Checks, balances 'simply broke down'
UT dean testifies before House panel
By DAVID IVANOVICH
Feb. 4, 2002, 11:38PM
Houston Chronicle Washington Bureau
WASHINGTON -- A special board committee investigating Enron Corp. discovered an "absolutely appalling" situation of managers trying to hide the company's true condition, board member William Powers Jr. told a House panel Monday evening.
Powers, dean of the University of Texas Law School, told the House Subcommittee on Capital Markets that at Enron "the checks and balances simply broke down."
"We found a systematic and pervasive attempt by Enron's management to misrepresent the company's financial condition," Powers said.
Powers declined to say whether he thought any laws had been broken, deferring to the Justice Department, the Securities and Exchange Commission and other agencies conducting their own probes.
However, he did note: "This is very serious conduct. ... Certainly, it warrants close attention."
Powers' appearance on Capitol Hill came just two days after his investigatory panel filed its damning 218-page report.
It accused executives, auditors, lawyers and other board members of improperly creating partnerships to inflate earnings, hide debt and enrich a handful of insiders.
The report details how Enron managers exaggerated earnings over a 15-month period in 2000 and 2001 by more than $1 billion.
Rep. Richard Baker, R-La., chairman of the House Subcommittee on Capital Markets, called the Powers committee's report "one of the most disturbing things I've ever had the misfortune to read."
The Powers report "blows my mind," said Rep. Christopher Shays, R-Conn. "I am absolutely dumbfounded. I feel like I am in Sin City."
Lawmakers had to settle for questioning Powers after the day's headliner, Ken Lay, who resigned from the Enron board on Monday, canceled plans to appear earlier in the day before a Senate panel.
Powers' three-member committee did not try to fathom all the reasons for the Enron collapse. It was only asked to investigate some controversial off-balance-sheet transactions involving former Enron Chief Financial Officer Andrew Fastow and other Enron executives.
Fastow personally took in more than $30 million from these transactions, Enron has said.
Though Enron's board approved of his involvement with the ventures, the report said, it was was unaware of how much money he was making on them.
Powers said board members had raised questions about the deals, but were told they should not be given the information because the off-balance-sheet ventures were supposed to be independent of the company.
Besides Fastow, other members of the company's finance and accounting departments were aware of the transactions, Powers said.
Powers' committee concluded that former Chief Executive Jeff Skilling also had substantial knowledge about the deals, although Skilling has said he had little involvement with them.
"We were not able to ascertain with ... precision what Lay or Skilling knew," Powers said.
Skilling is slated to testify before a House panel on Thursday. Lawmakers also wanted to hear from Fastow, but he has already notified them that, if called, he would invoke his Fifth Amendment right against self-incrimination.
The company's board did not learn that some of company's off-balance-sheet joint ventures were "under water" until Skilling resigned in August and former Chairman Ken Lay resumed the duties of chief executive officer.
When conducting its probe, Powers' committee was able to review some documents from Enron's outside auditor, Arthur Andersen, but was unable to interview Andersen officials, Powers said.
Andersen officials dispute that contention: "Andersen offered to make our people available, and it was the Enron special committee that was unwilling to cooperate with us."
Andersen Chief Executive Joseph Berardino is slated to appear before the House subcommittee today.
Powers' committee took particular exception to Enron's system of "hedging" losses in these off-balance-sheet transactions -- that is, contracting with a third party willing, for a price, to assume the risk.
But the main assets of some of the joint ventures were Enron's own shares. "Enron was essentially hedging with itself," Powers said.
While there are many questions about who knew what about Enron's true financial condition, "virtually everyone, everyone from the board of directors on down, understood that the company was seeking to offset its investment losses with its own stock."
As Enron's outside auditor, Andersen should have raised questions about the hedging strategy.
Andersen has been criticized for both serving as Enron's outside auditor and also receiving hefty consulting fees from the company.
Some lawmakers have proposed that the auditors be hired and paid by someone other than the company itself.
"Perhaps ... it's time to have the stock exchanges engage the auditors and report their findings simultaneously to the exchange and the corporation," Baker said.
Noting that he is not a securities lawyer, Powers expressed surprise at Enron's ability to move assets around and, in essence, manipulate the company's balance sheet.
Critics on Capitol Hill also have cited securities analysts' failure to warn investors about Enron's indecipherable financial statements.
Securities and Exchange Commission Chairman Harvey Pitt, who also appeared before the subcommittee, plans to propose new rules Thursday aimed at tightening controls over financial analysts. |
