Conspiracy of Fools: Creating Profits…
It was 1998.
As the end of the first quarter rolled around, the finance division was scrambling again. If nothing was done, Enron was going to miss its earnings projections. A little extra creativity was needed to close the gap.
The idea to generate additional profits centered around Chewco, the partnership that agreed to pay Enron an annual management fee of $2 million. The accounting rules said that the fee could only be reported as income by Enron after the company provided the services.
Executives came up with an idea to make 80% of that fee a “required payment”, rather than a “management fee.” The amount of the fee didn’t change, but Chewco had to pay Enron the fee no matter what.
Enron operated under mark-to-market accounting, whereby they essentially reported the all revenue from their deals at the start of the contract. Now the entire value of the five years of “required payments” would be booked by Enron as income.
There was a rush to change the contracts between Chewco and Enron. Two words (management fee) were changed to “required payment.”
Glisan had found almost twenty-six million dollars in new profits, all by changing two words. Everyone celebrated his genius. But the accounting again was wrong. And nobody noticed.
Related posts:
