Part 1: How to Spot a Corporate Fraud Before It Makes the Headlines

In this episode of Motley Fool Hidden Gems Investing, Motley Fool contributor Rachel Warren sits down with Bethany McLean, veteran investigative journalist and co-author of The Smartest Guys in the Room, to dig into the psychology behind corporate disaster. They discuss:

• Why most fraud starts with self-delusion rather than malice.
• Why the auditors, lawyers, and board of directors may not be protecting you the way you think.
• Why the line between a visionary CEO and a fraudster is thinner — and more unsettling — than most investors realize.

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A full transcript is below.

This podcast was recorded on July 26, 2026.

Bethany McLean: You think that people like auditors and law firm and a board of directors is there to protect you, the individual investor. But the more you learn, the more you realize that their main incentive is keeping the company happy. That's still true today.

Rachel Warren: That was Bethany McLean. The investigative journalist who exposed Enron before Wall Street did, one of the sharpest financial minds in the business. I'm Motley Fool analyst Rachel Warren. Bethany has spent decades following the money through every major boom and bust in modern financial history, and she has a lot to say about where we are right now. In Part 1 of our conversation, we dig into the psychology behind corporate fraud, how to spot a red flag before it becomes a headline, and why the line between the visionary CEO and a fraudster may be thinner than you think. We hope you enjoy.

Welcome back to Motley Fool Conversations. I'm Motley Fool analyst Rachel Warren. Today, I'm joined by veteran investigative journalist and Vanity Fair contributing editor Bethany McLean. Bethany is famously the co-author of the definitive Enron chronicle, The Smartest Guys in the Room, and has spent decades exposing hidden financial risks, from the '08 financial crisis in All the Devils Are Here to the pandemic-era corporate bailouts in her book, The Big Fail. Today, we're using her legendary investigative toolkit to give you a masterclass on spotting corporate red flags, evaluating charismatic CEOs, and finding the next hidden market risks. Bethany, welcome to the show.

Bethany McLean: Thanks for having me on.

Rachel Warren: You have a remarkable record of being early on massive stories that later blew up. We have to talk a bit about Enron. When you look back at Enron now, 25 years ago or so, how much of that collapse was a failure of the raw numbers versus a failure of the gatekeepers who were simply afraid to ask the hard questions?

Bethany McLean: Well, I think it's both. The raw numbers were a failure because the gatekeepers failed in their job. That, to me, is still the most instructive lesson from Enron's collapse, which is that you think that people like auditors and law firms and a board of directors is there to protect you, the individual investor. But the more you learn, the more you realize that their main incentive is keeping the company happy, and that's still true today. It's not even so much a question just of your greed and who pays them, it's also just human nature. When your approval rests on somebody else saying “good job," you start to want them to say “good job,” and that happens. Time and time again, we see that the auditors have failed investors many times since Enron. It's just a really important lesson to know that just because the auditors and the lawyers and the board of directors say it's OK, and just because the bankers have a buy rating on the stock, that doesn't mean it's OK.

Rachel Warren: For members of our audience who might only know Enron as a historical buzzword, maybe you can go through a bit, how did management use complex financial structures, mark-to-market accounting to turn future projections into fake current profits? Maybe you can walk us through that story a little bit.

Bethany McLean: It's funny, so I've joked. When I wrote about Enron way back when, Fortune magazine, where I worked at the time, had labeled Enron its most innovative company for the previous seven years. I still think that Enron was the most innovative company in corporate America, even 25 years later, because they used all of those tools in order to make their reported earnings look much better than they were. One of the fascinating things about Enron is that people think of it as this giant fraud. It actually wasn't. There was a lot of reality to their business. The fraud lay in just pushing the boundaries of generally accepted accounting principles past the breaking point in a few key ways.

But most of what they did was legal. What they did was figure out how to create reported earnings even when the economic substance wasn't there. They used a whole variety of tool kits from mark to market accounting, and the reality is accounting is language. Mark-to-market isn't necessarily any better or any worse than using historical prices, which is the other way of doing things. Both can be manipulated. But what Enron did is they used mark-to-market to increase the reported earnings they could produce. They used special vehicles that their CFO had set up in order to sell at investments to that vehicle and be able to record of the gain on the investment they had sold, what was effectively a captive vehicle. They used a whole host of other techniques. What it really shows is the way in which accounting laws can be manipulated without breaking the law in order to increase the metric that a company wants to increase.

Rachel Warren: Well, and obviously, the regulatory environment, the industry. There were a lot of lessons learned from Enron, to be sure. But I think that there has been and continued to be since that time, concerns about how those dynamics can repeat in the future. In your career covering scandals since, have you found that corporate fraud is planned from day one, or is it more of a slippery slope where executives are trying to cover up on that quarter, and then it just completely spirals out of control?

Bethany McLean: It's almost always the latter. When I first started working on my book about Enron, I was young. I was a math major, so I have this very simplistic view of the world, and I thought, if bad people are doing bad things, then they know they're doing bad things. That's just not the case. Hank Paulson, the former Goldman CEO and turned Treasury Secretary, said at one point, It’s not that interesting why good people do good things, and it’s not that interesting why bad people do bad things.

But what's interesting is when good people do bad things. The system of corporate incentives, combined with human nature, can lead people down this path because they rationalize that, oh, I’m doing the right thing by my investors by not quite telling the truth about this, because if I did, my stock price would crash. If my stock price crashed, it would hurt investors, or it would make it so that I couldn't raise any more money. In which case, the bad outcome would be guaranteed, so I'm just going to fudge this a little bit, and they don't even really mean to do it that way. It's this combination of rationalization and self-delusion. Almost every story of business gone wrong has that in common. With a possible exception of Bernie Madoff, there's still a raging debate about how much he deluded himself and whether he planned the whole thing from the beginning or slowly fell into the trap after losses made him not want to confess the truth to investors and believe that he could dig himself out of it.

Rachel Warren: That's the question. When a corporate disaster happens, I think we often debate whether the executives were malicious fraudsters, which is easy to paint them as such or just incredibly incompetent and delusional. In your decades of reporting, which have you seen be more common Active malice or just mass corporate delusion that overtakes the reality?

Bethany McLean: Really mass corporate delusion. Almost no one thinks it through and thinks, I'm going to set up to deliberately defraud investors, and if this goes badly, I could find myself in the headlines and possibly being prosecuted. That's just not the chain of logic that people use. If they did, then this would never happen, so it’s almost always the latter.

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Rachel Warren: You've obviously seen public corporate fraud up close, but you've also looked at private scandals like Theranos. I'm wondering, is it actually easier for a charismatic founder to hide systemic rot in a venture capital back private company than it is in a heavily regulated public market? What are your thoughts on that?

Bethany McLean: I think it is much easier with a caveat. It's much easier in a technical way because the financial statements aren't public, and there can't be short sellers. Those two things, publicly filed financial statements and short sellers, are helpful signs. They're helpful red flags. You may not be able to find anything in the public filed financial statements, and the shorts may not be right. But if there's a heavy short interest in the stock, chances are there's a reason, and you should at least understand the reason and then feel free to dismiss it and say they're wrong, but you should understand it and so you can see that. Whereas with a private company, you can't see any of that. The only caveat I'll offer is that in times like this, where we're in this raging, crazy bull market that almost feels more like gambling than it does investing, the preeminence of belief or the preponderance of belief in things that seem to be crazy can make you overlook red flags because you see the red flag and you think, this must be a bad sign, but then year after year, the red flag doesn't materialize, and the stock keeps going up and so you start to think, Well, I must be crazy. You start to dismiss these red flags in a raging bull market because they don't matter until they do.

Rachel Warren: You probably have many examples to pull from, but when you have suspected a company's corporate narrative doesn't match its financial reality, what are some of the key signals, whether it's corporate behavior or otherwise that tip you off first? I think that's something important that investors would want to explore.

Bethany McLean: It's everything from odd disconnects in the financial statements. In Enron's case, looking back, it was just laughably simple because no one actually understood how they made money. If you ask people who were raging bulls on the stock, how does this company make its money? One person actually laughed and said to me, “I don't know. If you figure it out, let me know. We don't have to worry about it.” These are just the best, smartest guys in the room, and you always know that the bottom line is going to be what they say it's going to be so who really cares about the details. I think that's one thing is when people don't really understand the company's business. Now there is just grungy clues in the financial statements. If you have a big, you can't do it if you own an index fund, you can't do it if you have a gigantic investment portfolio. But if you have a concentrated bet in a certain company, you should be familiar with every aspect of their financial statements. You should have seen the risk factors. You should have seen the related party discussions. You should make sure that you understand, for example, in Enron's case, the cash flow statement didn't make sense relative to the income statement.

Because the income statement showed earnings going straight up, marching upwards on this beautifully predictable line and the cash flow statement was all over the place, and you couldn't really reconcile the two statements. That's all important if you have a big portion of your portfolio exposed to a certain name. I'd also watch for signs of hype. Whenever you see a management team start to disconnect from the reality of the business, and this one is a little bit tricky today, too, and I'll explain what I mean. But in Enron's case, Jeff Skilling went from saying this is the world's leading energy company to world's leading company. When you see a CEO start to talk too much in terms of market value rather than in terms of value provided, I always see that as a red flag. I wrote a piece for the Washington Post last fall about when CEOs turn hype into capital. The difference today is that the more hype you can generate around your stock, the more access you have to the markets, the more ability you have to raise money. If you are losing money today, then potentially the more opportunity you have to succeed. The rules are a little trickier today than they used to be.

Rachel Warren: Well, I want to dig into that a bit more. We are in an age of hype. Obviously, there are a lot of very exciting companies and businesses amidst the AI revolution and beyond, but there are many others that might seem uncertain in terms of their growth story. I'd love to hear your thoughts on how as individual investors, we can be analyzing these company fundamentals to see, is management running what is a really great business or just managing the stock price?

Bethany McLean: Right. Well, I think one really important thing, and it's such an old school thing, but really understand the company's debt, how much there is and how much access it needs to the capital markets. Because companies that are dependent on the capital markets, should that access go away either because investors lose confidence in that particular narrative or because there is a capital markets cataclysm. It's a risk factor, and so you should understand that. I just recently wrote about SpaceX for the New York Times, and that's that's the epitome of this debate. But SpaceX, one analyst predicted, needs to raise some $80 billion of capital each year to continue to fund its aspirations. That's a lot of money, and that's a lot of risk. You have to understand that and take that into account. If you're believing the narrative and the hype and the huge story, you also have to understand the mechanism about how the company is going to get there. Then I just watch, do things that the CEO says happen happen? Does reality follow the grand pronouncements in some sort of measurable way? I think that's really important, too.

Rachel Warren: Well, I think another thing, as well, that we often think about is not just listening to what company executives are saying, but what they might avoid saying. I'm curious if there's whether it's linguistic pivots or dodges or could be patterns of executive turnover. What are some of these elements that make your antenna go up and want to probe a bit further?

Bethany McLean: For sure, executive departures are a big one. If you see a company where nobody seems to want to stay and where there's constant turnover in the management ranks, it's a sign of a lack of stability for sure and possibly a sign that people are seeing things they don't like. I think that is a big one to understand. I think it's also really important to listen to how a CEO talks, and I always think about that wonderful line from Alice in Wonderland, and it's Humpty Dumpty. He says, because a word means this, doesn't mean anything. I can make a word mean whatever I want it to mean. I'm paraphrasing, but there are CEOs who talk like and you can fall victim to it because you think, Oh, my goodness, this person just gave me this enormous amount of information. Buried in there somewhere, I must be my answer, so I'm not going to ask again, or I'm overwhelmed, but it must be in there somewhere because somebody so smart just shoveled a lot of words at this answer. You have to really be able to decipher the language and say, Is there an answer here? Did this person actually answer the question, or did they actually dodge the question?

Rachel Warren: As you alluded to, you've done a lot of work reporting on Elon Musk as finances and corporate structures, obviously, some of which raise questions that retail investors, even those who are the most bullish on his ideas and growth stories, these are questions that I think a lot of investors contend with constantly. I think that raises the point. When does a charismatic CEO represent massive upside for a business, or when does the, whatever you want to call it, cult of personality, otherwise, when can that become a risk for a founder-led company?

Bethany McLean: It is a huge unknown. What I mean by that, I have this way of thinking that I used to think that a fraud and a visionary were two different things, that the fraudster sat on this end of the spectrum, and the visionary sat on the other end of the spectrum, and they were not the same person. I started to realize over my career that they actually where the ends of the circles meet. The fraudster could be the visionary, and the visionary could be the fraudster.

But for a few quirks that make all the difference, if you think about them, they have some of the same characteristics. Hype a massive ability to get people to believe in whatever they're saying, an ability to believe in themselves, to persevere through the doubters and the people who say it can never be so to say, but it will be so. But those are the very same characteristics that can get the visionary into trouble. I've joked that sometimes I think the only thing that separates them is that the visionary gets lucky through that period of time when he or she still needs access to capital and is able to keep raising money to paper over the mistakes and overstatements and grand promises and to get to the other side. Whereas the fraudster is one who gets caught in the middle and can't raise capital right when he or she most needs it, and then the lies are exposed, and it becomes known as this gigantic fraud because the lies were exposed.

I'm not sure Elizabeth Holmes is totally an accurate figure through which to see this because there's a debate about whether her technology ever would have worked. But for sure I think she believed it. If she had gotten to the other side, then would it matter that there had been lies in the run up to it, projections to investors that weren't entirely true, lies about how well the technology worked? No, everyone would remember her as a visionary because she made it to the other side. I think it's really difficult to tell the difference between the two figures until the old saying hindsight is 2020. But again, back to that key question, just pay attention to the capital needs. If the company needs people to continue to believe because the company is dependent on the markets in order to or on continued fundraising from investors, that's all expected.

Rachel Warren: You would say there's not necessarily a huge delineation sometimes between a visionary founder and a corporate illusionist.

Bethany McLean: I don't think so. I think Elon Musk is a perfect example of how difficult it is to tell the difference. There have been skeptics about Musk, obviously, since the get go, and they have, by the way, been right about a lot of things. They've also been wrong about a lot of things. The confidence of the markets in Musk, his ability to raise money has not cracked. That's the most important thing and unless that cracks, he will continue to be a visionary.

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Rachel Warren: I want to talk a little bit about your book on the 2008 Crisis, All the Devils Are Here. It's a master class and how risk gets hidden and repackaged and sold to people who don't understand it. I think that also brings up the current era of private credit that's currently flooding the market and the age of AI. I would love if you could talk a bit about some of that. Do you see it carrying some of the same risk as what mortgage-backed securities did back in '08? I'd love to hear your thoughts on that.

Bethany McLean: I do. I wrote a piece for Inc. actually about private credit and why I was worried about it, and I do think it carries some of the same risks because the whole premise of private credit is that we built a better mousetrap, because now lending is match funded, meaning that the investors who are putting money into private credit are asking for their money back on the same schedule that the companies are repaying it so you don't have the risk of a run on the bank. But of course, Wall Street being what it is, they have come up with ways to not necessarily kill their own golden goose, but potentially maim their own golden goose. By doing these evergreen funds that promised semi-liquidity to investors, where you could supposedly get some of your money out on this specific schedule, they undermined that whole premise of match funding. I think that's where Wall Street's greed is similar this time around to what it was in the financial crisis, which was Wall Street seeing, Oh, my goodness, mortgages made to people who can't pay them back can be packaged up into these really high yielding securities and sold to investors around the globe who just look at the AAA rating and don't really understand what is they're buying, and they just cranked the machine and cranked the machine until it broke.

In this case, these private credit loans are also being sliced and diced into different types of securities, a great portion of which are being sold to insurance companies and to buyers that in some cases, are captive of the private credit firms that are making the loans. There's just a lot of potential in there for bad things to happen. There's also been a change on Wall Street in that some of these private credit firms and the private equity firms that have gone into private credit are now themselves publicly traded. Because they're publicly traded, their incentive is to put as much money to work as possible because their stock is valued based on fees on the assets they have under management so growing the assets under management is more important than earning an incentive fee on the products they've created so it's changed the whole incentive structure. These things taken together make me worried. There still is an argument that it will all be OK in the end. Just because so many people, including me, are looking at it, it might be OK in the end because the crises tend to erupt where nobody's looking. But there are enough risk factors here that I think it's concerning.

Rachel Warren: Well, it's interesting, as well. Private credit and private equity markets are pretty opaque, and I'm curious your thoughts on how a potential stressor in those sectors could expand to the very liquid, publicly traded equities that a lot of retail investors own.

Bethany McLean: Well, it could because private equity is so big now, it makes up so much of the market that if there is a decline in private equity, the private equity market and the publicly traded market they're not an offset to each other. Actually they're quite related. Because right now, for instance, private equity firms are sitting on this giant backlog of investments that they can't sell because they have the marked levels that are too high, and they can't be sold into the public market. But if the public markets are to crack, that backlog gets worse and worse and worse. Private equity firms are dependent on the performance of the public market. There's this interplay between the two that is just not great. My view is that we should end the distinction between private markets and public markets because the underlying investors in each are actually the same. The big investors and the private equity firms are pension plans who hold all of our retirements or many of our retirements in their grasp. If the underlying investors are the same, why are there public markets and private markets? Why not just regulate it all the same thing, all the same way?

Rachel Warren: One more question on private equity, little unrelated to what we're talking about, but it's worth touching on. You've written extensively on private equities expansion into everyday life, vet clinics, nursing homes, housing. Obviously, this impacts a lot of privately held entities, but publicly traded ones as well. Is this consolidation? Obviously, there's the argument that, well, this creates operational efficiency, or is this really just predatory financial engineering and something that consumers, individuals, and, of course, investors should be aware of?

Bethany McLean: I think it depends on each situation, and you have to look at it. I think there are really good private equity firms out there that really are adding value to the businesses they acquire and are creating something better and are bringing capital to areas that are underserved and needed. Then I think there are purely predatory operations. I don't even think it's as simple as each looking firm by firm. I think you almost have to look at each deal. I do think that these two incentives have combined in a really dangerous way, one being the one I just mentioned about private equity firms being publicly traded. They have an incentive to put as much money to work as possible, which means doing deals where they may not be adding that much value.

The other thing that happened was that the decades of very low interest rates made it very efficient for private equity firms to add debt to deals that they were doing more debt than was really sustainable. But it also separated private equity's outcome from that of the underlying investment. The private equity firms, like in the case of this hospital company called Stewart, that ended up bankrupt a couple of years ago. They can actually make a great deal of money, hundreds of millions of dollars in the case of Stewart, while the underlying company, in this case, a hospital chain that many people depended on, goes bankrupt. That split is not what private equity was supposed to be. Old school private equity was, we do well because the company does well and that makes sense. It can be a brutal form of capitalism, but at least it's a win-win form of capitalism. What I really dislike about modern private equity is that it can be a win-lose.

Rachel Warren: That was Part 1 of our discussion. Tune in next week for Part 2.

As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Hidden Gems Investing team, I'm Rachel Warren. Thanks for listening. We'll see you next time.

Rachel Warren has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.