Andersen Knew of Enron Risks Last February

Top executives at the Chicago headquarters of accounting firm Andersen discussed Enron’s financial problems in February, but two months later its auditors gave the energy giant’s books a clean bill of health, documents show.

The Feb. 5 meeting represents the earliest known date that senior Andersen officers--including its head of U.S. operations--knew about such issues as Enron’s aggressive deal making, internal conflicts of interest and huge compensation packages for its senior management.

The meeting, held by telephone between Chicago and the Houston branch office that handled the Enron account, was detailed in an e-mail the next day. Andersen has contended that it was unaware of serious problems until August.

The e-mail memo reported that Andersen considered dropping Enron as a client, though it noted that the accounting firm could earn fees from Enron reaching $100 million a year.

“Ultimately, the conclusion was reached to retain Enron as a client [because] it appeared that we had the appropriate people and processes in place to serve Enron and manage our engagement risks,” the e-mail read.

Andersen auditors in April signed off on Enron’s financial statement for fiscal years 2000 and 1999, saying it “fairly represented” the company’s condition.

It wasn’t until Oct. 16 that Enron reported serious financial losses, although Andersen had the ability to rescind its approval of the company’s financial statements at any time.

The new disclosures came as Enron’s board fired Andersen as its auditor and Congress pushed ahead with its probe of the Houston-based company’s collapse.

After obtaining the e-mail, congressional investigators on Thursday sent a letter to Andersen’s chief executive, Joseph F. Berardino, seeking more information about the senior-level meeting.

The e-mail from Andersen executive Michael E. Jones to partner David B. Duncan related to a meeting the day before in which Andersen executives discussed some of the Enron accounting methods that have become the subject of criminal and congressional probes.

The e-mail raised concerns about conflicts of interest from a partnership managed by Enron’s then-chief financial officer, Andrew S. Fastow, which investigators say was used to hide the energy company’s debts. The meeting is significant because until its disclosure, attention has focused on Andersen’s Houston office, where Duncan--chief auditor on the Enron account--was fired and seven others disciplined Tuesday because of the destruction of Enron-related records.

An Andersen spokesman, Patrick Dorton, said Thursday that “nothing in the meeting or the memo indicated that any illegal actions or improper accounting was suspected.” He said it was not until Enron Vice President Sherron S. Watkins alerted auditors in August that the accounting firm “became aware that individuals within Enron believed that there may have been accounting improprieties.”

But Ken Johnson, a spokesman for the House Energy and Commerce Committee, one of several congressional panels investigating Enron’s collapse, said: “From our perspective, the memo made it clear that some Andersen officials were clearly aware of the risks of having Enron as a client but decided in the end the company was too much of a cash cow to cut loose.”

The e-mail also said that during the conference call, executives discussed how Enron “often is creating industries and markets and transactions for which there are no specific rules.” The memo said Fastow faced potential conflicts from his role both as an officer of the energy trader and a paid manager of the LJM partnership that was doing business with the company.

The question was left unanswered as to whether the Securities and Exchange Commission would view Fastow and LJM as an affiliate of Enron, which would have obligated Andersen to wrap the financial results of LJM into the figures for the larger company.

Once disclosed, the debt and losses at LJM and other partnerships led to a rapid decline in Enron’s credit rating, pushing the company to file for bankruptcy protection Dec. 2.

A spokesman for Fastow declined to comment on the House investigation but added that Enron’s former chief financial officer did not hide his involvement with off-balance-sheet partnerships.

“The Enron board of directors had full knowledge and understanding of Mr. Fastow’s potential conflicts and gave its full approval,” said his spokesman, Gordon Andrew. “Business law does not say that conflicts of interest per se are illegal in any regard as long as they are disclosed and approved.”

When Enron issued its annual report in April, Andersen asserted that in its opinion the financial statements “present fairly . . . the financial position of Enron Corp. and subsidiaries as of Dec. 31, 2000, and 1999 . . . in conformity with accounting principles generally accepted in the United States.”

The e-mail was raised by congressional investigators during a private meeting with fired auditor Duncan this week. Duncan, one of 14 Andersen employees on the Feb. 5 conference call, was fired for allegedly ordering the destruction of documents. He has denied any wrongdoing.

Andersen spokeswoman Anne Groves said the e-mail summary of the teleconference confirmed that senior management had discussed various issues surrounding the Enron audit. The people at “this meeting represented every aspect of our work at the company at a senior level,” she said. “They were the right people to make the decisions that were made.”

One of the meeting’s participants was Steve Samek, who at the time was the firm’s managing partner for its U.S. operations. Another was Robert Kutsenda, who was censured by the SEC in June and barred from working on the audit of a publicly traded company for a year because of his involvement in Andersen’s audit of Waste Management Inc.

Andersen paid a $7-million fine in that audit to settle fraud charges--the largest civil penalty against a Big Five accounting firm.

Although he was not one of the lead partners in the audit, Kutsenda, Andersen’s central-region audit practice director, consulted on Waste Management and engaged “in highly unreasonable conduct that resulted in a violation of applicable professional standards,” according to SEC records.

Kutsenda has since retired from the firm, Groves said, and Samek is a partner in a different position.

In a statement, Andersen said the meeting described in the e-mail was routine, of a sort typically done to assess the firm’s work on all large engagements. It defended the memo’s use of such terms as “intelligent gambling,” saying that was a reference to the “mark-to-market” method of accounting, which “is based on sophisticated models using assumptions about events likely to occur in the future.”

Attendance of a large number of partners, including senior staff, is typical at these meetings, according to Andersen.

“Client acceptance is a continuous process. Before we sign off on an audit, or decide to continue as the auditor for a company, we consider all major events to confirm or modify our conclusions about our audit opinion and our decision to continue as the company’s auditor,” the firm’s statement said.

“The identification of a particular issue during one of these meetings does not indicate that the firm has reached any conclusions about the appropriateness of an accounting treatment or judgment. It simply indicates that such issues need to be addressed in the audit, if the firm continues the relationship.”

As for its firing by Enron, Andersen said: “As a matter of fact, our relationship with Enron ended when the company’s business failed and it went into bankruptcy.”

Enron CEO Kenneth L. Lay said Thursday in a statement that although the company has been conducting its own investigation and had been “willing to give Andersen the benefit of the doubt . . . we can’t afford to wait any longer in light of recent events, including the reported destruction of documents by Andersen personnel and the disciplinary actions taken against several of Andersen’s partners working in its Houston office.”

Congressional investigators, meanwhile, also made available an Aug. 21 internal Andersen memo detailing a call from Watkins to an Andersen employee raising concerns about accounting methods that “did not tell the ‘whole story.’ ” She raised similar concerns to Lay the same month.

Rep. W.J. “Billy” Tauzin (R-La.), chairman of the House Commerce and Energy Committee, said his panel’s investigation is in its early stages. But he said the fallout from the Enron debacle could fill his committee’s agenda for much of this year and that an overhaul of the nation’s accounting standards is almost certainly in order.

Tauzin suggested in an interview that it may be time to consider prohibiting accounting firms to perform audit and business consulting work for the same client. Critics have long complained of the inherent conflicts in such lucrative arrangements, but Congress has resisted such changes.

“We may all need to reconsider our position on that,” Tauzin said.

Tauzin expects his committee to hold hearings this month on the document destruction conducted by Andersen’s Houston office after it learned of the SEC probe.

At the White House, spokesman Ari Fleischer spent a second day on the defensive, declaring that the administration had not tailored its energy proposal to benefit Enron. He called a report by Rep. Henry A. Waxman (D-Los Angeles) that contends that the administration’s proposal benefits Enron “a partisan waste of taxpayer money.”

The White House finds itself in a bind--to some extent one of its own making. After first disclosing Enron’s efforts to reach out to two Cabinet members--Treasury Secretary Paul O’Neill and Commerce Secretary Don Evans--it has adopted a defensive posture. Officials have declined to say to what extent they are trying to determine what contacts Enron and its representatives had with the administration and what steps, if any, administration officials took as a result.

The refusal to make such disclosures has become entangled with the long-running refusal to turn over to congressional investigators requested information about the workings of Vice President Dick Cheney’s energy task force.

Fleischer said Thursday that in refusing to hand over documents about the task force, the White House was honoring “a very important principle,” holding that it is “the right of the people in our country to petition their government, to talk to their government. . . .

“The suggestion that any contact with the government is somehow sinister and, therefore, it should be examined . . . is a principle that has big implications beyond what we’re talking about today,” he said.

*

Simon reported from Washington and Hirsch from Los Angeles. Times staff writers Nancy Rivera Brooks, James Gerstenzang and Greg Miller contributed to this report.

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Timeline: Enron’s Corporate Collapse

1985

July: Houston Natural Gas merges with InterNorth to form the modern-day Enron.

1989

Enron begins trading natural gas commodities.

2000

December: Enron announces President Jeffrey K. Skilling will become chief executive in February. Kenneth C. Lay will remain as chairman. Shares hit 52-week high of $84.87.

2001

Feb. 6: Andersen executives in Houston express concerns about Enronearss accounting methods in phone conference with superiors.

Feb. 22: Enron representatives meet with Vice President Dick Cheneyearss energy task force; five more such sessions with Cheney or task force will follow.

April 26: Lay and President Bush attend a literacy fund-raiser in Houston; Bush says it is the last time he spoke to Lay.

May 17: Task force provides 105 recommendations for national energy policy, including many favored by Enron.

Aug. 14: Skilling resigns; Lay resumes as CEO.

August: A memo from Enron Vice President Sherron Watkins to Lay warns that company success is based on an residentresidentelaborate accounting hoax.earsears

Sept. 18-19: Lay asks to meet with Energy Secretary Spencer Abraham and is turned down. Oct. 12: Andersen auditors working on Enron books instructed to destroy documents.

Oct. 15: Lay talks to Commerce Secretary Don Evans; Commerce officials say the call did not deal with Enronearss financial troubles.

Oct. 16: Enron reports a $618- million third-quarter loss and discloses a $1.2-billion reduction in shareholder equity.

Oct. 22: Enron acknowledges Securities and Exchange Commission investigation.

Oct. 26: Lay calls Fed Chairman Alan Greenspan.

Oct. 28: Lay telephones Treasury Secretary Paul H. OearsNeill to inform him of companyearss financial problems, according to a Treasury spokeswoman.

Oct. 29: Lay phones Evans regarding downgrade of Enron credit rating. According to Commerce spokesman, Evans decides intervention would be improper.

Oct. 31: Enron announces SEC inquiry has been upgraded to a formal investigation.

October/early November: Enron President Lawrence Whalley makes six to eight calls to Treasury Undersecretary Peter Fisher to ask help in securing loans from the companyearss bankers.

Nov. 2: Abraham calls Lay about Enronearss financial problems.

Nov. 8: Lay talks to OearsNeill again regarding Enron problems. Enron revises financial statements to account for $586 million in losses. Former Treasury Secretary Robert Rubin calls Fisher to ask that the federal government intervene with credit agencies about to downgrade Enron debt ratings.

Nov. 20: Enron stock drops to lowest level in nearly 10 years.

Dec. 2: Enron files for bankruptcy.

2002

Jan. 9: Justice Department confirms it has begun a criminal investigation of Enron. Jan. 10: White House discloses Lay sought administration help shortly before the company collapsed. The companyearss auditor, Andersen, admits it destroyed some Enron documents.

Jan. 17: Enron fires Andersen.

Sources: Bloomberg News, Associated Press, Times research; compiled by TOM REINKEN/Los Angeles Times