The Smartest Guys in the Room

Bethany McLean, a former Goldman Sachs analyst, wrote one of the first skeptical pieces on Enron, a Fortune article in early 2001 asking how the company actually made its money. With her Fortune colleague Peter Elkind, an investigative reporter who had earlier written for Texas Monthly, she spent a year and a half on this book, drawing on hundreds of interviews and thousands of documents.

The book's thesis, as Booklist summarized it, is that Enron's web of accounting tricks, inflated revenue and complex trading did not begin as a scheme to defraud investors. It grew out of an obsession with keeping the stock price rising at any cost, which mark-to-market accounting and Andy Fastow's partnerships fed.

The reporting is deep and the characters vivid, from the traders who profited during the California power crisis to the analysts and bankers who kept recommending the stock. Amazon's reviewer remarked on the authors' barely suppressed sarcasm and noted that keeping track of the schemes can be a chore. The book also became the basis for Alex Gibney's 2005 documentary of the same name.

For analysts, auditors and investors, it is the best case study of how reported earnings can drift away from cash, and of how a culture that rewards deal volume can rot a company from inside.

1. Mark-to-market can manufacture profits. Booking the projected value of long-term deals up front turned Enron's earnings into estimates, then into a treadmill that required ever more deals.
2. Follow the cash, not the earnings. Enron reported rising profits while its operating cash flow told a weaker story. A persistent gap between the two is a warning.
3. Off-balance-sheet entities deserve suspicion. Fastow's partnerships hid debt and inflated results. When a company's structures are too complex to explain, ask why.
4. Incentives shape behavior. Rewards for closing deals and a ruthless review system pushed employees to book volume regardless of quality.
5. Ask how the company makes money. McLean's question about where the profits came from was the one most analysts, bankers and auditors failed to press.

The book follows Enron chronologically from its formation to its collapse, with long detours into the deals and people that drove it.

1. Building Enron. Ken Lay merges pipeline companies into Enron in the mid-1980s and survives an early trading scandal. Jeff Skilling, a McKinsey consultant, sells him on a gas-trading business and on mark-to-market accounting.
2. The new economy company. Enron expands into power trading, international projects, water and broadband. Each new venture is booked aggressively, and the pressure to post rising earnings grows.
3. Fastow's machine. CFO Andy Fastow builds a network of special-purpose entities that move debt off the balance sheet, hedge Enron's investments with its own stock and pay him millions.
4. The peak. In 2000 and 2001 Enron's stock soars, its traders profit from the California electricity crisis, and Skilling becomes CEO. Skeptics, including short sellers and McLean herself, start asking questions.
5. The unraveling. Skilling resigns abruptly in August 2001, losses and restatements emerge, the partnerships are exposed, and Enron files for bankruptcy in December 2001. The book closes with the investigations and the fate of the main players.

There were dozens of books about Watergate, but only All the President's Men gave readers the full story, with all the drama and nuance and exclusive reporting. And thirty years later, if you're going to read only one book on Watergate, that's still the one. Today, Enron is the biggest business story of our time, and Fortune senior writers Bethany McLean and Peter Elkind are the new Woodward and Bernstein.

Remarkably, it was just two years ago that Enron was thought to epitomize a great New Economy company, with its skyrocketing profits and share price. But that was before Fortune published an article by McLean that asked a seemingly innocent question: How exactly does Enron make money? From that point on, Enron's house of cards began to crumble. Now, McLean and Elkind have investigated much deeper, to offer the definitive book about the Enron scandal and the fascinating people behind it.

Meticulously researched and character driven, Smartest Guys in the Room takes the reader deep into Enron's past—and behind the closed doors of private meetings. Drawing on a wide range of unique sources, the book follows Enron's rise from obscurity to the top of the business world to its disastrous demise. It reveals as never before major characters such as Ken Lay, Jeff Skilling, and Andy Fastow, as well as lesser known players like Cliff Baxter and Rebecca Mark. Smartest Guys in the Room is a story of greed, arrogance, and deceit—a microcosm of all that is wrong with American business today. Above all, it's a fascinating human drama that will prove to be the authoritative account of the Enron scandal.