“In the spring of 1998, Macey notes, a group of six students at Cornell University’s business school decided to do their term project on Enron. “It was for an advanced financial-statement-analysis class taught by a guy at Cornell called Charles Lee, who is pretty famous in financial circles,” one member of the group, Jay Krueger, recalls. In the first part of the semester, Lee had led his students through a series of intensive case studies, teaching them techniques and sophisticated tools to make sense of the vast amounts of information that companies disclose in their annual reports and S.E.C. filings. Then the students picked a company and went off on their own. “One of the second-years had a summer-internship interview with Enron, and he was very interested in the energy sector,” Krueger went on. “So he said, ‘Let’s do them.’ It was about a six-week project, half a semester. Lots of group meetings. It was a ratio analysis, which is pretty standard business-school fare. You know, take fifty different financial ratios, then lay that on top of every piece of information you could find out about the company, the businesses, how their performance compared to other competitors.”
The people in the group reviewed Enron’s accounting practices as best they could. They analyzed each of Enron’s businesses, in succession. They used statistical tools, designed to find telltale patterns in the company’s financial performance—the Beneish model, the Lev and Thiagarajan indicators, the Edwards-Bell-Ohlsen analysis—and made their way through pages and pages of footnotes. “We really had a lot of questions about what was going on with their business model,” Krueger said. The students’ conclusions were straightforward. Enron was pursuing a far riskier strategy than its competitors. There were clear signs that “Enron may be manipulating its earnings.” The stock was then at forty-eight dollars—at its peak, two years later, it was almost double that—but the students found it over-valued. The report was posted on the Web site of the Cornell University business school, where it has been, ever since, for anyone who cared to read twenty-three pages of analysis. The students’ recommendation was on the first page, in boldfaced type: “Sell”.
-OPEN SECRETS; Enron, intelligence, and the perils of too much information
Here’s the Enron report mentioned above (browse down the page);
"As shown in Table 2, the 8-variable Beneish model shows that that Enron may be manipulating its earnings. We get a M-score of -1.89 for Enron, which is greater than the standard M-score of -2.22 used to gauge the likelihood of manipulation. The most significant factor contributing to the M-score manipulation statistic is the SGI. After close examination we were not concerned by the fact they were growing too fast because the sales increase comes from the recent acquisition of PGE. Additionally, the GMI shows deteriorating margins, the AQI shows increasing amounts of ‘soft’ assets, DEPI shows depreciation expense slowing down, and LVGI indicate rapidly increasing leverage. However, further examination of these indicators showed no cause for concern.”
The Detection of Earnings Manipulation
Experts and Overconfidence
How to Bring Our Schools Out of the 20th Century