Panel Finds Rush to Hide Losses and Enrich a Few
The New York Times
February 3, 2002
NEWS ANALYSIS
By FLOYD NORRIS
At the bottom of the Enron
debacle there
now appears to have been a
simple proposition: for years,
Enron reported profits that it
should not have reported, while
Enron insiders reaped huge
profits to which they had no
right.
The report of the special
committee of the Enron board
describes a company without
effective controls, where auditors
and lawyers approved
transactions that they should
have known were improper. Many
of those transactions involved
partnerships run by Andrew S.
Fastow, then Enron's chief
financial officer.
"Enron employees involved in the partnerships were
enriched," the committee concluded, "by tens of millions
of dollars they never should have received." In case after
case, it makes clear that Enron signed sweetheart
arrangements - and notes that in some cases people who
were representing Enron in what were supposed to be
arms-length negotiations were secretly collecting millions
from the partnerships.
"This personal enrichment of Enron officials, however, was
merely one aspect of a deeper and more serious problem,"
the report concludes, adding that many transactions were
designed to produce fictional profits and did not come
close to complying with accounting rules.
Just who will be held responsible for what happened is
not clear. Enron's top officials during the period -
Kenneth L. Lay and Jeffrey K. Skilling - told the
committee they often did not know what was going on.
And the board itself, while it clearly knew some of what
was going on, seized on the report to proclaim that it had
been misled.
By the committee's account, transactions without
economic substance - but with the intent of making
investors think Enron was far more profitable than it was
- began in 1997. They occurred mainly within the last
week of each quarter, just when Enron needed to come up
with results to present to investors.
The fevered activity seems to have reached a peak last
March, when few investors had any inkling of serious
problems at Enron. The committee concluded that
because some investments had performed very poorly, the
company would have to report a loss of more than $500
million. That loss would have shocked investors.
To avoid that, there were hurried negotiations that the
special committee said severely damaged Enron's own
interests and amounted to giveaways to the Fastow
partnerships.
"This transaction apparently was not disclosed to or
authorized by the board, involved a transfer of very
substantial value for insufficient consideration, and
appears inconsistent with governing accounting rules,"
the committee concluded.
Other Enron employees told the committee that Mr.
Skilling, then Enron's president and chief executive, "both
approved a transaction that was designed to conceal
substantial losses" and "withheld from the board
important information about that transaction."
Mr. Skilling denied knowing what went on, according to
the committee. Although Enron's board had been told Mr.
Skilling was carefully reviewing what went on in the
Fastow partnerships, he told the committee he paid little
attention to them.
Whether or not he was aware of what had happened, Mr.
Skilling was in no mood to hear anyone questioning what
went on at Enron. In early April, when Enron reported its
freshly scrubbed - and apparently falsified -
first-quarter profits, Mr. Skilling bristled when one
questioner on a conference call tried to ask questions
about the company's balance sheet. He used a vulgarity to
describe the questioner, stunning many who were
listening to the call.
Mr. Fastow, who has declined to discuss his role since he
left Enron, emerges in the special committee report as an
executive who hid facts from the board and engaged in
huge conflicts of interest.
He secretly allowed other Enron executives to invest in
partnerships, and handed out such interests to executives
whose jobs were to negotiate on Enron's side to get the
best possible deal from Mr. Fastow's partnerships.
The committee says it suspects there were side deals to
assure that Mr. Fastow's partnerships would profit no
matter what happened.
In one deal, Mr. Fastow invested $25,000 - and made
$4.5 million within two months.
No one emerges well from the board report. Mr. Lay, the
chairman for the entire period at issue and the chief
executive for most of the time - save for the six-month
period when Mr. Skilling held that title - seems to have
done little about his responsibilities, at least according to
what he told the committee. Both men made tens of
millions of dollars from selling shares while Enron was
reporting profits the committee says were unjustified.
Arthur Andersen is reported to have taken millions in fees
for structuring the partnerships, but to have failed to
report to the board serious qualms that Andersen
partners had about them. The report says time and again
that it cannot explain Andersen's actions, and complains
that Andersen declined to provide needed documents.
Andersen said its efforts to cooperate were rebuffed..
In one case, an internal Andersen memo reported that
auditors in Houston consulted two partners in Andersen's
Chicago headquarters about one piece of dubious
accounting before approving it. Months later, that memo
was amended to report the previously unmentioned fact
that the Chicago partners said the accounting was
improper.
No one involved - not the executives, directors, lawyers or
accountants - appears to have lived up to the
responsibilities of their positions. In essence, that
explains what happened to Enron.
nytimes.com
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