Enron-Andersen Ties Ended in Disaster
By Jeff Franks
Thursday May 9, 8:45 pm Eastern Time
HOUSTON (Reuters) - Accounting firm Andersen bent over backwards to please its lucrative client Enron Corp. in an unusually close relationship that ended in disaster for both, according to testimony on Thursday in Andersen's obstruction of justice trial.
A picture emerged of Enron constantly looking for ways to polish its financial statements by skirting conventional accounting rules and Andersen all too frequently going along, after a little internal anguish.
Their chummy relationship came to an end last fall when Enron reported a series of staggering financial losses tied to off-balance sheet partnerships the company used to disguise debt and boost profits.
The energy trading giant declared bankruptcy on Dec. 2 and Andersen, discredited by its permissive auditing of Enron, is struggling to survive the loss of hundreds of clients.
The Big Five accounting firm is charged with obstruction of justice for allegedly destroying thousands of Enron audit records to keep them away from investigators.
Prosecutors say Andersen wanted to cover its role in Enron's collapse because it feared losing its license to practice after involvement in previous accounting scandals at Waste Management and Sunbeam corporations.
Two high-level Andersen partners, Ben Neuhausen and Carl Bass, described an ongoing tug-of-war between Enron and Andersen in which the energy trading giant enlisted the local Andersen accountants to fight for its financial schemes against senior Andersen people advising caution.
"They (Enron) operated in areas (where) the accounting wasn't real clear..it was sort of pushing the envelope of what other companies would do," Bass told the jury.
SKIRTED REGULATIONS
The battles were often over Enron's numerous off-balance sheet partnerships, where the company skirted federal regulations about ownership, conflict of interest and financial reporting, they said.
Neuhausen told of a 1999 exchange in which Andersen's lead Enron accountant David Duncan asked whether it would be OK for Enron's then-chief financial officer Andrew Fastow to run and be part-owner of one of the partnerships.
Neuhausen, like Bass a member of a high-level Andersen standards committee that resolved accounting questions, shot back a memo saying there was "conflict of interest galore" in the proposal and that no board of directors "in its right mind" would approve such a deal.
But, in the end, both the board and Andersen OKd Fastow-run partnerships that earned him a reported $30 million.
Bass told of how he opposed several Enron proposals, including accounting treatment of the off-balance sheet deals, then one day his managers took him off all Enron work because Enron thought him to be an obstructionist.
Enron blasted him in a client satisfaction survey as "too rule-oriented" and his bosses said the company viewed him as "caustic and cynical toward their transactions," he said.
Aside from the personal blow of being removed from working with Andersen's biggest Houston client, he said he thought it dangerous for a client to be dictating personnel decisions to its auditor, who is supposed to remain independent.
The two witnesses, in a mirror of Andersen's overall strategy in the trial, appeared to pin the blame for their firm's cozy Enron relationship on Duncan, who they thought too willing to do Enron's bidding.
'PUSHED TO EXCESS'
Duncan has pleaded guilty to obstruction of justice by shredding Enron documents so investigators would not see them. He is scheduled to testify in the trial, perhaps as early as Friday.
"They (Andersen's Enron team) would often push for an aggressive interpretation of the accounting standards," Neuhausen said. "I thought many times, yes, he (Duncan) pushed to excess on aggressive interpretations."
He said Duncan and his team defied his committee's recommendations about how to book the off-balance sheet deals, with the result that Enron took a $1.1 billion charge to its 2001 third quarter earnings and restated results for four years.
Both men said relations between them and the Duncan-led group were tense last fall as Enron began to unravel. They said top-level Andersen managers got involved to try to come up with accounting methods to reduce the third-quarter blow, but Enron released the figures before they reached a solution.
Things only worsened when shortly afterwards Enron was forced to write down shareholder equity by $1 billion because of an Andersen error.
"There was a billion-dollar debit that needed to find a home somewhere," Neuhausen said.
Neuhausen also testified that he deleted Enron-related e-mails at the height of Enron's problems in October, but said he was simply cleaning up his files, not hiding information from investigators.
"It didn't dawn on me that anybody would have an interest in them," he said.
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