Andersen faces closer scrutiny on Enron debacle
Congress to focus on Chicago firm's role as consultant
By Stephen J. Hedges and William Neikirk, Washington Bureau.
Chicago Tribune
Published January 28, 2002
WASHINGTON -- With the first round of hearings investigating the collapse of Enron Corp. now complete, congressional leaders say they have many more questions--and plans for more hearings--regarding what role the Chicago-based Andersen accounting firm may have played in the energy giant's failure.
Investigators plan to focus on Andersen's activities as a business consultant to Enron and whether the accounting firm advised the Houston-based energy trading company on the controversial partnership transactions that concealed more than $618 million in Enron losses and more than $1.2 billion debt.
Nearly a year ago, Andersen executives expressed concerns among themselves about Enron's finances and the fallout should they ever be linked to the energy company's precarious position.
Investigators believe those partnership losses, concealed from the company's ledgers, triggered Enron's collapse. The partnerships are central to investigations of Enron by the Securities and Exchange Commission, the Justice Department and 11 congressional panels.
"The destruction of the documents was the first thing," said Rep. Cliff Stearns (R-Fla.), referring to last week's hearings. "The next big thing is to see from a financial accounting point of view if there is a conflict if a person is an accountant and also a consultant. I think there is."
By its own admission, Andersen's Houston office, which managed a $25 million auditing and a $27 million consulting contract with Enron, destroyed documents between mid-October, when it learned that Enron was the subject of an SEC investigation, and Dec. 2, when the company filed for bankruptcy.
The Andersen accountants who testified last week placed much of the blame on Houston partner David Duncan, who was in charge of Andersen's Enron account. Duncan has talked with committee investigators but asserted his 5th Amendment right against self-incriminating testimony during the hearings.
Without answers from Duncan, committee leaders have turned their sights on Andersen's role as a consultant and whether it played a more direct role in helping Enron structure its complex--and possibly illegal--trading practices, particularly the collection of partnerships that paid Enron executives high fees and concealed the company's true financial condition.
"Their professional responsibility is to provide factual statements that fairly and accurately reflect the financial condition of the company. They chose not to do that," said Rep. James Greenwood (R-Pa.), chairman of the House subcommittee on investigation, which held a hearing last week. "They chose to use smoke and mirrors to keep the transactions off the books. Why did they do that? Enron was their biggest customer. Enron paid them $1 million a week, and it paid them for the very consulting services that may well have advised them just how to keep this stuff off the books."
Andersen fought regulations
Andersen is one of several large U.S. accounting firms that have successfully opposed regulatory changes that would prohibit independent auditors from also working for clients as business consultants. Andersen's work as an Enron consultant still is not well understood, and investigators are trying to determine whether the accounting firm played any role in advising Enron on a variety of controversial trading, partnership and tax-planning issues that may have been illegal.
"An important question is whether documents destroyed were documents that had to do with accounting matters, or whether they were documents that also had to do with consulting matters," Greenwood said. "Was Andersen trying to cover up that it had advised Enron on how to construct these partnerships?"
While Andersen and Enron have acknowledged destroying documents, both businesses also provided congressional committees with more than 40 boxes of records. Investigators have used those records to piece together a chronology of Enron's collapse.
Individually, each document reflects the pressure-laden atmosphere that Andersen employees worked under as Enron slipped into its tailspin. Collectively, the documents create a compelling, but still incomplete, record of Andersen's attempts at self-preservation and damage control.
Though Enron crumbled last month, the documents show that Andersen executives began to privately express their doubts about the energy company's methods, and Andersen's own possible exposure, nearly a year ago.
On Feb. 5, 2001, the Andersen partners who ran the Enron account in Houston, as well as some in Chicago, held a discussion to consider whether it would keep Enron as a client. That, Andersen CEO Joseph Berardino has said, was something the firm did annually regarding each of its clients.
But documents gathered by the committee show that the Andersen team working on Enron's account in Houston had serious concerns about the high compensation and potential conflicts of interest among Enron executives. They were particularly troubled by a partnership called LJM, which was run by Andrew Fastow, who then was Enron's chief financial officer. In auditor's parlance, such partnerships were called "related party transactions."
"Significant discussion was held regarding the related party transactions with LJM, including the materiality of such amounts to Enron's income statement and the amount retained `off balance sheet,'" wrote Andersen's Michael Jones, who recounted the meeting in an e-mail the next day to Duncan. "The discussion focused on Fastow's conflicts of interest in his capacity as CFO and the LJM fund manager, the amount of earnings that Fastow received for his services and participation in LJM."
Fastow made a reported $30million from such partnerships.
Jones' electronic record went on to recall that Andersen executives had referred to some of Enron's activities as "intelligent gambling," that they had raised questions about the company's aggressive method for registering profits and that Andersen itself may face exposure to Enron's future problems.
Chief among those, Jones wrote, was "a perceived independence issue solely considering our level of fees."
As auditor and consultant to Enron, Andersen's annual take from the company had grown to more than $50 million, and it could, Jones noted, "reach a $100 million per year amount considering the multidisciplinary services being provided. Such amount did not trouble the [Andersen meeting] participants as long as the nature of the services was not an issue."
Despite their concerns, the 14 Andersen executives who took part in the meeting decided to keep Enron as a client. Duncan was directed to bring the questions about the LJM partnership to Enron's board of directors, but never did, investigators say.
In the end, wrote Jones, the Andersen team decided "that we had the appropriate people and processes in place to serve Enron and manage our ... risks."
Critics say that probably was Andersen's first big mistake. Two months later, it made its second.
On April 2, 2001, Andersen approved Enron's annual report. Like all corporate reports, it included the accounting firm's assurance that, "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enron Corp. and subsidiaries as of December 31, 2000 and 1999."
Partnership issue buried
None of Andersen's concerns about the partnership trading or generous executive compensation were addressed in the report. In fact, the entire partnership issue was buried in footnote 16 on page 49, in a and virtually incomprehensible reference to the "Related Party."
If nothing else, the opaque nature of the note should have raised a red flag with analysts, accounting experts say.
"I don't think anyone could have understood the footnote at the time the report came out," said Frank Partnoy, a professor at the University of San Diego School of Law who testified about Enron's practices before the Senate Governmental Affairs Committee last week.
Partnoy had much the same concern over Enron's mention of its derivative trading practices, which received equally vague treatment in Enron's annual report.
"The numbers are staggering," he said. "It was Andersen's responsibility not only to audit Enron's financial statements, but also to assess Enron management's internal controls on derivatives trading."
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