Ex-Enron Employees Suggest Anderson Helped Veil Deals
The conference room on the 48th floor of Enron Corp.’s Houston headquarters--the nerve center of the energy trader’s convoluted and risky deals--was at the opposite end of the hall from the company’s outside accounting firm, Andersen.
The room was entirely paneled in whiteboards and furnished with a full supply of colored markers. There Enron executives were briefed on the dizzyingly complex structures that Andersen consultants had layered onto deals that often had started out as straightforward. The experience often left some at Enron dumbfounded.
“You’d see things involving 30 or 40 different entities,” said Clayton Vernon, a former research analyst and trading manager at Enron. “They would clear a whiteboard and draw a flowchart that would be absolutely incomprehensible.”
Another former executive familiar with the conference room recalled: “They’d be drawing boxes and arrows going in every direction.” The drawings would describe shell companies and offshore entities with intricate interrelationships, all headed by mysterious figures designated on the whiteboards as “Mr. X” or “Mr. Y.”
When pressed, accountants would identify the mystery figures only as “somebody who’s a friend of the company,” according to the former executive, who asked to remain unidentified. These phantom executives, the Andersen accountants announced, were due payments of hundreds of thousands of dollars to play their shadowy roles in the transactions.
Chicago-based Andersen served Enron not only as its outside auditing firm, bound to ensure that the company’s books complied with financial disclosure standards, but also as business consultants. The dual function, which may have subjected Andersen to a conflict of interest, is expected to come under intense scrutiny by Congress as it begins looking into the Enron collapse.
In many cases, the goal of the complex structures, the former employees say, was twofold: to keep them off Enron’s corporate balance sheet and thus out of view of the public, and to enable Enron to record revenue from the deals before it was received--often more revenue than the deals were likely to produce.
Whatever the rationale, this process is behind the extraordinary complexity of Enron’s financial dealings and helps explain how profound problems in its numerous businesses eluded the comprehension of auditors, shareholders, regulators and tax authorities for years.
Enron’s 2001 annual report lists about 3,800 subsidiaries, of which more than 700 are located in the Cayman Islands or other offshore financial havens. Most of these are known as “special purpose entities,” or SPEs, created by Enron as vehicles for its complicated transactions.
These deals were among those lambasted by Enron Vice President Sherron S. Watkins, who complained in a memo she wrote Aug. 15 to Enron Chairman Kenneth L. Lay. The memo was released earlier this week by a congressional committee.
Public documents and interviews with former Enron employees suggest that during the last two years the company’s deals became more complicated and their economic rationales more suspect.
The effect was to create transactions that, rather than benefiting Enron, tended largely to enrich senior executives who were entitled to special compensation for their roles in the partnerships. Andrew S. Fastow, Enron’s former chief financial officer, reportedly was entitled to $30 million in such compensation.
The aim also may have been to produce the illusion of continued revenue gains for the company, which was facing slowing growth in many of its core businesses.
Even before that, the labyrinthine character of Enron deals was a byword at the company. In early 2000, four months after he joined the company, Vernon said he first saw deals that didn’t seem quite right.
“But the transactions were so complicated I assumed there was some part I was missing that meant they were at least reasonable business propositions for the Enron shareholders,” he said. “In hindsight, they should have raised more red flags.”
Vernon and others say there were indications within Enron that high-level executives of the company’s outside auditing firm, formerly known as Arthur Andersen, approved of these maneuvers.
Andersen, which on Tuesday fired the Houston-based partner overseeing the Enron account and suggested that lax oversight of the company was limited to its Houston office, declined to reply to questions Wednesday about the firm’s involvement in structuring the transactions. An Andersen spokesman said the firm is looking into its actions and is cooperating with investigators.
Vernon said he asked Enron Chairman Lay point-blank at a company “town hall” session Sept. 26 if he was comfortable with Andersen’s integrity and oversight. At the time, the company was facing the first wave of criticism over the offshore partnerships that had shielded liabilities from public scrutiny.
Lay replied in the affirmative, Vernon recalled, adding that not only Andersen’s Houston office but its national office had also approved the partnerships in advance.
“Everything is done ethically,” Lay said, in Vernon’s recollection.
An Enron spokesman said Wednesday night that she could not confirm or deny that Lay made the remarks Vernon attributed to him. Recordings of this and other internal company meetings purportedly featuring Lay’s reassurances have been requested from Enron by congressional investigators.
In any case, the complex structures enabled Enron to conceal the real ramifications to its bottom line of many of its deals with offshore partnerships.
Some of the sour deals stemmed from the company’s ill-fated venture into broadband communications in the late 1990s, when Wall Street was highly excited about high-speed data services for homes and offices over fiber-optic networks. Enron invested in several fiber-optic companies and bought transmission rights over regional lines despite signs that the market for such communications capacity was facing a glut and that values were likely to plunge.
In transferring some of these transmission rights to offshore partnerships, former employees say, Enron wantonly overvalued them. The company might value regional lines in the Southeast on the same scale as lines in the Northeast, which were more heavily used and much more valuable.
It also would value “dark fiber”--that is, installed but unused network capacity akin to empty pipelines--at the same value awarded “lit” fiber, which already was interconnected to nationwide networks and carrying data. In transferring the asset offshore, it would record the sale on its own books as a sale at the higher, inflated values.
But such deals also required Enron to cover any losses incurred by the offshore partnership, usually by payments of cash or shares. This so-called contingent liability would not be disclosed to investors, a process that vastly inflated Enron’s earnings and led to a $586-million restatement of its earnings late last year.
Sources say the transactions became even more questionable beginning in early 2000.
“One of the games they played was to make them so complex that people couldn’t see where the risk lay,” Vernon said. “You’d have to spend hours with the analysts to figure it out, and then you’d be told, ‘Andersen’s already signed off on this.’ ”
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Hiltzik reported from Los Angeles, Streitfeld from Houston.
