Lies and more lies! Arthur Andersen CEO May Have Given Inaccurate
Information During Testimony
By JOHN EMSHWILLER
Staff Reporter of THE WALL STREET JOURNAL
Arthur Andersen LLP Chief Executive Officer Joseph Berardino gave what now
appears to be inaccurate information in testimony to Congress last month
regarding a controversial Enron Corp.-related partnership, raising further
questions about Andersen's role in auditing Enron's relations with the
partnership.
The partnership in question is known as Chewco Investments LP. In Dec. 12
testimony before the House committee on financial services, Mr. Berardino
said his accounting firm had recently discovered "possible illegal acts
within" Enron in connection with Chewco. He added that Andersen had been
kept in the dark about a crucial part of the Chewco arrangement that allowed
Enron to improperly inflate its earnings by nearly $400 million between 1997
and 2000. Disclosure of Chewco's existence by The Wall Street Journal in
late October helped precipitate the loss of investor confidence that led to
Enron's Dec. 2 bankruptcy-court filing seeking protection from its
creditors.
A person familiar with the matter said that in his testimony Mr. Berardino
may have mischaracterized part of the Chewco arrangement and may have
understated Andersen's level of knowledge about it.
Thursday, a spokesman for Andersen, David Tabolt, said that Mr. Berardino's
testimony was truthful but based on incomplete information. "Given what we
know now," the testimony would have been somewhat different, the spokesman
said. But he added that the firm believed the testimony was accurate in its
major points. Mr. Berardino told the congressional committee that Andersen,
based in Chicago, was committed to learning from any mistakes it made in
regard to Enron and to making any necessary changes.
Chewco was created in 1997 to help deal with a pressing problem confronting
the fast-growing Houston energy concern. Chewco purchased from Enron a half
interest in a limited partnership known as JEDI (for Joint Energy
Development Investments), which the company had helped create several years
earlier to invest in energy-related ventures. This deal helped Enron avoid
having to book several hundred million dollars of JEDI-related debt to its
own balance sheet. Enron routinely tried to keep debt off its balance sheet
in order to protect the company's credit rating.
But Enron could avoid booking the debt only if Chewco was deemed an
independent third party. Enron determined -- and its auditor Andersen
concurred -- that it was.
But a number of things about Chewco weren't routine. For one thing, Chewco
was being run by an Enron executive named Michael Kopper. Mr. Kopper, who
has since left Enron, has consistently declined to be interviewed and
couldn't be reached for comment Thursday.
In his December testimony, Andersen's Mr. Berardino said that in 1997 his
firm had agreed that Enron could treat Chewco as independent because there
was a sufficiently large equity investment from an outside party. Mr.
Berardino identified the outside party as a "large international financial
institution," but didn't name the institution.
In his testimony, Mr. Berardino said Andersen hadn't been told about a
crucial feature of the Chewco deal. Enron had agreed with the financial
institution to effectively guarantee half of the equity investment by
putting up cash collateral of about $6 million, Mr. Berardino said. That
separate guarantee agreement meant that Chewco didn't have enough outside
equity to be considered independent of Enron, he added.
Andersen says it didn't discover this side deal until November of last year,
when Enron was in a full-blown crisis that had been sparked in large part by
disclosures concerning Chewco and other partnerships run by Enron
executives. The discovery forced Enron to retroactively fold Chewco and JEDI
into its own financial statements going back to 1997. This, in turn, added
hundreds of millions of dollars to Enron's reported debt and reduced
previously reported earnings by nearly $400 million, or more than 10%, for
that period.
The side guarantee on the Chewco equity investment and the apparent hiding
of its existence was what prompted Andersen to report possible illegal acts
to Enron's board last November, Mr. Berardino said in his testimony.
The international financial institution in question is Barclays PLC, the
large British banking group, according to the person familiar with the
matter. A Barclays spokesman declined to comment.
It turns out Mr. Berardino was incorrect in saying that a large financial
institution was the equity investor in Chewco. Barclays, which in 1997 had
existing banking ties with Enron, according to the person familiar with the
matter lent about $11.4 million to two limited-liability companies called
Big River and Little River. Those two entities made the crucial equity
investment. A check of public records didn't come up with any information
that appeared to be related to Big River or Little River.
Additionally, the person familiar with the matter said, Barclays had in 1997
been told by Enron officials that Arthur Andersen had reviewed the Chewco
financing structure, including the cash collateral aspect, and approved it.
Thursday, Mr. Tabolt, the Andersen spokesman, reiterated the firm's position
that it didn't know about the collateral agreement until November. However,
he did acknowledge that Mr. Berardino had incorrectly identified the Chewco
equity holder in his congressional testimony. Now, the firm believes Big
River and Little River were the equity holders, though Mr. Berardino wasn't
aware of that fact at the time he testified, Mr. Tabolt said.
Andersen's professed misunderstanding of the ownership issue itself raises
questions about how Andersen could have given its blessing to the Chewco
arrangement in 1997 without knowing the identity of all the parties. The
Andersen spokesman said the audit firm is "still looking into" questions
surrounding the ownership issue. |
