Math, Enron Style: $1.2 Billion = 'A Simple Mistake'
By Allan Sloan
The Washington Post
Tuesday, February 19, 2002
This column was written with Newsweek staff writer Mark Hosenball.
<<Isn't it amazing that no one seems to have been responsible for the collapse of America's seventh-largest company? In congressional testimony last week, Enron Corp. executive Sherron Watkins blamed former Enronites Jeffrey Skilling and Andrew Fastow for misleading former chairman Kenneth L. Lay. Lay, in turn, blamed his attorneys for forcing him to take the Fifth Amendment. (The lawyers weren't blaming anybody.) Skilling, who quit two months before Enron's death spiral started, claimed at recent congressional hearings to have believed the company was in great shape when he left. Fastow and his former subordinate, Michael Kopper, took the Fifth. Law firms, accountants and executives point fingers at one another.
And there's more to come. Arthur Andersen, Enron's outside accountant, may soon be back in the news, with top executives at headquarters in Chicago trying to offload blame for document shredding onto the Houston office, where Enron's audits were carried out.
We have learned that Andersen's internal investigation has provisionally cleared the firm's top managers of responsibility for the document shredding disclosed a month ago. The shredding began after a lawyer in the head office sent her Houston colleagues a copy of Andersen's document-retention policy.
But Andersen's investigators have tentatively concluded that the shredding had nothing to do with the letter. Rather, investigators believe, the shredding resulted from collusion between Enron employees and members of Andersen's Houston office. It's not clear what evidence -- if any -- backs up that allegation.
It's a sign of the times that Andersen is so jumpy that it has hired two other law firms that are monitoring the investigation. Asked for comment, an Andersen spokesman would say only that the internal investigation is continuing and that "no conclusions have been reached."
With hearings by about 10 congressional committees and subcommittees, endless lawsuits, civil probes, criminal probes and a treasure trove of documents (many of them available on the House Energy and Commerce Committee's dandy Web site), it seems as if the more answers we get, the more new questions are raised. Last Tuesday, senators teed off on Lay for 50 minutes, safe in the knowledge that he would utter only variations of "I must respectfully decline to answer, on Fifth Amendment grounds." (Imagine if the pols had known about Lay's Friday SEC filing: He'd sold $70 million of his Enron stock back to the company last year, some of it while he was urging employees to buy.)
In sharp contrast, Watkins, publicly mum since the House committee outed her a month ago, testified for hours and defended Lay. "I believed, and I still believe, that Mr. Lay is a man of integrity," she said. Why did Enron do sleazy things? She blames Lay's subordinates, Skilling and Fastow: "I think they intimidated a number of people into accepting some structures that were not truly acceptable."
While the human drama plays out on TV and the front pages, the real conversation about how to eliminate future Enrons is playing out mostly on the business pages, with discussion of unsexy but essential measures such as changing how companies calculate profits, account for some of their assets, produce financial statements and disclose stock sales by insiders. The recent panic in the market over anything that looks remotely like hinky accounting has produced more reform pressure in the two months since Enron filed for bankruptcy protection than former SEC chief Arthur Levitt Jr. could generate in eight years of fighting on behalf of investors.
But no matter how much you change the rules, it's hard to force people to call things as they are, as opposed to the way their firms -- and their clients -- want them to be. An illustration: We have obtained confidential legal documents that show Enron knew about a disastrous accounting error months before mentioning it in a crucial Oct. 16 meeting with investors. And that lawyers probing Watkins's allegations of accounting irregularities found the error but didn't put it in their report.
A memo written by Max Hendrick III of Vinson & Elkins, Enron's outside law firm, shows that Enron's chief accounting officer knew in August that Enron had made a huge mistake accounting for one of its controversial off-the-books partnerships. (It doesn't say when the accounting officer, Richard Causey, learned of the mistake.) During an Aug. 31 interview, "Causey pointed out that an unfortunate error will require an adjustment to the third quarter [financial] statements," the memo says. "Causey characterizes this as a simple mistake that now requires correction."
That "simple mistake" forced a $1.2 billion reduction of Enron's net worth. That reduction -- and Enron's failure to produce a quick, clear explanation for it -- sowed mistrust of all of Enron's numbers. That mistrust was a crucial factor in Enron's implosion. So how could V&E not mention the bookkeeping problem in its Oct. 15 report to Enron? V&E's answer: That matter was outside the scope of the report. Why did Enron wait months to disclose the huge and crucial bookkeeping error? The company declined to comment.
Almost any blame game seems plausible when it comes to Enron these days. Take the Internet sendup of those Sprint PCS ads that blame "bad cellular" for laughable miscommunications. Here's the Enron version: "The Arthur Andersen partner said, 'Ship the Enron documents to the feds,' but the secretary heard, 'Rip the Enron documents to shreds.' "
Yes, it's a joke. But not everyone is laughing.>>
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Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.
© 2002 The Washington Post Company |
