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Non-Tech : The ENRON Scandal -- Ignore unavailable to you. Want to Upgrade?

To: Mephisto who wrote (4823)	3/11/2003 12:39:13 PM
From: Mephisto	Respond to of 5185

Report Details Enron's Moves to Shift Assets The New York Times March 6, 2003 By KURT EICHENWALD In the most complete analysis to date of Enron's collapse, a bankruptcy examiner has concluded that the company violated accounting rules in a wide array of transactions that misrepresented its true financial performance and shifted billions of dollars in assets off the books. The report, by Neal Batson, an Atlanta lawyer who was appointed by the federal bankruptcy court in New York to investigate Enron's financial transactions, says that the company's creditors could properly seek to recover about $3.9 billion in assets held in entities that were improperly segregated from Enron, the energy-trading company. The report also concludes that $2.9 billion in additional asset transfers could be recovered. Mr. Batson's report, which was filed on Jan. 21 and unsealed yesterday, sets the stage for a battle in the Enron bankruptcy, as creditors fight to determine which entities - including some partly owned by certain creditors themselves - should always have been treated as part of the company. It also holds up the potential of setting the company against its own former executives. Mr. Batson concludes that under the bankruptcy laws, the Enron estate could seek $74 million from Kenneth L. Lay, the former chairman, who borrowed the money and repaid it with company stock in the months before the bankruptcy. The report also said it could seek $55 million in deferred compensation that was given as accelerated payments to certain senior executives soon before the bankruptcy. At almost 2,000 pages, the Batson report reads like a pulp fiction novel for the financial world, replete with tales of manipulations, deceits and flat-out mistruths that resulted in one of the world's most powerful and respected companies misrepresenting its precarious - and ultimately fatal - position. The report dissects Enron's flaws, concluding that much of the trouble stemmed from the company's own business model, one that created serious problems with the quality of its earnings. In essence, one of the company's accounting techniques - involving a method known as mark-to-market - was used so aggressively that the company was able to report millions of dollars in earnings on businesses that were not even up and running. Through mark-to-market accounting, the report says, "Enron often recognized earnings before these activities generated any cash." Yet such accounting treatment left Enron with too little cash flow from operations to support its earnings. In other words, any knowledgeable investor examining Enron's financials would notice huge earnings but little generated cash. To solve that problem, the report says, the company turned to accounting gimmicks. Mr. Batson also concludes in the report that the company relied on six complex accounting maneuvers to make its financial picture more attractive. Such techniques - including noneconomic hedges, tax transactions and other devices - accounted for 96 percent of Enron's reported $979 million in net income for 2000, the report concludes. They also allowed Enron to report debt of only $10.2 billion instead of $22.1 billion. In his report, Mr. Batson makes clear that Enron's financial techniques frequently violated generally accepted accounting principles. However, the report also suggests some of the difficulties prosecutors face in transforming such conclusions into a criminal case. Repeatedly, Mr. Batson describes Enron and its accountants at Arthur Andersen bending and twisting to hit literal compliance with the accounting rules, often with outcomes that misrepresented the company's true financial performance. In most of those instances, Andersen - relying on law firms that the report said often provided legal opinions about parts of deals, without understanding them in their entirety - approved the accounting. That increases the difficulty of proving that Enron deliberately violated the rules - a necessary element in a fraud case - even if the outcome was just as deceptive as straight-out fraud. Indeed, people involved in the investigation have said prosecutors have decided that they will not prosecute accounting fraud involving transactions approved by the accountants unless they develop evidence that the opinion was tainted. Ultimately, the report treats the accounting used by Enron - involving devices known as special purpose entities, or S.P.E.'s - as something like alcohol: moderate use is fine, but Enron had gone on a destructive binge. "There is nothing improper about the use of structured finance and S.P.E.'s to achieve and report business results," the report says. "Enron, however, used structured finance to report results it had not achieved." The Batson report also said that some former Enron executives earned more than had been previously thought from the transactions with some of the outside entities. For instance, Andrew S. Fastow, the former chief financial officer, "received at least $60.6 million," from his dealings with the entities, the report said. That is about $15 million more than previously thought. Mr. Fastow is under indictment in a federal court in Houston on several charges related to his work at Enron. He has pleaded not guilty. nytimes.com Copyright 2003 The New York Times Company \| Privacy Policy