Lessons from Enron's Debacle. (Business Briefs).

Once a company's accounting is in doubt, its future is, too. Few more potent examples have surfaced in recent years than the collapse of Enron Corp. last fall and the failed acquisition efforts by its far smaller Houston rival, Dynegy.

For years, Enron had amassed something of an aura, building itself into a powerhouse trader of energy contracts at a time when shortages offered huge trading profits. Its rise came quickly: the company grew from a local Houston natural gas utility with $5 billion in revenues in the late 1980s to a $150 billion colossus last year. In the process, its chairman and guiding light, Kenneth Lay, became a noted corporate celebrity and a political mover, and Enron planned to spend $100 million over 30 years to put its name on the new Houston stadium.

But it's clear now that Enron played a little fast and loose with its financial systems, and didn't feel obliged to clue in analysts about what it was doing. Little matter: Most cut the fast-growing company a great deal of slack in terms of its reporting -- filings included some labyrinthine explanations that few could follow -- and didn't regard its lack of transparency as a problem. Indeed, jealous energy industry rivals were quick to emulate what the company was doing, the result of what one industry analyst calls "Enron envy."

It's now apparent that billions of dollars in debt that could have hurt its credit ratings or hampered its growth were kept off the balance sheet "through tangled webs of transactions with dozens of related entities" The Wall Street Journal noted in an analysis. "As the financial demands became greater and the transactions more complex, Enron officials began creating and heading some of the entities, raising serious conflict-of-interest questions."

The sudden departure of CEO Jeffrey Skilling last summer was an ominous portent, but what really set events in motion was the disclosure of the size and financial exposure created by Enron's outside trading partnerships. Years ago, Enron had elected to allow company officials -- most prominently, former CFO Andrew Fastow -- to take key roles in outside partnerships that Enron persistently refused to consolidate on its own balance sheet. When the company announced a $618 million third-quarter loss tied in large part to those partnerships, it triggered a firestorm of criticism; within a matter of days, the company had suspended Fastow.

Enron then restated its earnings going back to 1997 -- affecting close to $600 million in all. A number of accounting professionals claim the errors that forced the restatements were fairly basic and not the result of indecipherable filings. For instance, Enron recorded notes it was to receive in exchange for its stock as additional equity, even though generally accepted accounting principles restrict equity infusions to cash.

Not surprisingly, the troubles didn't end there. The Securities and Exchange Commission launched an investigation into the trading partnerships, "strike suit" lawyers sprang into action as the stock plunged and Enron struggled to keep its credit ratings from being tattered. Meanwhile, Enron had to hunt for capital. When the stock's freefall continued and talks with outside equity partners faltered, the merger with Dynegy became Enron's best option. Then that, too, crumbled in late November when the ratings agencies reduced Enron's credit ratings to junk levels. In early December, Enron filed for bankruptcy.

Clearly, Enron sacrificed far too much on the altar of growth, and Lay also blamed "very bad investments" in non-core areas, such as a power plant in India. Still, its fall from grace shocked many in the financial world. "One minute they are everyone's favorite, completely redefining themselves, corporate officers' faces on every financial publication, etc. -- and then they apparently violate all of the principles that supposedly helped them achieve their lofty achievements," says a corporate treasurer in another industry. "Where were the internal and outside auditors, the audit committee, the SEC, the FASB?"

Enron's implosion offers scary echoes of Sunbeam, Cendant, PharMor and others brought low by accounting irregularities -- and more evidence that power and prestige can evaporate very quickly in today's volatile markets.