Included in his Yale Class Syllabus, Jim Chanos discusses some lessons from the Enron Scandal. Here’s an excerpt from the syllabus:
Bethany McLean, then a Fortune writer, broke the Enron scandal in 2001. She quotes one employee explaining how the accounting and auditing process worked at Enron: “Say you have a dog, but you need to create a duck on the financial statements.”
“Fortunately there are specific accounting rules for what constitutes a duck: yellow feet, white covering, orange beak.”
“So you take the dog and paint its feet yellow and its fur white and you paste an orange plastic beak on its nose, and then you say to your accountants, `This is a duck! Don’t you agree that it’s a duck?'”
“And the accountants say, `Yes, according to the rules, this is a duck.’ Everybody knows that it’s a dog, not a duck, but that doesn’t matter, because you’ve met the rules for calling it a duck.”
Companies used accounting flexibility to project artificial growth but dug a hole deeper and deeper with each quarter. That is because the “number” (the consensus estimate that Wall Street analysts predict for companies’ quarterly and annual earnings), Alex Berenson writes, mattered most.
You can read the entire syllabus here:
Jim Chanos – Yale Class Syllabus – Financial Fraud Throughout History: A Forensic Approach
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