Cadwallader 1 Diane Cadwallader Professor Thomas Costa Fall2009 AMH2020-U S HIS TO PRES -306857 3 October 2009

Book Review The Smartest Guy in the Room As America leaps into the twenty-first century we can already see that history books will have no shortage of events to write about. The new millennium has brought terrorist attacks to American, Hurricane Katrina that cost thousands of lives, and a movie actor becomes Governor of California. Corporate American has made its mark in history also when the 5th largest company in the world was found out be a shame and had bilked American investors out of billions of dollars due to corporate fraud. The company Enron will have its place in history books to represent the greed and power of the corporate world at the turn of the century.

Cadwallader 2 Title of Book and Length: Among the many books to hit the market about the Enron scandal is a fascinating historical look at the rise and fall of the company. McLean, B., Elkind, P., The Smartest Guys in the Room, The Amazing Rise and Scandalous fall of Enron, 2003 Penguin Group, New York, NY. 435 pp Author: The Smartest Guys in the Room is co-authored by Bethany McLean and Peter Elkind. McLean was born 1970 in Hibbin Minnesota and received her BA in English and math from Williams College in 1992. McLean started her career as an investment analyst for Goldman Sachs and later joined Fortune magazine and is currently a senior writer. (Absolute) In March of 2001 McLean wrote and article for Fortune titled, Is Enron Overpriced which is stated to be the first national publication to openly question the companys dealings. (McLean cover) Coauthor Peter Elkind was also a senior writer with Fortune since 1997. Prior to joining Fortune he was editor at the Dallas Observer and has won several journalist awards and well as authoring the book, Death Watch. (Penguin) Thesis: The idea that the authors portrayed in this book is exactly as its titled, The Smartest Guys in the Room. The book focused more on the history of Enrons top guns and how for years they managed to pull the wool over the eyes of Wall Street, investors, and basically the world. It also tells a story of how thousands of people knew what was going on but they ignored

Cadwallader 3 it because of personal gain. Imagine that a handful of people were able to create one of the largest companys in the world and basically sold very little, had some worthless assets, were able to show double digit profits each quarter, convince all that knew differently to turn away, and by the time someone looked at the books it was said to have $38 billion in debt. (McLean p 161) Now there is an argument that these men were indeed the smartest guys in the room. McLean and Elkind do not focus the book on the legal proceeding or simply the final days of Enron like many other authors. Instead they go to great length to explain the characters and their actions over the years that enabled them to build essentially the largest business scheme of all time. This is not to imply that they are glorifying the key players. More like they are stating that one has to be incredibly smart to be able to pull off not only cooking the books but charming the world with your brilliant investing and trading ideas and to do this for years. General Information: The book begins by detailing Kenneth Lays (Chief Executive officer of Enron) life and the start of HNG (later to become Enron) in 1984. The book chronicles the early years of Enron but really takes off in 1990 when Jeff Skilling (later became Chief Operating Officer and eventually the CEO) joins the company. The inner working of the deals and schemes are detailed throughout the 1990s. The book winds down in December of 2001 when Enron files bankruptcy and then followed with an epilogue of some of the actions taken in 2002 with regards to cleaning things up. The book is basically covering a 10 year period of less than two dozen people thus it was able to provide thorough information of the interworkings of Enron and its top management. The

Cadwallader 4 writers even included background on the cast of characters and occasionally intermixed details of their personal lives and events. It many not have been necessary to include these details but the writers may have wanted to provide some balance to many of the books technical business details. The majority of the book was supplied by primary sources. In the authors notes and acknowledgments McLean and Elkind describe the 16 months of intensive reporting. They tell of the reviewing records, personnel files, e-mails, letters, SEC filing, etc. Then they acknowledge the insight that was gained by the interviews, McLean writes, this is a story about people. We believe we have gained considerable insight into the thinking and behavior of virtually every major character in this book. (McLean) The author goes on to say that they interviewed hundred of people from all levels of the company. The book is presented with quite a bit of detail and some may find all the details to be too much. Rob Walker, currently a freelance journalist and has worked as editor for New York Times, Money, and American Lawyer, as well as contributing writer for Inc. and he provides a review of The Smartest Guys in the Room. Walker writes, They (authors) are forthright in arguing that the Enron story is no simple tale of thievery. Their account is extremely detailed and offers a barrage of specifics on Enrons accounting acrobatics that can be overwhelming at times. (Walker) Walker does have a point about accounting acrobatics and the details of Andy Fastows (Chief Financial Officer) may cause non accounting readers to get a bit lost. The book delves into mark to market accounting and off-balance sheet accounting and the authors do explain the terms used but Andy Fastow was running so many schemes a reader may get tangled

Cadwallader 5 in the details. The bottom line to the accounting actions is understood with more clarity when the author writes think of it this way. All the structured-finance deals Fastow and his team cooked up were meant to accomplish a fairly simple set of goals: keep fresh debt off the books, camouflage existing debt, book earnings, or create operating cash flow. (McLean p 155), In reading some of the interviews with McLean and Elkind reporters often asked if they were surprised at the success of the book. They responded by saying yes and that they expected the book to just be of minor interest but it turned out to be popular with a wide range of people. This book may be incorporated as an optional or additional reading for college business students as it tells a story of accounting games and corporate fraud. The characters although egotistical were also brilliant and it shows the reader how an organization can have little regard for social virtues. Throughout the story you see time and time again those who were responsible for oversight looked the other way. Auditors, board members, creditors, and market annalist all failed the shareholders and this is a good example for scholarly reading on the need for not only oversight but also strong ethics. Enron began as a company that was a transporter of natural gas and Kenneth Lay CEO helped push deregulation and then Enron became a trader of natural gas. As the company grow and spun in more markets Lay relied on more and more people to manage the affairs. The story of highly educated and intelligent people turns into a story of greed and outright thievery. So on one hand this is a story of social history. On the other hand this may be viewed in some way political history because as a result of Enron activities government regulations have changed.

Cadwallader 6 The SEC has long been viewed as having issues (mainly it does not have the recourses to keep pace) however the most sweeping change in its history came about partly because of Enron. I say partly because Enron was not the only company practicing these loose accounting methods nor was it the only company that looked for ways to edge around GAAP (generally accepted accounting practices). This massive change is called the Sarbanes-Oxley Act (SOX) which created tighter reporting requirements for public companies and holds officers liable for the information contained within the reports. The Smartest Guys in the Room used dates within the story only to show the timeline or progression of how Enron grew to be so powerful and the spiral downward. The center of the book included photos of the principle characters. The photos were a nice additional as it gave you an image to the people you were reading about. These photos were ordinary looking people that you meet on the street everyday. The books strength is the portrayal of a company that operated not as a team that was building a strong company, but as individuals with no rules and a culture of social Darwinism. The weakness are best pointed out by Russ Allbery Stanford University in his book review when he states, Without academic citations, however, one has no way of knowing which parts of this story could be independently confirmed. This book desperately needed comprehensive end notes; in their absence, one must extend a lot of trust in McLean and Elkind. (Allbery) Allbery does present a very valid point of the books weakness. Know that much of the information is public record and verifiable. If you bear in mind that there may be some subjectivity in the authors writing you will still gain valuable insight into a period of corporate and American history.

Cadwallader 7 Books Influence: In December of 2001 news reports were full of the headlines about Enron going bankrupt. Through the years I understood only that a few greedy people cashed out money and drove the company into the ground. There is so much more and this book presents the details that almost make you feel like youre enthralled in a mystery novel. This book points to many, many companies that knew the problem and ignored it because of greed. I also thought of what a shame it was that Arthur Anderson (one of the top 5 accounting and audit firms) would go under because of what the people at Enron did. That was a wrong assumption, the Enron account was worth millions of dollars to Arthur Anderson and they did what it took to keep the account. Many banks were involved with loaning money to Enron and they knew there were problems. Why did they do it; the Wall Street Journal estimated that Chase earned as much as $100 million in fees and interest from these deals. (McLean p 159) How Enron built its business is quite interesting and how greed and lack of ethics among so many people is a very scary realization. You dont need to be a bean counter to find this book interesting. As you read you realize that Enron is not exclusive in its corporate culture and how money controls individuals morality. It brings perspective on the issues facing our society today with banking bailouts, companies failing, and unemployment and how it ties to greed. I recommend this book to anybody because it is a piece of history that shows how corporations can control our society. This book gives food for thought on the ethics and social virtues that surround us everyday. Its an understanding that Enron is not unique and that our lives can be controlled by The Smartest Guys in the Room.

Cadwallader 8 References Allbery, Russ Stanford University http://www.eyrie.org/~eagle/reviews/books/1-59184-0538.html Retrieved September 30, 2009 Bethany McLean Absoluteastronomy.com http://www.absoluteastronomy.com /topics/Bethany_McLean Retrieved September 30, 2009 McLean, B., Elkind, P., The Smartest Guys in the Room, The Amazing Rise and Scandalous fall of Enron, 2003 Penguin Group, New York, NY. 435 pp Peter Elkind, The Penguin Speakers Bureau, http://penguinspeakersbureau.com/speaker/32 Retrieved September 30, 2009 Walker, R. No Simple Tales of Thievery Best Business Books 2003, http://www.strategybusiness.com/media/file/03408.pdf Retrieved September 30, 2009