Cypress!? AREM! Andersen CEO Says Possible Illegality Found at Enron (Update3)
2001-12-12 13:53 (New York)
(Adds Enron audit committee in 16th and 17th paragraphs.)
Washington, Dec. 12 (Bloomberg) -- Arthur Andersen LLP Chief
Executive Officer Joseph Berardino said his firm told Enron
Corp.'s audit committee last month ``of possible illegal acts
within the company'' after discovering the energy trader didn't
provide critical information about one of its units.
Andersen is trying to learn why it didn't get some material
needed to determine the proper accounting treatment for Chewco
Investments LP, which contributed to a decision to cut $586
million from Enron's income since 1997, Berardino said. Andersen
told Enron on Nov. 2 that withholding of that information may have
involved illegality, he said.
The restatement sent Enron shares into a 99 percent nosedive
preceding the Houston company's filing for the biggest U.S.
bankruptcy. Enron's collapse has raised public and regulatory
concern about the quality of company financial statements, leading
to investigations by the Securities and Exchange Commission and a
hearing today by subcommittees of the House Financial Services
Committee.
``Important information was not revealed to our team'' about
Chewco, said Berardino, whose firm handled Enron's accounting. An
``error in judgment'' by Andersen caused incorrect accounting for
another unit, LJM Cayman LP, known as LJM1, the CEO said in
testimony prepared for today's House hearing.
Subpoenas Possible
Enron officials didn't return three calls seeking comment.
Enron Chairman Ken Lay refused an invitation to testify at today's
hearing, citing a scheduling conflict with a bankruptcy hearing.
``I certainly wish to cooperate with the committee and its
subcommittees,'' Lay said in a letter to the committee. Given the
Enron-connected investigations and lawsuits, Lay said he is about
to hire a lawyer to represent himself.
The U.S. Department of Justice has launched a criminal probe
of Enron, the New York Times and the Wall Street Journal have
reported.
Representative Richard Baker, a Louisiana Republican, said
Lay and Enron officials would be given future opportunities to
testify before the committee. ``Should social obligations
preclude'' Lay or other Enron executives from appearing ``the
committee has the right to subpoena'' them, said Baker.
Enron's shares fell 4 cents to 69 cents in mid-afternoon
trading.
`Error in Judgment'
In Chewco's case, Berardino said auditors weren't given
information about cash collateral that would have made a
difference in determining the right accounting treatment for
Chewco. Adding Chewco to Enron's books was responsible for 80
percent of the company's restatement, the Andersen CEO said.
Berardino accepted responsibility for errors involving LJM1.
``We now believe, based on a second look, that our team made an
error in judgment,'' he said. ``An honest error, but an error
nonetheless.''
Regarding other complaints that Enron didn't make adequate
disclosures to investors about related entities, Berardino said
Enron wasn't required to reveal that information.
``It's true that Enron did not disclose every transaction or
contingency,'' he testified. ``It was not required to.''
Berardino said he felt his appearance was important to help
restore public confidence in the integrity of the capital markets.
``I am here today because faith in our firm and in the
integrity of the capital market system has been shaken,''
Berardino told the panel.
Audit Committee
Members of Enron's audit committee, which Berardino said
received notice of possible illegality, include: Robert Jaedicke,
a former accounting professor and retired Stanford University
Business School dean; Ronnie Chan, chairman of Hong Kong-based
Hang Lung Group; and John Mendelsohn, president of the University
of Texas M.D. Anderson Cancer Center, according to the company's
latest proxy filing.
Other audit committee members listed in the filing are: Paulo
Ferraz Pereira, executive vice president of the Brazilian-owned
investment bank Group Bozano; John Wakeham, a former leader of the
British House of Commons; and Wendy Gramm, former chairman of the
U.S. Commodity Futures Trading Commission, who is married to
Senator Phil Gramm, a Texas Republican.
Berardino said ``investors would be better served if
our accounting rules were changed to reflect the risks and reward
of transactions such as'' special-purpose entities, the likes of
Chewco and LJM1.
Accounting for Units
The SEC has been urging a professional accountants' group to
develop guidance for companies on how to account for such units,
said Robert K. Herdman, SEC chief accountant.
These entities were created by Enron to get access to capital
and increase leverage without adding debt to its balance sheet.
Enron, in restating five years of earnings, disclosed that three
of these entities should have been included in the company's
consolidated financial statements.
Herdman said the Financial Accounting Standards Board, a
professional rule-writing group, intends to develop guidance for
treatment of these units and ``increase financial statement
transparency.''
Richard Trumka, secretary-treasurer of the AFL-CIO, said the
umbrella labor group will petition the SEC to require companies to
disclose all ties between their board members and officers. Trumka
said Enron went bankrupt because of conflicts of interest
involving company executives and accountants.
`Rampant' Conflicts
``The most important lesson to be learned from the collapse
of Enron is how hard it is to repair the damage done by rampant
conflicts of interest aided by regulatory loopholes,'' an advance
text of Trumka's testimony said.
Berardino said, ``I do not believe the fees we received
compromised our independence.'' The Andersen CEO said only $13
million of the $47.5 million in fees that Andersen received from
Enron last year were for consulting, with about $34 million for
audit and tax work.
--Vicky Stamas and Neil Roland in Washington (202) 624-1958, or
vstamas@bloomberg.net with reporting from William Roberts in
Washington /rp/bd |
