Journal number 13 – A reflection paper on the movie "Enron: The Smartest Guys in the Room"

Its APEC season and the next week after our professor will be on a business trip to India. In lieu of the classes that we will miss, she instructed us to watch the movie “The Smartest Guys in the Room” and write a reflection paper about it. This is about the Enron scandal that happened in the early 2000s that shook business world and the accounting practice globally.

Greed, cost-benefit analysis, and management integrity, these are just among the words that I found surprisingly present in most of the cases that we have tackled during the previous classes and this movie. Enron, before the financial scandal was one of America’s top companies with an estimated market value of approximately $70 billion. The film featured Enron’s executives who were involved in unethical practices that took place in the business. The film also portrays its founder, Kenneth Lay’s, humble beginnings and Jeffrey Skilling’s rise and demise in the business world before and after becoming Enron’s CEO. Based on the movie, Enron’s executives were involved in a couple of unscrupulous activities, they are the following:

• Lay found out that two his traders were involved with questionable trades that are putting the company in great risks. Instead of disciplining them and enforcing the company’s code of ethics, Lay encouraged them more as at that moment based on a cost-benefit analysis the company will in a better position than if the trader were fired as at that time that is the only part of the business in total that was making money. Another executive, Mike Muckelroy, found about this and showed his findings to Lay but the latter ignored this and when this was made known to the public he argued that he did not know of this even though there was evidence proving otherwise.
• Skilling got Arthur Andersen’s (America’s oldest accounting firm at that time and one of the original big five accounting firms) approval of using Market-to-Market accounting method. This let Enron cooked their books by valuing their contracts or assets by their potential value which is on the presumption that the company’s stocks will continue to increase in value. This is of course very uncertain especially in the commodities/oil market where prices are very volatile and uncertain. This enabled Enron to make their financial statements look good when in fact their business ventures are not doing so well like the ones they made in India. From a business standpoint, they knew that this would tantamount to misleading their investors that is why they secured the accounting firm’s approval to make it legal and appear that this is in the best interest of the company and the shareholders.
• Enron’s executives took advantage of the power deregulation law in the state of California. As stated by the company’s former Public relations spokesperson, there were several times that the company would not meet its targeted earnings. Miraculously, they will be able to do so in the 11^th hour. Little did he know that the company was manipulating the production of electricity to artificially increase its price to ultimately help Enron meet its financial targets. As a result there were massive blackouts even though there was enough capacity. What’s ironic in this instance is Enron used its resources to find legal loop holes in the free market and used it to unjustly benefit the company. The free market economy concept has actually good intentions behind it, however, because of Enron has done it made it look like that its not the case.
• Lastly, when the masterminds of all the above knew that Enron will eventually collapse, they headed for the nearest exits selling their shareholdings while making the public believe that the company is still doing well. In fact, in the movie, before Skilling resigned, he even encouraged his employees to buy the company’s stock for their retirement. This resulted to many employees losing their pensions and retirement funds when the company became bankrupt.

What’s worse in the case is that Enron has good employees like Cliff Baxter and Sherron Watkins; after finding the above, they escalated the issues to higher management and in this case to Skilling and Lay but the two ignored them. Enron’s collapse would have been prevented had top management listened to them as Watkins told Lay that companies that do come out and admit their wrongdoings were able to move forward whilst if they were found out by external companies they would most likely be dealing with serious repercussions that the company may not be able to overcome.

Truly, Lay’s story was one to be admired about by everyone as he started-out as a small boy delivering newspapers to founding and becoming chairman of one of America’s most valued company - Enron. Initially, I can’t understand how was Lay able to come to convince himself that what his executives were doing was right at the time. Personally speaking, I think that as successful businessman greed got the best of him later in his days as Enron’s Chairman that he was willing to take greater risk for unsustainable and short-term gains than sustainable long-term gains. Furthermore, he was enjoying political power by the backing of the Bush family making him think that he can bend the law according to his will. 

One of the realizations that I have made in watching the film is that we’re not much different for the US even though they are a developed nation while we are not. The only difference is that at least in their country the culprits are trailed and convicted unlike in our country where most of the time no one is convicted especially if they have the political and financial power to do so. Although the Enron scandal tainted America’s reputation in the business world it is also good in a way that the culprits were caught and made answerable to the public. They are in fact currently in prison and serving their jail terms. It also allowed the accounting practice and the business community to place safeguards in check to protect the public and shareholders from people taking advantage of loop holes in the free market to unjustly benefit themselves. Unfortunately, this is not the case in our country wherein there are hardly culprits punished even with widespread traditional and social media coverage. Last year we have the pork barrel scam and until now no one is still convicted and the present administration is still trying have the same by renaming it to Disbursement Acceleration Program. Personally, I think that they are trying to make this legal by making it into a law. On the other hand, very recently, we have the Tanim Bala scam at our airports, however, even with vast resources that the government has on its disposal it was not able to stop the scam completely and determine who the real culprits are. My point here is until someone is convicted, we will never learn as a nation as we have to know what has gone wrong for us to know what is right. Unfortunately, unlike the US, we have a very slow and weak judicial process that makes the powerful able to shield themselves from prosecution and punishment. In our case, one of the senators who allegedly used his PDAF funds to enrich himself is now out on bail and sitting on one of the highest post in our government.