Few people ever get the chance to help expose a fraud as massive as Enron’s. Wall Street Journal reporter John Emshwiller, who broke the Enron story, shared his thoughts with the Harbus about the bestseller “24 Days”, which he co-wrote with fellow reporter Rebecca Smith. The title refers to the amount of time that elapsed between Enron’s disastrous 3rd quarter 2001 earnings conference call and the date of the company’s financial restatement, which proved to be the company’s undoing.
“When we were first doing the stories, Enron was one of the most prominent, successful corporations in America, said Emshwiller. “Enron happened so fast that they hardly had time to complain.”
Emshwiller first began looking through the company’s filings when Jeff Skilling suddenly resigned as CEO in early August. The story was a difficult one to tackle, according to Emshwiller. “It is a daunting task – [you really require] two or three hours to read the Enron 10k and I was doing two or three minute ‘quickies’.” (Quickies are shortcuts taught in journalism school, such as skipping to board interlocks and related party transactions.)
Reading the reports, Emshwiller came across some of Enron’s partnerships that were run by Jeff Skilling, and “it seemed very suspicious that a CEO would operate these partnerships.” For almost two years, other reporters, including Bethany McLean at Fortune, had also seen them “but nobody could quite figure it out.”
One of the techniques the reporters used to troll for information was to put a confusing information tidbit into the “Heard on the Street” column to see if readers recognized it. “Most times it doesn’t lead to much, [but] this time it did lead tp a discovery in the way people only dream about,” said Emshwiller.
An anonymous source, whom Emshwiller still refuses to identify, called him at the Wall Street Journal about the information and faxed over confidential documents on the off-balance sheet entities. This information, which Emshwiller couldn’t have obtained any other way, was what eventually provided the means to get the rest of the pieces of the puzzle that finally broke the story.
Although its top financial executives set the stage for the Enron debacle over several years of illegal activities, the company didn’t publicly stumble until October 16, 2001 when they tried and failed to explain a $1 billion write-off during a conference call with analysts and journalists. Ken Lay and Rebecca Smith, who had known each other for years, ended up sparring verbally when Lay could not name the entity that was responsible for much of the loss. Lay finally had the last word when he accused her of being “sneaky.” After that the company came undone with astonishing speed.
Just 24 days later, on November 8, Enron was forced to restate its earnings downward by $586 million over almost 5 years and to add $661 million in debt to its balance sheet in order to properly report off-balance sheet entities that should have been consolidated years before.
“At that point, the company was effectively dead,” said John Emshwiller A trigger in their off-balance sheet entities stated that if Enron’s debt fell below investment-grade, Enron would have to pony up over $3 billion.
Despite the last-minute merger attempt with Dynegy, Enron’s debt was downgraded.
“People at the top of Enron blamed the [Wall Street] Journal stories for starting the panic,” said Emshwiller. “Clearly some people thought we were overstating things.” However, by the time Arthur Andersen disclosed that it had shredded documents, the press was in a “feeding frenzy” and was publishing thousands of articles on the debacle.
The most sobering part of the whole story, says Emshwiller, was the lack of whistleblowers. “There were hundreds of smart, honest, decent people who took part in this, but some of them had enough pieces to raise ethical concerns,” he said. “Enron was one of the elite in the 1990’s – there were very bright energetic people working on Enron deals. When do you start saying to yourself ‘Am I involved in something that’s not right?’, ‘Should I have known more?’ It’s not an easy thing to do, risking your career, your position.”
Emshwiller doesn’t view former Enron Vice President Sherron Watkins as a whistleblower. “There are a number [of Enron executives] that had qualms about the LJM partnerships – it is inaccurate to call her a whistleblower.”
(Although Watkins alerted Lay about her concerns, she never contacted the SEC or the FBI or the press about the fraud.)
But what disturbed Emshwiller most was that the auditors, the investment banking research analysts, the financial experts at the banks, the credit rating agencies, the institutional investors, and many others whose job it was to probe for the truth simply didn’t. “If we hadn’t gotten that one crucial phone call…one of those calls that turned [around] events for us, I would have gone back to covering white collar crime.”
HBS professor Krishna Palepu knows the phenomenon well. He co-authored a Harvard Business Review article last year with Professor Paul Healy that analyses the market as a set of interconnected players, each with a ‘job’ to do, to demand or supply information or both. In the years leading up to Enron, many of the players experienced deterioration in one way or another that left them weaker and less able to demand and obtain the information.
“It is not surprising, given many events that had taken place years earlier, that these institutions were ineffective when they were most needed,” said Palepu, who is an expert in corporate governance.
Emshwiller believes that, despite the Sarbanes Oxley legislation, the pressures that led to Enron haven’t gone away, nor have the abuses. The fundamentals of the market, including the intense pressure on quarterly earnings reports, remain the same. And, just as before the legislation, it all comes down to personal responsibility.