Experts question Enron's ties to Andersen
By Robert Manor
Chicago Tribune staff reporter
Published January 17, 2002
CHICAGO -- Accounting giant Andersen and collapsed power trader Enron Corp. share a long and now uncomfortably close relationship that begins--but certainly doesn't end--with a procession of executives who moved from the auditing firm to occupy top posts at Enron.
The close ties between the two companies posed a risk of a conflict of interest, accounting experts say. Auditors who want to leave their accounting firm to work for a client, they say, have an incentive to avoid finding financial problems at their prospective employer.
Sherron Watkins, the Enron executive who warned her firm's chairman that deceptive accounting might destroy the Houston energy company, earlier worked at Andersen. So did Enron's chief accounting officer, Richard Causey, and Jeffrey McMahon, now Enron's chief financial officer.
But Andersen was more than an employment pool for Enron, one of its largest and most lucrative clients. The firms have a relationship that dates to the mid-1980s, when Enron set off down the road to becoming the energy-trading powerhouse it was before its collapse last fall.
Among other things, Andersen helped Enron select investments, praised Enron in trade publications, feted Enron executives at parties and even co-sponsored an award for Enron's now-disgraced former chief financial officer, Andrew Fastow.
"It's an incestuous relationship that brings into question the entire auditing process," said University of Maryland School of Law professor Mike Greenberger, who was director of trading and markets for the Commodity Futures Trading Commission from 1997 to 1999. Such close relationships between auditor and client are "a practice that has become all too frequent, like too many practices illuminated by this fiasco."
Observers say the migration of employees from Andersen to Enron is an example of how conflicts of interest can arise in the accounting industry.
Former SEC Chairman Arthur Levitt said that when a partner at an auditing firm goes to work for his client, it creates the appearance of a conflict. "It certainly is a perception" of conflict of interest, Levitt said. "It is not illegal."
Lynn Turner, former chief accountant for the Securities and Exchange Commission, said that when an auditor accepts a job at a client, it raises questions about how thoroughly he performed his financial review. An accountant could feel pressured to overlook irregularities in the hope of winning a job.
The potential for a conflict of interest continues even after an auditor takes a job with a client, Turner said. "People who leave an [accounting] firm and go to work at the audit client know exactly what the auditor does, exactly what the auditor will look for," Turner said. "As a result, they sometimes will game the system."
At least eight congressional panels are investigating the Enron affair. The issue of auditor independence toward clients is expected to receive close review. Under the Clinton administration, the SEC tried to adopt rules requiring a more arms-length relationship between auditor and client, an effort defeated after an aggressive lobbying campaign led by Andersen.
Andersen and Enron did not respond to repeated requests for comment on the two companies' relationship. Enron in the past has said it is normal for companies to hire their auditors.
Andersen has said that Enron misled its auditors, and it did not know that hundreds of millions of dollars in debt had been concealed from investors. When word of the secret debt came out, Enron -- then the nation's seventh-largest company -- spiraled into bankruptcy.
On Tuesday, Andersen said it would fire David B. Duncan, the partner in charge of examining Enron's books. Andersen also announced it would replace the management of its Houston office, where Andersen partners audited Enron and later destroyed vital documents.
But many at the Houston office left months or years ago, taking jobs at Enron.
Jack I. Tompkins, who handled Enron as a client while a partner at Andersen, joined Enron in 1988 and served as chief financial officer and on the executive management committee until 1996. He departed Enron a couple of years before the company began setting up partnerships that regulators say were later used to conceal its debt.
Tompkins was not the only alumnus from Andersen to rise high at Enron.
McMahon, the chief financial officer at Enron, had been an audit manager for Andersen, although he did work at another company before joining Enron.
Causey, meanwhile, is chief accounting officer of Enron. He had been a senior manager with Andersen.
Both men were recruited from Andersen's Houston office, which was responsible for auditing Enron.
Dwayne Hart became vice president and controller of Enron Capital & Trade Resources Corp., an Enron subsidiary, in 1991. A published biography of Hart says he was responsible for audit support of many activities at Enron, including utility operations, energy trading and market intelligence. Before joining Enron, Hart was a manager in Andersen's Houston office, where he handled audits and SEC reporting. Hart has since left Enron.
Hart, like other former Andersen-Enron employees named in this story, could not be reached for comment.
Andersen did much more than simply audit Enron's books. Enron paid Andersen $52 million last year, of which $13 million was for consulting.
A year ago, for example, Andersen's Global Corporate Finance Team obtained financing for a small Texas telecommunications company. The money came from Enron.
When Enron decided to sell a power plant in India, it called on Andersen to help with the deal.
Andersen repeatedly sponsored conferences at which Jeffrey K. Skilling, the former Enron executive who briefly served as chief executive officer, was the featured speaker.
Andersen also praised Enron in public, holding the company up as an example of the business of the future. "It comes from the top that Enron is an energy company like no other and everyone lives and breathes that belief," gushed an Andersen partner, Victor Burk, in a trade publication last year.
In 1998, Andersen ran a commercial named "The Players" on CNN's Business Unusual show. One of the commercials involved a mock interview of Enron Chairman Ken Lay with the mountains of Aspen, Colo., as a backdrop. Lay explained Enron's success, saying "the key ingredient first and foremost are the people."
Then there was the honor bestowed on an Enron chief financial officer. In 1999, CFO magazine gave its CFO Excellence Award to Andrew Fastow, saying that at Enron he transformed the CFO's function "into a capital-raising machine."
Investigators say that by the time he received the reward, Fastow had set up a series of partnerships to conceal Enron's debt. He had a lucrative financial interest in the partnerships in an arrangement described as self-dealing.
The co-sponsor of the CFO Excellence Award? Andersen.
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