The story of Enron tells of how a little-known natural gas company appeared to achieve success after stunning success until it rose to become the 7th largest corporation in the United States. At its height, the company and its leadership was given a steady stream of acclaim in the industry and in the press which recognized Enron as “America’s Most Innovative Company.” It was also among the “100 Best Companies to Work for in America.”
Today it’s common knowledge that Enron’s stellar success was based on deceit, corruption and accounting fraud. Creating an artificial power shortage in the state of California that allowed the company to charge 20 times the normal rate for electricity also helped inflate Enron’s bottom line.
Accounting Principles Gone Wrong
A large part of the sleight of hand that helped Enron appear successful did not come from schemes and deception. It came from using (and misusing) commonly accepted accounting practices that were implemented poorly and eventually became detached from reality.
Enron chose to measure its financial fitness using mark-to-market accounting. This system allows companies to claim the profits that they project future deals will bring them. These “hoped for” profits can be listed on the books as if they were actual dollars earned.
Mark-to-market accounting allowed Enron to take the most optimistic projection of an asset’s performance and put it on the balance sheet as if it had already been earned. For example, Enron built a power plant in India that failed to make a profit because the Indian government would not buy power at the rates Enron charged. Instead of acknowledging that the plant was losing money by listing its actual worth on its financial statements, mark-to-market accounting allowed Enron to value the plant at what it hoped the plant would be worth in the future.
With no rigorous accounting method to force the company to acknowledge its true financial performance, Enron’s leadership became bolder in overvaluing assets based on a wildly optimistic view of future worth instead actual worth. With the liberty to write fiction on the balance sheet, Enron executives were able to delay the eventual day of reckoning by deceiving investors, journalists, and even themselves about the company’s true financial condition.
How Could Six Sigma Have Helped?
A project team with pride in ownership in its newly redesigned process may fall victim to seeing the results they want to see rather than the results that their new process is actually delivering.
Six Sigma has built-in safeguards that force teams to look clearly and unflinchingly at performance, avoiding Enron-like intentional or unintentional self-deception.
Six Sigma’s suite of analytical tools gives objective and unbiased facts that expose the system’s true performance.
Statistics – Basic descriptive statistics including averages, ranges, variance and distribution are a key part of Six Sigma analysis.
Control Charts – Investigate process stability and evaluate process capability.
Histograms – Graphically display process output relative to the requirements.
Design of Experiments (DOE) – Investigates and quantifies the process and product variables that affect product quality.
Measurement Systems Analysis – Allows teams to evaluate the accuracy and precision of data that the measurement system acquires.
Could Six Sigma principles have saved Enron?
Not likely.
Sadly, Six Sigma cannot cure the iniquities of greed, corruption and deception. However, Six Sigma does provide those who seek truth with the tools and mindset to look at a process clearly and objectively. And those who can make Six Sigma part of their company culture can experience even more of an advantage.
