ENRON DIRECTORS IMPLICATED IN FRAUD
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Despite assertions they knew little, Enron directors ignored repeated warnings about problems, Senate report says
Sat Jul 6, 3:15 PM ET
By PETE YOST, Associated Press Writer
WASHINGTON - Enron's board closed its eyes to evidence the company was heading for financial disaster, and claims by former directors that they were kept in the dark are untrue, a Senate report concludes.
"Much that was wrong with Enron was known to the board," the Senate Permanent Subcommittee on Investigations said in a scathing 60-page critique.
Directors of the Houston-based energy-trading company failed to heed "more than a dozen red flags that should have caused the Enron board to ask hard questions, examine Enron policies and consider changing course," the report says.
Lawyers for the company and the former directors disputed the findings.
Senate investigators said the board failed to protect company shareholders and contributed to the collapse of Enron, which in December became the biggest company bankruptcy in U.S. history.
The report being made public Sunday estimated that at its peak, the company "apparently had between $15 billion and $20 billion involved in hundreds" of complex transactions that entailed "convoluted financing and accounting structures."
The subcommittee chairman, Sen. Carl Levin ( news, bio, voting record), D-Mich., said the report shows how important it is for swift Senate passage of legislation to strengthen accounting oversight and toughen laws that punish corporate misconduct.
But Washington attorney Robert Bennett, who is representing Enron, said the report is setting the responsibility of boards of directors far beyond what is commonly understood to be the case.
"I only wish the Congress would apply the same standards to their own conduct," Bennett said. He said the report was "grossly unfair" and that it "leaps to unfounded conclusions."
"We would expect nothing less in this frenzy that is taking place on Capitol Hill," he said.
W. Neil Eggleston, a Washington attorney representing Enron's former directors, says the board was "misled by Enron management and outside auditors about now-suspect transactions."
The Senate report focused on a three-year period leading up to the bankruptcy, an event that marked the first in a wave of huge corporate scandals rocking the U.S. economy. The latest is WorldCom, which inflated its financial results by improperly accounting for nearly $4 billion in expenses.
Enron directors were aware of high-risk accounting practices, inappropriate conflict-of-interest transactions and extensive undisclosed off-the-books activity, the report says.
The report also says Enron's executives compromised the independence of some board members with consulting payments.
Enron paid board member John Urquhart $493,914 for consulting in 2000. Starting in 1996, John Wakeham got a monthly retainer of $6,000 for consulting. The money was in addition to the regular compensation for board members at Enron, which amounted to $350,000 per year, much of it in the form of stock options, says the report.
The $350,000 figure is more than twice the national average for board compensation at the top 200 U.S. publicly traded corporations.
The report says former Enron auditor David Duncan of Arthur Andersen warned directors on the audit committee that the company engaged in high-risk accounting practices. Duncan told the directors that some of what was being done was "pushing the limits" and was "at the edge" of acceptable practice.
Duncan's notes of the discussion were backed up by other documents and by the testimony of a second Andersen accountant who was present. But the Enron audit committee chairman, Robert Jaedicke, said he did not recall being told that the company's accounting practices pushed the limits.
"When we would ask them, even in executive session, about, OK, how do you feel about these" accounting practices "the usual expression was one of comfort," Jaedicke, dean emeritus of the Stanford Business School, told the subcommittee.
"It was not, these are the highest risk transactions on our scale of one to ten," Jaedicke added.
Duncan, who pleaded guilty to obstruction in the Enron probe, was the chief prosecution witness in last month's criminal trial of the Andersen accounting firm, which was convicted of obstruction of justice.
The Senate report said that the board:
_Cleared the way for Enron executives to improve the appearance of the company's financial statements by waiving conflict-of-interest rules for chief financial officer Andrew Fastow.
_Did not raise any questions when told that in six short months, one of Fastow's outside partnerships had produced a phenomenal $2 billion in funds flow for Enron.
_Did not bother until late last year to press for information about the outside compensation of Fastow, who took tens of millions of dollars from Enron in exchange for keeping hundreds of millions of dollars in Enron debt off the company's books.
The Senate report says the board's compensation committee engaged in a "lavish compensation philosophy."
Enron's former chief executive officer, Kenneth Lay, "used his credit line to withdraw $77 million in cash from the company in one year, replaced the cash with company stock, and never mentioned his borrowings or stock sales to the board or the public," the report says. Still, board members were reluctant to criticize Lay at a Senate hearing.
Lay declined comment until he had a chance to review the entire report, his spokeswoman, Kelly Kimberly, said Saturday.
The committee "exercised little, if any, restraint over Enron's compensation plans," the report says.
Board members indicated that they had been unaware the company paid cash bonuses of $750 million to Enron executives in a year when the company's entire net income was $975 million.
Asked why Enron executives misled the board and cheated the company, one board member told Senate investigators he assumed "they did it for the money." |
