Andersen Fires Executive Who Oversaw Enron Audit

The Andersen accounting firm said Tuesday that it fired the executive in charge of auditing Enron Corp., saying partner David B. Duncan organized an effort to destroy thousands of documents after learning of an inquiry by the Securities and Exchange Commission.

Andersen also placed three other partners responsible for the Enron engagement on administrative leave and took away management responsibilities from the four partners who ran the Houston office where the Andersen audit was conducted.

“Based on our actions today, it should be perfectly clear that Andersen will not tolerate unethical behavior, gross errors in judgment or willful violation of our policies,” Joseph F. Berardino, Andersen’s managing partner and chief executive, said in a statement.

Sullivan & Cromwell, the New York law firm representing Duncan, issued a statement saying he did nothing wrong and is cooperating with investigators. A spokesman said Duncan was following the instructions of an Andersen attorney.

Duncan did not return a phone call to his home.

An Andersen official said the firm learned in the first week of January that documents had been destroyed. Its assertion that Duncan systematically destroyed documents after learning that the SEC was looking into the Enron audit is yet another devastating blow to Andersen, said Lynn Turner, the SEC’s former chief accountant.

“It is about as close to an admission of guilt that you can get without actually saying it,” Turner said.

Typically, accounting firms facing probes and litigation place the partner who headed the problem audit “on ice” while the matter sorts out, according to accounting experts. They don’t allow the individual to do more audits, but they don’t fire the person, because they want the partner to testify on the firm’s behalf.

“It is almost unheard of for a partner to get fired during one of these investigations, and so early in it,” said Turner, who heads the Center for Quality Financial Reporting at Colorado State University.

Andersen collected $25 million for the Enron audit, one of the largest audit fees in corporate America. Microsoft, by comparison, paid less than $5 million in audit fees last year.

Turner predicted the firing would help congressional investigators, who plan to meet with Duncan in Washington today. “Frankly, now that he’s been fired, he may have a little more motivation to cooperate with us,” said Ken Johnson, a spokesman for the House Energy and Commerce Committee.

Investigators are reviewing six boxes of Duncan’s personal files, which they hope to use to reconstruct some of the destroyed records. Johnson said that Duncan may have “crucial information” relevant to the probe--”and apparently he’s prepared to share it with us.”

Each successive revelation about how it handled the Enron audit--starting last year when Andersen reissued the energy company’s financial reports, slicing nearly $600 million off its profit statements over a four-year period--has been increasingly damaging for the firm, said Howard Schilit of the Center for Financial Research and Analysis in Rockville, Md.

The firm’s integrity has been challenged, employee recruiting and retention efforts have been damaged and Andersen faces the prospect of huge financial penalties and judgments stemming from numerous federal probes and Enron shareholder lawsuits.

Duncan, 42, is a former treasurer of the Alpha Tau Omega fraternity at Texas A&M; who serves on the advisory board of the business school’s accounting department.

Duncan also is a member of the politically powerful board of the American Council for Capital Formation, a Washington-based organization that lobbies for business-friendly tax and environmental policies.

Also on the board are Enron Chairman Kenneth L. Lay and an array of Washington blue-chippers from both parties, including former Secretary of State George P. Shultz, former Treasury Secretary Lloyd Bentsen, former House Ways and Means Committee Chairman Bill Archer and former ambassador and Democratic Party chief Robert S. Strauss.

Andersen claimed that an internal investigation found that Duncan organized an “expedited effort to destroy documents” in the Houston office and called a meeting with staff members Oct. 23 to get the task started.

What is especially damaging, according to accounting experts, is that Andersen asserts Duncan started shredding papers and deleting electronic files after learning that Enron had received a request for information from the SEC about its financial accounting and reporting. Such an action could be grounds for obstruction of justice charges.

“This effort was undertaken without any consultation with others in the firm and at a time when the engagement team should have had serious questions about their actions,” Andersen said in its statement.

“The activity appears to have ended shortly after the lead partner’s assistant sent an e-mail to other secretaries on Nov. 9--the day after Andersen received a subpoena from the SEC--telling them to ‘stop the shredding,’ ” Andersen said.

Andersen rejected the claims of Duncan’s attorney that he was following orders. The firm said an Oct. 12 e-mail to the Houston office from Nancy Temble, an in-house attorney, was a routine reminder for the Enron team to follow the firm’s documentation and retention policy and did not authorize the destruction of documents.

The e-mail to Andersen partner Michael C. Odom said: “Mike--It might be useful to consider reminding the engagement team of our documentation and retention policy. It will be helpful to make sure that we have complied with the policy. Let me know if you have any questions.”

Schilit said Andersen’s actions and statements over the last several days represent the seeds of what might turn into the accounting firm’s defense.

“Andersen may be in a damage-control mode where they stress that their internal policies were violated and that this guy is a scoundrel,” Schilit said.

But others said Andersen is correct to sever ties with people it believed violated its policies and to disclose what happened.

“This is a sad situation all the way around, but Andersen is taking the right steps to restore its reputation and working through the details as you would expect,” said Randolph Beatty, dean of USC’s Leventhal School of Accounting.

Ira Solomon, head of the accounting department at the University of Illinois, noted that although Andersen has had a troubled audit, the firm is acting responsibly and that “You can’t characterize Andersen as a corrupt organization.”

The accounting firm said it has recovered some documents from electronic backup files and is working to retrieve more. Andersen also said it does not believe that any crucial “work papers” were destroyed. Such papers typically detail the rationale for accounting decisions made during an audit.

Andersen said its internal probe is continuing and that the individuals already named and other staff members could face additional sanction.

The partners who were put on leave were Thomas H. Bauer, Debra A. Cash and Roger D. Willard. The Houston-based partners being relieved of management responsibilities were D. Stephen Goddard Jr., Michael M. Lowther, Gary B. Goolsby and Odom.

A Duncan associate, Jerry Strawser, dean of the school of business at Texas A&M;, said Duncan was well-regarded in Texas accounting circles, and he reserved judgment on Andersen’s allegations.

“Any time our department of accounting wanted to do a project or needed ideas of how to structure courses or programs, he would be on the short list of who to call,” Strawser said.

Duncan also was instrumental in recruiting students for Andersen and in using his Andersen contacts to raise funds for the school, Strawser said.

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Times staff writers Thomas S. Mulligan in New York and Richard Simon in Washington and researcher Penny Love contributed to this report.