JURIST Guest Columnist Nancy Rapoport, dean of the University of Houston Law Center, says that as we watch witnesses at the trial of former Enron executives Kenneth Lay and Jeffrey Skilling continue to testify about Enron's earnings management, we should ask ourselves if we're really all that different from the defendants when we "manage" numbers in other contexts….

The criminal trial of Ken Lay and Jeff Skilling continues this week, and once again, I find myself enjoying the role of a "talking head" on such disparate programs as our local public radio station and AlJazeera (an out-of-body experience if ever there was one). I've been following the testimony obsessively, and the latest round of witnesses have been spending a lot of time talking about Skilling's directives to "hit the numbers" in order to keep Enron afloat. I'm not sure what the jury is thinking, but I do know that "hitting the numbers" is hardly a novel idea for corporations – or for law schools, for that matter.

What exactly does "hitting the numbers" mean? In its benign form, "hitting the numbers" should mean that a company does what it's supposed to do: make a profitable product, provide a profitable service, etc., so that customers keep the company comfortably in the black. Unfortunately, not all companies hit the numbers by (and forgive the mixed metaphor) sticking to their knitting. Others tie the truth up in knots in order to hit their numbers – and Enron was one such company.

People forget that Enron's "black box" approach to the numbers fooled some of the people all of the time, and some of the people not at all. In researching an article that my husband and I wrote [1], we discovered that certain analysts and reporters were not impressed by Enron's habit of rescuing itself from financial disaster at the end of quarters or fiscal years [2]. Bethany McLean, of Smartest Guys in the Room fame [3], reported on Enron's end-of-quarter/end-of-fiscal-year game long before Enron started to spiral toward bankruptcy [4]. In essence, McLean observed that Enron's cash flow was flowing the wrong direction (downward, and fast) for the timing of the deals to be coincidental [5].

The pressure to make the numbers at Enron was likely a direct link to the departure of Rich Kinder, who left the Enron presidency and formed Kinder Morgan. While Kinder was Enron's president, he paid attention to cash flow – he minded the numbers the old-fashioned way, by making sure that input exceeded outflow. After he left, Enron's extravagant spending went way up, and no one was monitoring whether there was enough money in the bank to pay for those expenses.

Not only was no one minding Enron's cash flow, but Enron was rewarding its employees on paper profits booked when the deals were signed – not on actual profits over the life of the deals. So "money out" (including bonuses) bore less and less relationship to "money in." Is it any surprise that Enron needed to "manage" its numbers in the less-benign sense?

Sure, it would have been better to manage the numbers by managing the business: to stop doing the deals that were bad ideas from the start, such as the brokering of "unused" broadband space and the building of a power plant in India so expensive that neither the government nor the citizens could ever pay for the electricity generated there. It would have been better to stick to Enron's original business as an energy company, rather than trying to make it into an asset-lite, new-economy company. It would have been better not to cut side deals with investment banks and analysts. But Enron went for the quick fix, the fast buck, the gamble on large returns when (if?) a new business idea actually worked. And, in the end, the quick fix didn't take, the fast buck never happened, and the gamble failed. Thousands of former Enron shareholders have been reminded of the old saw, "if it looks too good to be true, it usually is."

As we watch the witnesses continue to testify about Enron's earnings management, let's ask ourselves if we're really all that different from many of the folks at Enron. Do we do the right things, and for the right reasons?

Two points hit home for me. One is something I've written about before: the effect of cognitive dissonance on decision-making [6]. Humans are very, very good at fooling themselves into thinking that they can be good people while doing very bad things. The second point is one that a friend of mine recently raised in a different context.

On February 16, 2006, Professor Christine Hurt made a post on the Concurring Opinions blog that reminded me of Enron's earnings management. In her post, she talks about how law schools have managed the "numbers" for admissions purposes:

I teach corporate law, so I follow the recent white-collar prosecutions. Bernard Ebbers was criticized, and eventually punished, for blithely telling subordinates to "hit the numbers" without regard to the consequences. The ABA is also blithely telling law schools to do something without regard to the realities of numbers.

Deans are painfully aware of U.S. News & World Report's ranking system [7], and every year involves a balance of watching the numbers (LSAT, undergraduate GPA, placement rate, and bar passage scores) and taking reasonable actions to influence the numbers. Not every action is reasonable, and some actions are too close to earnings management for comfort [8]. Apocryphal stories of rankings manipulation abound: tales of law schools hiring their own graduates for duty at copiers and of deans directing admissions officers to select half of the class on LSATs and half on undergraduate GPAs.

Are we really so different from the earnings managers at Enron when we, too, stray from our core businesses of educating law students and learning more about law and legal systems? Are we so focused on moving up the U.S. News & World Report rankings system that we would be willing to play games with our numbers in the (typically ill-fated) attempt to move higher on the pecking order? If so, then we're not really as different from Enron as we might think.

* (c) 2006 Nancy B. Rapoport. All rights reserved. The views that I express in this opinion piece are mine alone and not those of the University of Houston or its administration or faculty. Clearly.

Notes

[1] Jeffrey D. Van Niel & Nancy B. Rapoport, "Dr. Jekyll & Mr. Skilling:
How Enron's Public Image Morphed from the Most Innovative Company in the Fortune 500 to the Most Notorious Company Ever" [hereinafter "Jekyll"],
Enron: Corporate Fiascos and Their Implications 77 (Nancy B. Rapoport & Bala G. Dharan, eds., 2004) [hereinafter Enron].

[2] See Bethany McLean, "Is Enron Overpriced?", Fortune, Mar. 5, 2001, at
122 [hereinafter "Overpriced"], cited in "Jekyll", at 81 n.17.

[3]
Bethany McLean & Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (2004); see also Enron: The Smartest Guys in the Room (Magnolia Pictures 2005).

[4] See "Overpriced", supra n.2.

[5] Id.

[6] See Nancy B. Rapoport, "Enron, Titanic, and The Perfect Storm," 71 Fordham L. Rev. 1373 (2003) and, revised, at Enron, supra n.1, at 927 (Nancy B. Rapoport & Bala G. Dharan, eds.) (2004).

[7] See, e.g., Nancy B. Rapoport, Eating Our Cake and Having It, Too:
Why Real Change Is So Difficult in Law Schools, 81 Ind. L.J. 359 (2006); see also the entire symposium issue, entitled The Next Generation of Law School Rankings).

[8] See Alex Wellen, The $8.78 Million Maneuver, New York Times, Education Life Supplement (July 31, 2005, at Section 4A) (available Opinions expressed in JURIST Commentary are the sole responsibility of the author and do not necessarily reflect the views of JURIST's editors, staff, donors or the University of Pittsburgh.