Enron Exec Warned Auditors on Practices

Enron Vice President Sherron S. Watkins warned the company’s auditors, Andersen, about a series of questionable accounting practices that now are the focus of investigations of the energy company’s collapse, congressional investigators said Wednesday.

Watkins alerted the company in an Aug. 20 phone call with an unidentified Andersen employee, who in turn relayed the concerns to senior Andersen management on the Enron account and in Andersen’s Houston office, officials said.

Investigators said Watkins’ warning cast further doubt on claims by Enron and Andersen officials that they were unaware of the company’s dire financial straits last summer. The disclosure followed release of a letter this week showing that Watkins had given a similar warning to Enron Chairman Kenneth L. Lay in August.

“It’s clear now to us that key players at Andersen as well as Enron knew of the growing problem months before the company imploded,” said Ken Johnson, a spokesman for the House Energy and Commerce Committee.

As part of the continuing probe, committee investigators in Washington met for about 4 1/2 hours with an Andersen partner, David Duncan, who was fired Tuesday by the company for allegedly ordering the destruction of thousands of Enron-related documents beginning in late October.

Duncan, who has said through his attorney that he was following company orders, was among the Andersen officials briefed about Watkins’ concerns, investigators said Wednesday. Johnson said Duncan was cooperative, answering all questions and providing “some valuable leads that we are now pursuing.”

An Andersen spokesman, Patrick Dorton, said the firm is still conducting an internal investigation. “If we find that anyone did anything improper, we’ll take the appropriate action,” he said.

Enron said that Andersen, formerly known as Arthur Andersen, reviewed and approved the company’s accounting practices. “We placed very heavy reliance on Arthur Andersen, as will become very clear,” said Robert Bennett, Enron’s Washington attorney.

Investigators are attempting to apportion responsibility for the collapse last year of the energy company, which filed for bankruptcy protection Dec. 2, and to determine whether questionable accounting and lax audits helped deceive investors and employees. The collapse cost investors and Enron employees billions of dollars.

The latest revelations suggest that the rapidly evolving investigation could turn on the testimony of insiders such as Duncan and Watkins. The Justice and Labor departments, the Securities and Exchange Commission and several congressional panels are investigating whether Enron and its auditor withheld information from employees and investors that led to billions of dollars in losses as the company’s stock plummeted.

Much of the inquiry is focusing on a series of partnerships to which Enron shifted debt, keeping it off the company’s books, where it could have a negative effect on Enron’s financial picture.

Investigators said they found the Andersen memo articulating Watkins’ concerns while digging through 80 boxes of documents.

The three-page internal memo written by the unidentified Andersen employee said in reference to Watkins’ concerns, “Based on our discussion, I told her she appeared to have some good questions.”

On Aug. 21, the employee called an emergency meeting with other Andersen employees, including Duncan, to discuss what Watkins had said. They “agreed to consult with the firm’s legal advisor about what actions to take in response to [Watkins’] discussions of potential accounting and disclosure issues,” according to an excerpt of the memo.

An Andersen spokesman said that after Watkins contacted the firm, officials notified Enron’s general counsel and were told that law firm Vinson & Elkins was conducting an investigation. That investigation acknowledged that the accounting treatment of the suspect partnerships was “creative and aggressive” but that it was not “inappropriate from a technical standpoint.”

Rep. James Greenwood (R-Pa.), chairman of the Energy and Commerce Committee’s subcommittee on oversight and investigation, said the newly discovered internal Andersen memo “raises additional concerns about Andersen’s knowledge of potential accounting irregularities and the subsequent destruction of Enron-related documents.”

The disclosure came as Duncan met with a team of eight House Energy and Commerce Committee investigators in his lawyer’s Washington office. Duncan spoke without any promise of immunity.

Investigators called it an “informal” interview. Duncan was not sworn in, but he was warned about the prohibition against giving false statements to Congress or its investigators.

The discussion ranged from the destruction of documents to internal memos to his handling of the Enron account.

“Clearly, we’re trying to determine who knew what and when they knew it,” Johnson said.

“Mr. Duncan is continuing to cooperate with all investigations and looks forward to the full disclosure of the truth,” said Robert Giuffra, attorney for Duncan.

The Duncan interview was dominated by questions about the destruction of Enron-related documents and the accounting methods used for numerous Enron partnerships.

Among other things, he told investigators that he was merely following company policy and was not told by Andersen’s lawyers to begin preserving Enron documents until Nov. 9, more than two weeks after the Securities and Exchange Commission probe was disclosed.

However, a representative for Rep. John Dingell (D-Mich.), top Democrat on the Energy and Commerce Committee, said, “Our investigators were disappointed by the limited nature of Mr. Duncan’s memory. We expect documents and other witnesses to fill in the blanks.”

Investigators see Duncan as a potential star witness because of his knowledge of Enron’s complex accounting methods--including the partnerships that kept debt off the books--and Andersen’s handling of those books.

On Oct. 16, Enron reported a third-quarter loss of $638 million and disclosed a $1.2-billion reduction in shareholder equity. On Nov. 8, it announced that it had overstated its earnings by $586 million during the last four years, sparking a massive loss of confidence on Wall Street. In a year, the stock price went from more than $90 a share to less than $1.

One experienced former congressional investigator suggested that the committees are moving too quickly by holding public hearings and conducting key interviews before investigators fully understand how Enron collapsed.

“Any serious investigation will take four to six months just to get your hands on the documents and use them to build a chronology and flow charts,” said Jack Blum, a former Democratic Senate investigator who worked on such inquiries as the BCCI banking scandal, Gen. Manuel Noriega’s drug trafficking and Lockheed overseas bribes.

“How are [congressional investigators] going to pin anybody down until they get all the facts and know the right questions to ask?” said Blum, now a Washington attorney. “At this point, investigators aren’t going to know whether something someone says is real or a lot of smoke.”

Blum said he was “amazed” that House Energy and Commerce investigators decided to interview Duncan without first looking into allegations by Andersen that he had ordered the destruction of thousands of Enron documents.

Similarly, because the investigation is still at such an early stage, Blum said that Lay’s expected Feb. 4 appearance before a Senate subcommittee looks more like a “morality play” than an attempt to unravel the Enron mess and learn what the government could do to prevent similar meltdowns.

Stanley Brand, a former House counsel, said he was surprised that Duncan would talk to investigators without seeking immunity.

“He’s singing for his supper in a way,” he said. “He’s going to be regarded by prosecutors and others as a potential target unless and until he can trade up. . . . He has to turn the focus on other people in a big way, or else the government is going to visit their missiles on him.”

Andersen fired Duncan on Tuesday, saying he had ordered the destruction of thousand of Enron-related documents Oct. 23, after the Securities and Exchange Commission launched an investigation of the company.

The records destruction is believed to have ended Nov. 9, when Duncan’s assistant sent a “stop the shredding” e-mail, a day after Andersen received a subpoena, according to Andersen officials.

Duncan’s meeting with investigators came as Enron’s and Andersen’s extensive business and political ties continued to complicate the investigation and create awkwardness for Washington officials.

Top congressional Democrats called on the head of the Justice Department’s criminal investigation to step aside, saying his former law firm represented Enron.

But Deputy Atty. Gen. Larry Thompson declined to recuse himself, saying that he had never represented Enron at his old law firm.

Earlier, Atty. Gen. John Ashcroft, his chief of staff and the U.S. attorney’s entire Houston office recused themselves because of possible conflicts.

Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Judiciary Committee, questioned whether the Justice Department could fairly investigate Andersen’s role in the Enron scandal at the same time that a branch of the firm holds a $700,000 management consulting contract with the Justice Department.

Andersen, working with the Justice Department to help reorganize the FBI after a series of setbacks at the bureau, has access to confidential and sensitive FBI documents filed as part of its consulting work, Leahy said.

Leahy said the Justice Department needs to ensure that proper safeguards are put in place so that potential conflicts do not “taint” the Enron investigation. The potential for conflict “raises obvious concerns and questions,” Leahy wrote.

Thompson said that although he had not yet read Leahy’s letter, he is satisfied that the branch of Andersen now acting as a consultant in the FBI reorganization is “completely different and separate from the firm’s accounting practice,” which is embroiled in the Enron affair.

“We will review any kinds of concerns that come to our attention with the very good and able ethics officials at the department,” Thompson added. “And rest assured that we will handle this investigation like all other investigations--that is, to make certain that we do everything possible to avoid any kind of appearance of impropriety or inappropriateness.”

Also Wednesday, Rep. Henry A. Waxman (D-Los Angeles) issued a 23-page report, “How the White House Energy Plan Benefited Enron,” while again assailing Vice President Dick Cheney for refusing to make public details of his and his energy task force’s private meetings with Enron officials and other outside interests during last year’s energy crisis.

At the White House, officials said economic advisor Larry Lindsey, a former Enron consultant, had studied how an Enron collapse could affect energy and financial markets. But Lindsey’s work was “not in reaction to any phone calls they had with Enron officials,” spokesman Ari Fleischer said. Lindsey concluded that the company’s problems would not cause significant disruptions, Fleischer said.

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Times staff writers Janet Hook and Eric Lichtblau in Washington and Lianne Hart in Houston contributed to this report.