Enron Auditor Raises Specter of Crime
December 13, 2001
The New York Times
BUSINESS
By JOSEPH KAHN with JONATHAN D. GLATER
WASHINGTON, Dec. 12 -
Enron's accounting
firm told Congress today that the company
had engaged in "possibly illegal acts"
before its collapse and misled its auditors
by withholding crucial information.
Enron executives, meanwhile, presented a
plan for the company to survive by spinning
off its prized energy- trading operation and
emerging as a more conventional energy
producer and wholesaler.
Joseph P. Berardino, chief executive of
Arthur Andersen, Enron's longtime auditor,
provided a House panel with the first direct
testimony that the company, now bankrupt,
might have violated securities laws. He did
not specify any violations.
Both the Securities and Exchange
Commission and the Justice Department
are investigating Enron's demise, which
burned investors who once owned Enron
stock worth tens of billions of dollars and
left thousands of employees unemployed.
The S.E.C. went to court today to force
Andrew S. Fastow, Enron's former chief
financial officer, to testify in its inquiry. It
said he had failed to comply with an earlier
subpoena. [Page C6.]
Andersen auditors told Enron's board that
company officials had withheld information
about a so-called special-purpose entity on
Nov. 2, Mr. Berardino said. One week
later, Enron issued a revised financial
statement and reported $586 million in
losses connected with such entities,
contributing to its death spiral.
Andersen also acknowledged that its
auditors had made mistakes in analyzing
another of Enron's special- purpose
entities, which the company often used to
remove debt from its balance sheet. "We
made a professional judgment about the
appropriate accounting treatment that turned out to be wrong," Mr.
Berardino said.
Enron said in a prepared statement today that it had always cooperated with
its auditors and that it had been the Enron management, not Andersen's, that
"discovered the arrangement" that raised questions about the accounting
treatment of one special-purpose entity. The company said it had
immediately reported the findings to Andersen as well as to an investigative
panel of its board.
"Enron is determined to get to the bottom of these issues and began work on
that effort before Andersen's advice," the company said.
Mark Palmer, an Enron spokesman, conceded that someone at Enron must
have known about the Enron information that Andersen said had been
withheld and that had forced the change in accounting. But he added: "It was
not known to our chief accounting officer. It was not known to our senior
management."
The quality of the audits is likely to come under close scrutiny because
Andersen gave its seal of approval to Enron's financial reports for 10 years,
as Enron grew from a medium-size natural gas company to a complex energy
trading concern that reported more revenue than all but seven companies in
America.
At the hearing, before the House Committee on Financial Services, the first
of several House and Senate panels that are expected to inquire into Enron's
collapse and its impact on energy and financial regulation, lawmakers said
there had been widespread abuses by company executives. Company
officials enriched themselves by selling hundreds of millions of dollars worth
of stock while they engaged in questionable financial practices that ran the
company into the ground, several congressmen said.
Company officials were "just having too much fun," said Representative
Richard H. Baker, the Louisiana Republican who presided over the hearings.
"We must make the careful determination of whether we are dealing with a
case of outright fraud and violation of existing securities laws," he said.
Mr. Berardino of Andersen said he thought that his appearance at the
hearing was important to help restore public confidence in the stock market,
where investors must trust the quality of financial results certified by the Big
Five accounting firms, including Andersen.
"I am here today because faith in our firm and in the integrity of the capital
market system has been shaken," he said.
Mr. Berardino said the firm was still seeking to learn why it had not been
provided information that would have allowed it to account properly for a
special-purpose entity called Chewco Investments. Andersen let Enron
exclude Chewco's debt from its own books.
He said Enron had kept Chewco off its books by arranging in 1997 for a
financial institution he did not identify to invest $11.4 million in it. That
satisfied an accounting rule saying that if an unrelated party provided at least
3 percent of the equity, disclosure was not mandatory.
But, he said, Enron had in fact "arranged a separate agreement with that
institution" in which Enron guaranteed half that amount and put up cash to
back that guarantee. Had Andersen known that, he said, the accounting
would have been different, and Enron's reported profits in subsequent years
far lower.
Mr. Berardino said it had allowed Enron to treat Chewco as an independent
entity because it had not known the full scale of the company's financial
involvement. "Important information was not revealed to our team," Mr.
Berardino said.
But he said it had been Andersen's own "error in judgment" that had led to
incorrect accounting for another special-purpose entity, LJM Cayman.
In New York today, Enron gathered creditors to present its plans to remain
in business. Executives said the company planned to sell its troubled Azurix
Corporation (news/quote) water unit and its wind energy business, among
other operations that they predicted could raise up to $6 billion. The
surviving company would have three primary business lines: pipelines, energy
exploration and production.
Enron is in advanced talks to sell a controlling stake in its energy trading unit
to one of its financial backers. Wall Street firms like J. P. Morgan Chase
(news/quote) and Citigroup (news/quote), among Enron's largest creditors,
are thought to be among those that might want to invest in the trading
operation.
"We will do everything we can to maximize value," said Kenneth L. Lay, the
company's chief executive, as he spoke to more than 100 assembled
creditors, bankruptcy lawyers and investment bankers at the New York
Hilton. He said he envisioned the company's emerging from bankruptcy
proceedings within a year.
Mr. Lay declined an invitation to address the Congressional committee
yesterday, but he said he expected to testify in Washington at a later date. "I
couldn't today because of this," he said, referring to the meeting with
creditors. "This is the No. 1 priority for the company."
The trading floor, one of Enron's most prized businesses, is also one of the
most fragile because of the risk that employees will leave. It is essential to set
up the joint venture quickly, before Enron's traders flee the firm, said Jeff
McMahon, Enron's chief financial officer, emphasizing, "The key here is
timing."
Enron executives, trying to hurry the reorganization process, offered
yesterday's presentation - one of the first opportunities for creditors to hear
directly from the company since its bankruptcy filing on Dec. 2 - even
before an official creditors' committee was appointed.
Enron's bankruptcy lawyer, Martin Bienenstock of Weil Gotshal & Manges,
urged creditors to withhold judgment on what had driven the company to
bankruptcy so quickly. "Don't assume there's a smoking gun," he said,
"because this company was in the forefront of this business."
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