Enron Corp. - University of California | Office of The President

(k) Under Mark-Jusbasche, Enron International repeatedly deferred capital
expenditures, including developer, financing and promotional fees, that were incurred on failed
project proposals. For more than five years – between 93 and 97 – these deferred expenses were
accumulated – a practice known inside Enron as "snowballing" – and very few write-offs were taken.
Costs for South African projects involving oil and gas reserves, pipelines, and a plant designed to
convert ore into another form of energy, and projects in China, among others, were "snowballing"
quickly – the cash burn rate was as much as one million dollars a month – but not being expensed.
As former executives explained, quarter after quarter, year after year, Enron International "got
pressure from corporate about meeting earnings," which prohibited write-offs – even when it was
clear that the proposed project would never go forward. Consequently, the "snowball" grew
exponentially – so large that an international accounting officer repeatedly told Enron's CAO Causey
that a writedown had to be taken because so many proposals were no longer even arguably viable.
But this ran counter to corporate directives. Causey, at Skilling's direction, routinely responded
that "corporate didn't have room" to take a write-off because doing so would bring Enron's
earnings below expectations. By 97, years past when start-up and proposal costs should have been
written off, Enron had deferred a $100-million "snowball" on some 75 projects, including those
in Central and South America, and the Dabhol power plant in India, while the cash-burn rate –
virtually all deferred – dwarfed the revenue return.
(l) Enron represented that its capable, impressive and top-notch management
team successfully managed its balance sheet and financial risk by effectively hedging its merchant
investments and placing billions of dollars of non-recourse debt in related but independent parties.
In fact, the hedges were illusory, not real, and were largely dependent on the value of Enron's own
stock where Enron still was exposed to the risk of its merchant investments. In fact, that debt was
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