When Forbes asked me to write on the topic "the lessons of Enron", I considered the question up and down, from the left and from the right, from inside and out. And you know what I concluded? 

There are no lessons of Enron.

Enron teaches us nothing new; it does remind us of lessons we should have learned long ago, and that we need to re-learn again and again. The Enron story is useful because it reaffirms old truths. So I will proceed not with the lessons of Enron, but with the reminders from Enron.

Enron reminds us that if something seems too good to be true, it probably is.

It reminds us that a revolution is not a tea party.

It reminds us to distrust complicated answers.

It reminds us that being accurate is not the same as being truthful.

Enron reminds us that the Mafia is a good business model—but not to companies on the New York stock Exchange. 

It reminds us that conflicts of interest matter, and that with power comes responsibility.

It reminds us that the most dangerous delusion is self-delusion.

None of this is new; all of it bears repeating.

Enron was formed in 1986 out of a merger of natural gas pipeline companies, Houston Natural Gas and InterNorth.  Kenneth Lay, a PHd in economics and a former Navy officer and federal regulator engineered the merger as head of Houston Natural Gas and he was named chairman and CEO.

Originally the company was to be called Enteron.  But someone looked that name up in the dictionary and found that that word—Enteron-- means "intestines."  So they decided to drop the "te" and go with Enron. 

Lately the company has talked about returning to its roots and changing its name: maybe it should call  itself intestines, inc.

In 1996, Lay promoted Jeffrey Skilling to president and chief operating officer.  Skilling had joined the company as a senior executive in 1990.  Over the years, Skilling would advocate a business philosophy that de-emphasized hard assets such as plants and pipelines in favor of trading and so-called wholesale management services. 1990 was also the year Andrew Fastow, a former banker, joined Enron.  By 1998, he was CFO.  

In 1993, Enron joined a partnership with the California Public Employees Retirement System (CALPERS) to develop energy projects. The partnership was referred to by its initials: JEDI.  By 2001, Enron had registered more than 3000 partnerships.  With the exception of a few, what they were all for remains a mystery.  In July 2000, Enron entered a 20-year deal with Blockbuster to supply video-on-demand.   Eight months later the deal was abandoned, and there was still no video-on-demand.  The agreement provided that profits would be shared equally: Enron claimed a profit of $111 million; Blockbuster's profit was zero.

In 1986, Enron had sales of $7.5 billion.  Sales rose for a few years and then fell.  By 1993, they had recovered to just under $8 billion, slightly higher than where they started seven years earlier. In 1995, two years later they took off, rising by 38% in one year, then by 53%, then 54%, then 28%.  Between 1999 and 2000, Enron's sales increased by 151% to $101 billion.

The next year it went bankrupt.

REMINDER #1: If something seems too good to be true, it probably is.

The tragedy of Enron is not its fall, but its rise.

Since Enron declared bankruptcy six months ago, there has been a mass of recriminations.  Who is to blame-- Enron's executives, its accountants, the bankers, the analysts, the regulators?  I am here to name a new villain: Fortune Magazine.  Now I say this not because Fortune is Forbes' main competitor. And I say this despite the fact that one Fortune writer, Bethany McLean, became deservedly famous as a lone voice raising questions about Enron at a time when no one else was.  I say this because of that magazine's famous list, the Fortune 500. 

As everyone knows, Enron was #7 on the Fortune 500 for 2000. The list gained added attention when Enron moved up two slots to #5 for 2001, despite going bankrupt.  Indeed, had it not been for the unfortunate fact of its bankruptcy, Enron might have challenged Exxon-Mobil and Walmart for the #1 slot.  This is nuts.

The reason Enron was #7 (or #5) is because Fortune measures a company's size solely by revenues or sales.  Fortune is not alone in this-- most often when someone asks how big a company is, they mean, first and foremost, what are its sales? Enron's sales were as phony as anything else.  But Fortune gave—and still gives-- those sales full faith and credit.  In fact, the revenues were as phony as anything else about Enron.

Now most of the attention lavished on Enron has been on the games it played with its balance sheet-- its use of off-the-books partnerships to obscure billions of dollars in debt. Much less notice has gone to its income statement.  But it was the incredible revenues that truly made Enron the Corporation From Another Planet. 

Before it went bust, Enron was building the $5 million man.  on a per-employee basis, Enron had revenues of $5 million.  This is eight times the revenues-per-employee of Microsoft, three times that of Goldman Sachs, 12 times General Electric, 18 times IBM.  What was in the water down in Houston?

Nothing real. More than 90% of Enron's revenues were from its trading operations-- the trading of energy futures contracts and other derivatives. Enron booked these revenues using what is known as gross accounting. By ratcheting up the trading and booking trades at gross, Enron was able to average 57% annual sales growth rates in its latter years.

Now some financial analysts, will tell you this doesn't matter as long as you understood the revenue reports. But I am quite certain that even many of the most sophisticated analysts did not understand Enron's revenues. I am even more certain that the average investor had no idea. Seeing a company that was high on the Fortune 500, a company still growing like crazy-- that alone would generate a lot of faith. An investor putting his money in the seventh largest company in the United States might do that with a great deal of confidence. 

The most telling contradiction to Enron's stratospheric ranking is perhaps how inconsequential Enron's collapse was. I didn't feel it—did you? Did you notice any change in the energy supply, in the natural gas market, in anything? We'd notice the loss of IBM, or Fedex for that matter. But Enron went under without a ripple. We lost a $100 billion business, yet who misses it. 

REMINDER # 2: A revolution is not a tea party.

At the beginning of the Enron Affair, there was a lot of talk about whether Enron was another dot-com.  There are substantial similarities with the dot-coms.  But people also see Enron as a big company—it was #7 on the Fortune 500 for gosh sakes!--  and therefore much different.  Of course, Enron, even if we properly discount its revenues, was a much larger concern than the dot-coms, with something like 25,000 employees.  But it was similar to a dot-com in how it sold itself as in the vanguard of a revolution.

As Enron expanded into energy trading, broadband and telecommunications, it was often said to be at the center of not just one  "revolution," but several, with telecommunications, the Internet, and energy deregulation among them. 

Now whenever anyone tells you his business is revolutionary, start counting the silverware.  There are revolutions in business, but they tend to be surrounding major inventions, such as the telephone or the light bulb, or even Windows.  Or they are part of widespread economic and social movements, such as the industrial revolution, the use of interchangeable parts on an assembly line, or the rise of personal computers. 

But Enron invented nothing. It had no proprietary systems.  Its revolution was based on an alleged ability to make a market in anything, from natural gas to water to broadband capacity.  Of course, one company can't make a market by itself, and this was mostly hype.  Energy deregulation may be a real phenomenon, but the idea that one company would become dominant through deregulation seems nutty on its face. 

The market for excess broadband never amounted to anything.

The Blockbuster video-on-demand deal epitomizes how Enron was oversold. Ken Lay announced the deal with great fanfare in July 2000.  He called it "the killer app for the entertainment industry."

At the time there was still a lot of talk about killer apps and about revolutions. Every day companies sent out press releases calling this or that tweak in Internet technology "revolutionary."  The fact was all of them put together, as impressive as they were, wouldn't amount to a decent coup d'etat, let alone a revolution. Enron was going to use the Blockbuster initiative as a demonstration of its broadband capacity. 

Though the project never amounted to anything more than a pilot project, Enron sold-- or appeared to sell-- its interest in the deal to a Canadian bank for $115 million-- and then claimed nearly all of that money as profit right away.  It told analysts it would generate $45 billion in revenue-- though when and how remains a mystery as there were virtually no paying customers.  Soon the deal went bust.  Today, Blockbuster says the technology to create true video on demand is still years off.

But Enron for a brief period managed to coalesce new dreams about broadband with ancient dreams of Hollywood dreams and voila! 

REMINDER # 3: Distrust complicated answers.

It is often said that investors, even small investors, should not simply trust analysts or company executives or other professionals, that they should take responsibility and do their own research. Yeah, right. To really do anything amounting to research takes many more hours than most people have time for. 

The best most people can hope for is to have some additional insight that builds on the basic research of others. There is, specifically, no real way for the average investor to second-guess a company's numbers.  Even professional investors don't often purport to do that.

Indeed, the genius of the U.S. securities markets is that most of the time we can blindly trust the numbers. We don't need to think a lot because the market digests all the available information and puts that information into the share prices. This is sometimes called the random walk theory of investing. There is a large body of academic research that says that no one can consistently beat the market because the market is such an efficient sponge of information.

But when a company reports even basic information ways that are fundamentally incomprehensible, we should stand up and say: "Huh? What? Say that again?"

Consider this line from Enron's 2000 annual report: "Enron builds wholesale businesses through the creation of networks involving selective asset ownership, contractual access to third-party assets and market-making activities."  This is not a line from footnote 43. It's the very first line of the section describing its business.  If you pick up an annual report and can't read the first line, maybe you shouldn't read the second line either. And you probably shouldn't invest.

My point is that when people in business can't describe what they do, they are hiding something from you. Or are fooling themselves. Either way, be wary. The ability to explain something simply implies a greater understanding, not a lesser one.

REMINDER # 4: Being accurate is not the same as being truthful.

When you read the report issued by Enron's board, the overwhelming impression is how convoluted some of Enron's off-the-books partnership deals were.  This is because they were trying to hide what they were doing behind a veil of complexity.  Accounting shouldn't be a sport for geniuses-- that defeats the point of transparency.

Enron's accounting got hard because they were trying to comply in the most literal and technical sense with the accounting rules. At the same time they did all kinds of violence to the spirit of those rules. A rule is by its very nature always a minimum, not a maximum. It's not enough for a company to comply with the technical accounting rules if the effect of that compliance is to mislead.  This is basic to securities law.  The idea of accounting is that a dollar here is comparable to a dollar there. Even if Enron and Andersen took care to adhere to the technical rules--and there is reason to believe they often did not--they violated this cardinal principle.

Enron operated as if all it needed was to pass the minimum, and they were done.

REMINDER #5: Leave Mafia tactics to the Mafia.

Enron seemed designed as an entity where no one, not even the people at the top, would know too much. When Jeff Skilling testified to Congress, he outlined a system of plausible deniability: No one should know what the guy down the hall is doing; when anyone asks, refer them to the lawyers or the accountants. If the lawyers or accountants get curious--or, God forbid, an analyst or journalist asks the wrong questions--tell him to mind his own business. 

This may be just a coincidence, but the same management technique was long favored by Mafia families: No one knows too much. No one asks questions. The boss stays aloof from the soldiers and delivers instructions cryptically and through intermediaries. If a guy gets caught red-handed, he dummies up -- hence the parade of Enron execs invoking the 5th amendment.

Of course no one has gotten whacked at Enron, which is unfortunate for us financial journalists. But that's the only difference.

Skilling in his testimony and Lay in statements made by spokesmen seem geared to defend themselves by saying they relied on the lawyers and the accountants, who told them all the financing arrangements were kosher.  I doubt this will succeed because I suspect there were at least a few people who told them that the arrangements were shaky at best. I also believe there will be many aspects of what they did that constitute criminal violations of the securities laws, about which they cannot deny knowledge.

REMINDER #6: With power comes responsibility.

When he was a lawyer—a long, long time ago, in a galaxy far, far away-- Abe Lincoln advised lawyers: "Resolve to be honest at all events; and if in your own judgment you cannot be an honest lawyer, resolve to be honest without being a lawyer."

I believe lawyers are as honest as other people, but they often appear dishonest.  They do this by putting themselves in uncomfortable, even ridiculous situations. Perhaps this is what happened to Enron's lawyers at Vinson & Elkins.  Vinson & Elkins is the largest law firm in Texas and supposedly one of its most prestigious. 

The result of their investigation was a report to Enron's general counsel that largely cleared the company of wrongdoing while noting that a few of the deals suffered from bad cosmetics. No further investigation was needed, the lawyers said.  V&E's conclusion that the facts disclosed did not warrant a widespread investigation by independent counsel and auditors came on October 15. The very next day, Enron announced that it would restate its financials, setting in motion a chain of events ending in bankruptcy six weeks later. V&E's conclusion may go down as one of the great bad calls in legal history.

REMINDER #7:  The most dangerous delusion is self-delusion.

W.C. Fields once said, “You can’t cheat an honest man. He has to have larceny in his heart in the first place.”  This observation applies to many allegations of fraud, especially in times of financial bubble, such as the recent Internet frenzy. When the Internet stocks were on the rise, we all knew these companies had no earnings, scant revenues, and, for the most part few prospects. This was stated ad nauseum in the financial press. People knew it had to end, but they signed on for the ride. Myself included.

We knew a lot, but we also fooled ourselves.

We are now left with a dozen investigations, lawsuits on top of lawsuits, denials on top of protestations of ignorance, board members blaming executives, who blame lawyers, who blame accountants, who blame executives. We have investors blaming analysts, who blame accountants and executives. One hundred bucks passing.

And Ultimately, unless I am very wrong, we will have more criminal trials and people will go to prison.

But in the orgy that was Enron, no one was asking difficult questions, let alone demanding simple answers.

And so if there is a lesson from Enron, it is this: Ask hard questions and demand honest answers.