Packets out of rackets

" Quis custodiet ipsos custodes ?' Juvenal asked 2,000 years ago. And the question "Who is to guard the guardians?" still echoes through most of today's big business scandals. The answer, lamentably, has yet to be found. But it is not a question that What Went Wrong at Enron even asks.

Peter C. Fusaro and Ross M. Miller's book aims to be nothing more than fast, clean reportage - a thundering good yarn about thundering bad people. As such, it succeeds admirably. But in consequence it leaves many questions - including Juvenal's - hanging in the air. What were the Enron satraps like personally when they were not at work conning the public? Did they really think they could get away with their skulduggery forever? How did they get away with it for so long? The answers to most of these questions will emerge only - if they ever do - in the courts. Meanwhile, Fusaro and Miller have provided an excellent primer to whet our appetites for the scurrilous revelations to come.

The basic story of Enron can be quickly told, and Fusaro and Miller précis it niftily in three excellent appendices. The first appendix provides the career CVs of the sorry crew who, under the captainship of Kenneth Lay, raced the leaky Enron packet through the commercial seas at a dazzling pace for more than a decade, ignoring - and often lying about - the increasingly stormy waters into which they were sailing. The second is a year-by-year schedule of Enron's history from 1984, when Lay took over as chief executive officer, until April 2002 when the presiding judge declared that the Enron executives still responsible for the employees' pension plan should be fired. The third and best appendix comprises facsimile reproductions of the key documents in the case - reproduced as they originally were, as emails, or typewritten, or as handwritten scrawl. These are immensely telling documents. If you want the briefest possible introduction to the whole shabby story, you need only read these three appendices, covering some 60 pages.

The book's remaining 150 text pages flesh out the tale, but add little to the basic chronicle. They do, however, reveal several of the tricks played by Enron, which go at least some way to explain how, year after year, they successfully hoodwinked the American investment analysts and regulatory systems - the sharpest and toughest in the world (at least by their own estimation).

Many of the tricks are arcane and difficult for non-accountants to grasp. Had their swindles been simple, the swindlers would doubtless have been exposed much sooner: even the most gullible auditors, and even the dumbest regulators, would have spotted simple racketeering. But Enron's racketeering was far from simple. The Enron bosses were proud of boasting how innovative they were. Now we know what they were best at innovating: opaque frauds. As Fusaro and Miller say when they are describing the off-balance-sheet partnerships called LJM and LJM2, set up by the chief financial officer, Andy Fastow: "A simple analogy for what Fastow did is difficult to conjure up because a good analogy makes sense, and (the LJMs) made no sense." But the LJMs certainly made sense to Fastow, who has now been charged with 78 counts of fraud. L, J and M were the initials of Fastow's wife, Lea, and of his two children - chutzpah personified - and the LJMs helped him personally to trouser some $40 million.

One of Enron's principal tricks - entirely legal but a trick nonetheless - that Fusaro and Miller explain with flawless clarity, was its practice of taking ownership of the raw materials in which it traded. Normally, traders such as stockbrokers take a commission on the deals they conduct but avoid owning the raw materials or equities passing through their hands. (J. Paul Getty said: "If I wanted to gamble I'd buy myself a casino"; he knew taking a rake-off was far smarter than taking a risk.) Enron eschewed this historic wisdom. It bought and sold the energy in which it traded. This was wonderful when prices were rising, but catastrophic when they plunged. More important, it required massive capital, which Enron lacked. But it allowed Enron legitimately to state the value of its trades as turnover on its balance sheet. This geared up its turnover, which rose by leaps and bounds until, inevitably, it bit the Texan dust.

Unravelling the financial tricks, however, still does not answer Juvenal's question. Why did the staff, who saw all these goings on, not blow the whistle before Sherron Watkins sent her celebrated memo to Lay on August 15 2001? And why did Enron's auditors, Arthur Andersen, have a blindspot for their chicanery over almost two decades?

Fusaro and Miller explain why the staff kept shtoom all too plainly. First, Enron bunged them lavish bonuses and options. Second, Enron practised a policy called "rank and yank". Every six months all Enron employees were ranked by their superiors on a range of factors such as sense of urgency, innovativeness and so on. The 15 per cent ranked lowest were fired. The next two groups of 15 per cent were warned they were edging close to the borderline. So almost half of Enron's employees were constantly under threat of being yanked out. This was not a corporate culture that encouraged outspoken criticism, even though the Enron panjandrums repeatedly claimed the opposite. Simultaneously, Enron was universally being rated as one of America's most dynamic companies, by the media and everyone else, with a booming share price that seemed unstoppable. It would have taken a very confident, not to say foolhardy, employee to proclaim publicly that the whole thing was mere trompe-l'oeil . Not even Watkins went that far.

As to why Andersen apparently gave its blessing to such hanky-panky, we still await answers. Fusaro and Miller do not even hazard a guess. Maybe we will never know. Maybe the answers were destroyed with the documents Andersen shredded when the ordure hit the fan. Andersen were raking in $52 million a year from Enron at the time. That wouldn't have influenced them, would it?

Winston Fletcher is chairman, The Royal Institution.