net Income $105 $703 $893 $979 $225
Operating Income $15 $1,378 $802 $1,953 $272
+ Cash Flow from Operations $211 $1,640 $1,228 $4,779 ($753)
+ Cash Investments in Operations ($2,146) ($3,965) ($3,507) ($4,264) ($1,366)
= Free Cash Flow from Operating Activities ($1,935) ($2,325) ($2,279) $515 ($2,119)
+ Cash Flow from Financing Activities $1,849 $2,266 $2,456 $571 $1,880
= Free Cash Flow to Equity (FCFE) ($86) ($59) $177 $1,086 ($239)

In taking a closer look at Enrons cash flow statements, we can see that Free Cash Flow from

operating activities from 1997 - 2001 was negative every year except in 2000, when Enrons

revenues more than doubled, increasing from $40 billion to 101 billion which generated more

than twice as much operating income as well. But Enron had been going through a lot of cash

since 1997.

In reformulating Enrons cash flow statements using the highly regarded Columbia

University professor Stephen Penmans methodology,13 in subtracting Cash Investments in

Operations from Cash Flow from Operations clearly shows that the resulting Free (net) Cash

Flow from Operating Activities results in consistently negative numbers, with the exception of

the year 2000.

13
Stephen Penman, Financial Statement Analysis & Security Valuation, 2001, p. 313.

The Phenomenology of Enron Accounting 19 W. Bufkins - 1/27/2004

 This explains why Free Cash Flow to Equity, the net increase or decrease in cash flow,

e.g. cash flows bottom line is negative 3 out of the 5 years between 1996 2001, as the

following graph illustrates requiring massive inflows of cash from financing to offset the net

deficit of cash flows from operations.

Enron Cash Flow Metrics

3000
2456
2266
1849 1880
2000
1086
1000 571
331 515
$ Millions

141 177
0
-86 -59
(190) -239
-1000

-2000
(1935)
(2119)
(2325) (2279)
-3000
1996 1997 1998 1999 2000 2001
Free Cash Flow from -190 -1935 -2325 -2279 515 -2119
Operating Activities
Cash Used in Financing 331 1849 2266 2456 571 1880
Activities
Free Cash Flow to Equity 141 -86 -59 177 1086 -239

Against cumulative sales of $101 billion in 2000 and $138.7 billion in the first three

quarters of 2001, this is an amazingly small amount of cash, stated Robert F. McCullough, an

authority on the electric utility industry, who testified before Congress. Although Enron was

reporting growing profits (net income), the cash flow statements show clear evidence of a cash

squeeze last year. McCullough also points out that although Enron reported $4.8 billion in Cash

The Phenomenology of Enron Accounting 20 W. Bufkins - 1/27/2004

Flow from Operations in 2000, the total included $5.5 billion in deposits required for California

customers by Enron because of the escalation in energy prices money in the sum of $2.35

billion that Enron reportedly had to repay.14

Enrons operating income margins had been declining also, from 5% of revenue to 2%,

which ultimately caught the attention of hedge fund manager Jim Chanos of Kynikos. No one

could explain how Enron actually made money...not only was Enron surprisingly unprofitable,

but its cash flow from operations seemed to bear little resemblance to reported earnings.15

Another reason Enrons cash flow and operating margins were declining from 1997

onward was due to the departure of Rich Kinder, President & COO for seven years and Ken

Lays right hand man, who had a reputation for being a strict financial manager. It was Kinder

who actually ran Enron. He was the bottom line manager who ran a tight ship, controlled

expenditures and provided a much need structure of discipline, demanding that his managers

meet cash flow targets as well as profit objectives16. Kinder also added very little debt to the

balance sheet during his tenure. Many have attributed Enrons demise to the departure of

Kinder, who subsequently founded the successful company, Kinder Morgan Energy Partners,

and became a billionaire by running a solid asset-based company.

Skilling, a former McKinsey partner and the master strategist who created Enrons

trading business, replaced Kinder as President & COO in 1997, which ushered in a new era of

rapid growth, that ultimately unwound the rigorous financial discipline and controls of the

Kinder administration, particularly in the areas of cash flow and debt management.

Kinder and Lay balanced and complemented each other perfectly. The soft-spoken Lay

played the David Rockefeller-like statesman role as Chairman & CEO and networked with

14
Gretchen Morgenson, Ibid.
15
Bethany McLean, Why Enron Went Bust Fortune, December 24, 2001.
16
Bryce, Ibid, p. 132-34.

The Phenomenology of Enron Accounting 21 W. Bufkins - 1/27/2004

presidents and heads of state. Although Kinder was exactly what Lay needed as a counterpart to

effectively manage the brass tacks of Enrons increasingly complex global portfolio of

businesses and finances, with Skilling assuming the role of COO in 1997, Lay and the Board

thought the management succession plan was in good order.

After four years as COO, Skilling was promoted to President & CEO in early 2001. Lay

had a visionary master strategist and new economy architect who was worthy of the CEO role.

Certainly, there was speculation that Lay would perhaps play a role in the Bush Administration

at some point.

Enrons cash problems in the post-Kinder era were also exacerbated by the phenomenal

hiring growth, increasing from 7,500 employees in 1996, Kinders last year, to 20,600 in 2000.

Needless to say, the multiplication of the number of employees was driven by the continuous

expansion of trading operations. And of course, every time a trader booked a power plant deal,

gas or electric power trade, mark-to-market accounting was used to book huge revenues and

profits, although there would be no immediate inflow of cash. And because of the incentive

plans, it was in the interest of the trader to inflate the value of a deal to the maximum, since his

cash bonus was based on the booked value of the deal. As the internal competitive pressure to

make deals heightened, more and more traders and deal makers went after bad deals, which

ultimately would not bring in the cash flow or profits. Skilling, with Lays and the boards

approval, also went on a capital spending spree, spending $3.8 billion in 1997 with the

acquisition of Portland General Electric and investments in Guam, India, Turkey, Puerto Rico,

Italy, Britain, Poland and Brazil17. All total, Enron spent $16.3 billion on investments from 1996

- 2001, of which 64% or $10.5 was for capital expenditures, and $5.8 billion was for equity

investments.
17
Robert Bryce, Ibid, p. 134-136.

The Phenomenology of Enron Accounting 22 W. Bufkins - 1/27/2004

Debt, Retained Earnings and The Balance Sheet

Kinder made everybody accountable for every penny...but when Skilling came in there

were no budgets,18 remarked a senior member of the finance staff.

The above statement can be verified by seeing the progression of various line items in the

cash flow statement and balance sheet. From 1996 to 1998 cash in the treasury declined from

$256 million to $111 million, a decrease of 57%. Operating income also plummeted from $690

million to $15 million from 1996 to 1997, a 98% decrease and Net Income decreased from $584

million to $105 million, an 82% decrease.

Enron Balance Sheet Items

$14.0 13.0
11.5
$12.0 10.2
9.6 9.6
$10.0 8.2
Billions

7.4 7.0
$8.0 6.3
5.6
$6.0
3.3 3.7 3.2
$4.0 2.2 2.7 2.5
2.0 1.9
$2.0
$0.0
1996 1997 1998 1999 2000 2001

Total Debt Retained Earnings Shareholders' Equity

As the above graph indicates, from 1996 to 1998 total debt increased from $3.35 billion

to $7.4 billion, an increase of 121%. But by September 30, 2001, Enrons debt had mushroomed

to $13 billion on the balance sheet, not counting debt hidden in Special Purpose Entities (SPEs).

Interest payments more than doubled from 1996 to 1997, increasing from $294 to 607 million,

and then increased 303% from $607 million to $1.84 billion between 1997 and 2000. By

18
Bryce, Ibid.

The Phenomenology of Enron Accounting 23 W. Bufkins - 1/27/2004

September 30, 2001, Enrons interest payments had doubled again to $3.9 billion. Shareholder

equity declined by a total $1.9 billion primarily due to the termination of controversial outside

investment partnerships run by former CFO Andrew Fastow.19

The following chart displays Enrons Debt to Equity ratio, indicating that long term debt

climbed from 90% to 121% of shareholders equity in Skillings first year as COO, and then

subsequently declined, which shows the cumulative effect of off balance sheet financing over

this period.

ENRON DEBT TO EQUITY RATIO

140.0%
121.1%
Shareholders' Equity
% of Debt relative to

120.0%
100.0% 90.0% 85.7%
80.0% 72.6% 71.7% 68.2%

60.0%
40.0%
20.0%
0.0%
1996 1997 1998 1999 2000 2001

DEBT TO EQUITY

The debt ratio was very important because of the obvious need to maintain favorable investment

grade credit ratings on long-term debt from the Moodys and Standard & Poors agencies. In

1998 Andrew Fastow was appointed to the position of Chief Financial Officer by Skilling in

March of 199820, and the debt ratio started declining immediately as Fastow set up a transaction

19
Bethany McLean, Ken, Lay Your Cards on the Table, Fortune, November 12, 2001.
20
Arthur L. Berkowitz, Enron: A Professionals Guide to the Events, Ethical Issues and Proposed Reforms, 2002, p.
6.

The Phenomenology of Enron Accounting 24 W. Bufkins - 1/27/2004

to move the joint investment by Enron and CalPERS, named JEDI, to Chewco, another special

purpose entity (SPE), which would move some $600 million off the balance sheet.21

Enrons shareholders also suffered a large decline in retained earnings and shareholders

equity when Enron announced that it was restating its earnings for a 4 year period spanning

1997 through 2001. The October 16, 2001 press release that announced a $1.01 billion charge to

earnings and in a $1.2 billion reduction in shareholders equity. The restatement also resulted in

another $591 million in losses over 4 years as well as an additional $628 million in liabilities as

of the end of 2000. To top it off one analyst report stated that Enron had burned through $5

billion in cash in 50 days.22

On October 22 Enron announced that the SEC was investigating its related party

transactions between Enron and partnerships set up by Andrew Fastow. Enron stock sunk to less

that $10 a share, down from $83 a share in February when Skilling made the pronouncement that

Enrons stock should be selling for $126 a share. Enron had just struck the iceberg. On

November 9th, the Dynegy-Enron merger plan was announced by Chuck Watson, with a visibly

shaken, sad sack Ken Lay standing off to the side. By November 28 the deal was off due to

Enrons lack of full disclosure of its off-balance sheet debt burden and anemic cash flow. On

November 30th Enrons stern was already out of the water, high up in the air, like the Titanic, as

its stock plunged to 26 a share.

Executive Compensation

There is a direct correlation with the revenue size of a company and the value of

executive compensation packages. So for Enron to be a peer of General Electric or Citibank in

terms of revenues on the Fortune 500, peer company comparisons are made by executive

21
William Powers, Raymond Troubh and Herbert Winokur, Powers Report (Report of Investigation by the Special
Investigative Committee of the Board of Directors of Enron Corp). February 2002., p.6.
22
C. William Thomas, Ibid, p. 7.

The Phenomenology of Enron Accounting 25 W. Bufkins - 1/27/2004

compensation consultants who are hired by management or the compensation committee of the

board of directors to present competitive pay data and recommend pay levels for the direct pay

components, including base salaries, annual cash bonuses, and stock based long-term

incentives such as stock options and restricted stock awards. For example, the typical total cash

compensation (base salary plus cash bonus, excluding stock based awards) for a CEO of a $10

billion company is $1.85 million. For a $25 billion company, total cash jumps to $2.4 million

and for a $100 billion company, total cash at the 50th percentile is $3.5 million. However, total

compensation including stock-based long-term incentives provides significantly greater

opportunities to acquire wealth than the short-term cash compensation portion. The median (50th

percentile) total compensation is an incredible $4.1 million for companies in the $2.5 -5 billion

revenue size (average: $3.6 billion). In the $5-10 billion range (average: $7.3 billion), total

compensation jumps to $5.8 million. For companies over $10 billion (average: $30.6 billion)

total compensation is $9.7 million.

Ken Lay for example had a base salary of $1.3 million and received a $7 million bonus in

2000, for total cash compensation of $8.3 million, which would put him 137% above the 50th

percentile for a $100 billion company since Enron had already attained $101 billion in revenues.

This extraordinary amount relative to the market would have been due to the perception of

company performance by the board of directors, since revenues climbed from $40 to 101 billion,

and profits increased 10% to $979 million. Ken Lay also sold 408,000 shares through the

exercise of options at prices ranging from $81 to $43 per share of Enron stock as it started its

decline from the winter of 2000 through July, 2001. Jeff Skilling sold 1.75 million shares before

he inexplicably resigned in August, 2001. Needless to say, Lay, Skilling and others made scores

to hundreds of millions on their stock option exercises.

The Phenomenology of Enron Accounting 26 W. Bufkins - 1/27/2004

 The following chart displays the relative values of executive compensation packages by

revenue size. The chart divides the compensation package into three separate components: base

salary, annual cash incentive and long-term incentives. As you can see, at the CEO level, the

long-term incentives portion represents the greatest values, which are dependent on the size of

stock option grants and restricted stock awards, and ultimately the stock price.

CEO Compensation Comparison

by Company Revenue Size

45,000,000

40,000,000

35,000,000
Total Compensation

30,000,000

25,000,000 32,759,484

20,000,000
29,019,377

15,000,000 21,556,483

10,000,000 12,227,866
7,563,558
5,000,000 4,764,973 7,381,000
1,767,400 1,976,900
803,400 1,105,000 1,399,900
1,0 4 2 ,2 0 0 1,2 7 6 ,2 0 0 1,4 8 7 ,6 0 0 1,7 3 4 ,0 0 0 1,8 6 7 ,9 0 0 1,3 0 0 ,0 0 0
-
10 25 50 100 140 Ken Lay
Revenues in $Billions

Base Salary Cash Incentive Long Term Incentives

Lays base salary is more than one half million lower than the average salary for a $140 billion

company, however, the $7.4 million cash bonus he received is more than triple the average

award. The prevailing practice for a multiple of base salary for annual cash incentive payments

is close to 100% of base salary CEOs of larger (profitable) companies, which are usually based

The Phenomenology of Enron Accounting 27 W. Bufkins - 1/27/2004

on short-term, annual earnings results. Key Lays cash incentive award was 570% or 5.7 times

base salary, which is a very high payout for a company that was not generating huge profits and

cash flows compared to other high performing companies with much stronger cash flow and

balance sheets.

The obvious downside to stock based compensation is when the stock price falls below

the exercise price of stock options. As the chart below indicates, it is no wonder that insider

trading activity became widespread as Enrons stock declined during 2001. Enrons last stock

option grant to executives was made at a strike price of $83.00 per share.

Enron Stock Price 2001

$90.00
$82.00
$80.00
73.09
$70.00
$60.00 $60.00

53.05
$50.00 $48.78

$40.00 40.25
$35.00
$30.00
$26.05
$20.00 $16.41

$10.00 $9.06
$4.71
$0.00 $0.40

1/9/2001 2/28/2001 4/19/2001 6/8/2001 7/28/2001 9/16/2001 11/5/2001 12/25/2001

Stock Price

The Phenomenology of Enron Accounting 28 W. Bufkins - 1/27/2004

Conclusion

Clearly, as Professor Bala Dharan stated in his address to Congress, the Enron meltdown

was the result of a massive failure of corporate control, governance, an unparalleled breakdown

of checks and balances, and the grand failure its business strategy. Lay, Skilling and the Enron

board also made a preposterous number of bad business decisions throughout the company,

including Dabhol, Azurix, and Broadband. Enron was burdened with dozens of failing

investments and assets hidden in special purpose entities, whose viability and existence

depended on maintaining the high value of inherently fragile Enron stock.23

To add fuel to fire, Enrons problems were exacerbated by an incentive compensation

system24 and a destructive forced ranking performance management system that fostered extreme

self-interest and greed and an extreme short-term focus that damaged teamwork and information

sharing. It also encouraged deception and the compulsion to make any kind of deal that could be

booked with fabricated numbers that would prop up the price of Enron stock and assure that the

deal-maker would hit targets in order to receive a large cash bonus. Indeed, the heavy use of

stock options was facilitated by the fact that they do not affect earnings or cash flow. Options

did, however, served to reinforce an arrogant, obsessive-compulsive culture that was

overwhelmed by the game of meeting, exceeding and fueling Wall Streets exaggerated quarter-

to-quarter expectations.

Enron was just one corporation who played the game well for a time, but simply pushed

the envelope too far. In pushing the envelope too far, the unprecedented Enron media spectacle

magnified the conflicts of interest with Wall Street analysts, investment bankers, commercial

lending institutions, and accounting firms.

23
Bala Dharan, Ibid.
24
Healy and Palepu, Ibid., p.15.

The Phenomenology of Enron Accounting 29 W. Bufkins - 1/27/2004

 Although the day to day media spectacle with Enron is over, it appears that confluence of

inextricably linked forces and processes have been set in motion to improve corporate

governance and strengthen government regulation that is critical for the effective functioning of

market intermediaries.25 The personnel change initiatives that have been made in the Bush

Administration to replace the SEC chairman, the chairman of the accounting oversight board,

Council of Economic Advisors and Treasury Secretary will hopefully will prove to be positive

actions that will demonstrate support and commitment to reform.

There is no doubt that the wide ranging, dysfunctional organizational behavior aspects of

Enrons inherently malignant culture and ethical value system, along with the decadence of Wall

Street and the Accounting profession, created an unacceptable state of unhealthiness with regard

to our economic and governance institutions. The resulting breakdown of standards, best

practices, checks and balances has gone a long way to damage investor confidence. Correcting

these massive conflicts of interest will require a sustained infusion of change management,

reengineering, and oversight based on redefined overarching ethics and principles.

We can only hope that some truly constructive reforms can be accomplished in the near

future that would put an end to the unwarranted, unethical use of mark-to-market accounting and

fraudulent financial practices. Conflicts of interest concerning the independence of security

analysts from their investment banker counterparts, and deceptive off balance sheet financing

practices using special purpose entities and disguised loans used to hide debt must also rectified

and eliminated.

Ultimately, the Enron debacle will hopefully provide many opportunities for government

agencies, legislators, jurists, universities and public policy research organizations to develop

innovative and sound solutions to address the full civilizational scope of these problems.
25
Healy and Palepu, Ibid., p. 38-40

The Phenomenology of Enron Accounting 30 W. Bufkins - 1/27/2004

 List of References

Berkowitz, Arthur L., Enron: A Professionals Guide to the Events, Ethical Issues, and
Proposed Reforms, CCH, 2002.

Bryce, Robert, Pipe Dreams: Greed, Ego and the Death of Enron, Public Affairs, 2002.

Bush and Enrons Collapse, Economist, January 11, 2002.

Dharan, Bala G., Enrons Accounting Issues What Can We Learn to Prevent Future Enrons,
Testimony before U.S. House Energy and Commerce Committees Hearings on Enron
Accounting, February 6, 2002. (www.energycommerce.house.gov)

Dharan, Bala G., Financial Engineering with Special Purpose Entities, June, 2002 (revised).

Fox, Loren, Enron: The Rise and Fall, Wiley, August, 2002.

Healy, Paul and Palepu, Krishna, Governance and Intermediation Problems in Capital Markets:
Evidence from the Fall of Enron, Harvard NOM Research Paper, August, 2002.

Hewitt Associates, Regression Analysis Report, 2002, Total Compensation Measurement,

April 1, 2002.

Hewitt Associates, Executive Long-Term Incentives: US 2002, Total Compensation

Measurement, April 1, 2002.

Thomas, C. William, The Rise and Fall of Enron; When a Company Looks Too Good to Be
True, It Usually Is, Journal of Accountancy, April, 2002.

McCullough, Robert, Enrons International Ventures, McCullough Research Presentation,

March 21, 2002.

McLean, Bethany, Is Enron Overpriced? Fortune, March 5, 2001.

McLean, Bethany, Enrons Power Crisis, Fortune, September 17,2001.

McLean, Bethany, Ken, Lay Your Cards on the Table, Fortune, November 12 ,2001.

McLean, Bethany, Why Enron Went Bust, Fortune, December 24,2001.

Morgenson, Gretchen, How 287 Turned Into 7: Lessons in Fuzzy Math, New York Times,
January 20, 2002.

The Phenomenology of Enron Accounting 31 W. Bufkins - 1/27/2004

Penman, Stephen, Financial Statement Analysis & Security Evaluation, McGraw-Hill Irwin,
2001.

Price Waterhouse Coopers, EdgarScan (www.edgarscan.pwcglobal.com), various financial

statements.

Powers, William; Troubh, Raymond and Winokur, Herbert, Report of Investigation by the
Special Investigative Committee of the Enron Board of Directors, February 1, 2002.

10K Wizard (www.10kwizard.com), various financial statements.

Whisenant, Scott, Lecture on Enron Financial Ratios, Class Lecture at the Bauer College of
Business; University of Houston, October, 2002.

Yahoo Finance (www.yahoo.com), company reports and industry financial data.

The Phenomenology of Enron Accounting 32 W. Bufkins - 1/27/2004