Senate Panel Says Enron's Board Could Have Stopped High-Risk Practices
July 7, 2002
By RICHARD A. OPPEL Jr.
WASHINGTON, July 6 - A Senate panel investigating the Enron Corporation has concluded in a report being released on
Sunday that the company's board knew about and could have halted many of the risky accounting practices, conflicts of
interest and disguising of debts that led to Enron's demise.
The findings by the Senate Permanent Subcommittee on Investigations, which has been investigating the matter for six
months, paints the board in a harsher light than a report in February by a special committee of directors, which found that the
board had failed in its "oversight duties" and should have been more vigilant.
By contrast, the Senate panel's report found that "much that was wrong with Enron was known to the board, from high-risk
accounting practices and inappropriate conflict of interest transactions, to extensive undisclosed off-the-books activity and
excessive executive compensation."
Senator Carl Levin, a Michigan Democrat who is chairman of the subcommittee, said in an interview this weekend that "the
failures here were enormous."
He added, "You have a board that is supposed to be an independent check on management, and they failed to do that."
Mr. Levin said the findings demonstrate the need for sweeping reform of accounting and corporate governance laws. "Congress
must act now to restore public confidence," he said.
A lawyer for the Enron directors who were not part of the company's management before it collapsed last fall said the panel was
blaming the wrong people.
"The Senate report unfairly criticizes the board for oversight failures, when what actually occurred here was that the board was
misled by management and the outside auditors about these transactions," the lawyer, W. Neil Eggleston, said this weekend.
According to the report, evidence collected by the Senate panel showed:
That the board had warnings that the company's accounting was very risky. In February 1999, for example, the panel found
that the board's audit committee was told by auditors from Arthur Andersen that Enron's accounting methods were "at the
edge" and "pushing the limits." Also, in May 2000, the board's finance committee was told that partnerships headed by the
company's chief financial officer, who at the time was Andrew S. Fastow, had produced a "remarkable" $2 billion in "funds flow"
for Enron in just six months, yet no director asked how this had been accomplished.
That the board, "with little debate," granted Mr. Fastow a waiver allowing his partnerships
to do business with the company in a manner that ultimately enriched him but helped lead
to Enron's collapse. Had the board simply reviewed the partnership
documents - one director even received them in the mail as an investment pitch - they would
have noticed that two other senior Enron finance executives, Ben F. Glisan Jr. and Michael J. Kopper,
eventually joined Mr. Fastow in the partnerships,
though neither man obtained the required waiver.
That the board "knowingly allowed Enron to move at least $27 billion or almost 50 percent of its assets off balance sheet." One
"accounting gimmick" used to artificially bolster Enron's financial statements was the creation of partnerships known as
Raptors, which directors knew carried huge risks for the company. Among other things, a chart shown to the board's finance
committee in April 2001 outlined how Enron could be forced to issue tens of millions of new shares, if its stock price declined,
because of these transactions.
That the board allowed senior executives to enrich themselves improperly. For example, the report cited how the former
chairman, Kenneth L. Lay, effectively sold $77 million in company stock by
"abusing" a line of credit, allowing him to delay the
disclosures normally required for such sales.
Later this month, the Senate panel is expected to hold a hearing examining the role of investment banks in Enron's collapse,
looking, for example, at whether the banks participated in deals that obscured Enron's true financial state in exchange for
outsized fees from the company.
nytimes.com Copyright 2002 The New York Times Company |
