What the Dog Saw [72]
Victor Fleischer, who teaches at the University of Colorado Law School, points out that one of the critical clues about Enron’s condition lay in the fact that it paid no income tax in four of its last five years. Enron’s use of mark-to-market accounting and SPEs was an accounting game that made the company look as though it were earning far more money than it was. But the IRS doesn’t accept mark-to-market accounting; you pay tax on income when you actually receive that income. And, from the IRS’s perspective, all of Enron’s fantastically complex maneuvering around its SPEs was, as Fleischer puts it, “a non-event”: until the partnership actually sells the asset — and makes either a profit or a loss — an SPE is just an accounting fiction. Enron wasn’t paying any taxes because, in the eyes of the IRS, Enron wasn’t making any money.
If you looked at Enron from the perspective of the tax code, that is, you would have seen a very different picture of the company than if you had looked through the more traditional lens of the accounting profession. But in order to do that you would have to be trained in the tax code and be familiar with its particular conventions and intricacies, and know what questions to ask. “The fact of the gap between [Enron’s] accounting income and taxable income was easily observed,” Fleischer notes, but not the source of the gap. “The tax code requires special training.”
Woodward and Bernstein didn’t have any special training. They were in their twenties at the time of Watergate. In All the President’s Men, they even joke about their inexperience: Woodward’s expertise was mainly in office politics; Bernstein was a college dropout. But it hardly mattered, because cover-ups, whistle-blowers, secret tapes, and exposés — the principal elements of the puzzle — all require the application of energy and persistence, which are the virtues of youth. Mysteries demand experience and insight. Woodward and Bernstein would never have broken the Enron story.
“There have been scandals in corporate history where people are really making stuff up, but this wasn’t a criminal enterprise of that kind,” Macey says. “Enron was vanishingly close, in my view, to having complied with the accounting rules. They were going over the edge, just a little bit. And this kind of financial fraud — where people are simply stretching the truth — falls into the area that analysts and short-sellers are supposed to ferret out. The truth wasn’t hidden. But you’d have to look at their financial statements, and you would have to say to yourself, ‘What’s that about?’ It’s almost as if they were saying, ‘We’re doing some really sleazy stuff in footnote 42, and if you want to know more about it, ask us.’ And that’s the thing. Nobody did.”
Alexander George, in his history of propaganda analysis, looked at hundreds of the inferences drawn by the American analysts about the Nazis, and concluded that an astonishing 81 percent of them were accurate. George’s account, however, spends almost as much time on the propaganda analysts’ failures as on their successes. It was the British, for example, who did the best work on the V-1 rocket problem. They systematically tracked the “occurrence and volume” of Nazi reprisal threats, which is how they were able to pinpoint things like the setback suffered by the V-1 program in August of 1943 (it turned out that Allied bombs had caused serious damage) and the date of the Nazi V-1 rocket launch. K Street’s analysis was lackluster in comparison.