Enron Auditor Says Fired Partner Drove Shredding
Senior Andersen accounting firm executives told Congress on Thursday that a fired partner destroyed potentially revealing Enron documents in an apparent attempt to keep them away from federal investigators.
Partner David B. Duncan “gave every appearance of destroying these materials in anticipation of a government request for documents,” Andersen executives C.E. Andrews and Dorsey L. Baskin Jr. testified before the oversight and investigations subcommittee of the House Energy and Commerce Committee, which is taking the lead in what promises to be an extensive congressional inquiry into the bankruptcy of the seventh-largest company in the U.S.
Documents released by the House subcommittee indicated that personnel at Andersen’s Chicago headquarters specifically warned Duncan in early October that Enron’s financial results harbored “a heightened risk of financial statement fraud.”
The results had set off a red alert in FIDO, a proprietary software program Andersen used to test financial statements for unusual patterns, according to two e-mails sent to Duncan by Mark B. Zajac, a risk-management executive in Chicago. The e-mails were sent Oct. 9, or about the time that Duncan allegedly undertook a large-scale effort to destroy documents related to Enron.
The e-mails covered a test apparently run on Enron’s results for the year ended June 30. Although the test was incomplete because some of Enron’s figures were missing, Zajac said the figures that did exist had set off an alarm.
Zajac further advised Duncan to run the test on the results for the quarter ended Sept. 30--figures that Duncan was reviewing at the time. He sent copies of one message about the alert to two of Duncan’s superiors, including Michael C. Odom, one of the Andersen executives who testified Thursday. The House subcommittee did not bring the issue up with Odom, however.
Zajac cautioned Duncan that FIDO occasionally generated red alerts because of “legitimate business activities” and therefore did not indicate that fraud necessarily existed. But he advised the Andersen partner that the alert was serious enough to warrant discussions between Duncan and senior Andersen executives aimed at a resolution of the alert.
“It is imperative that you evaluate the results carefully and objectively before reaching any conclusion,” Zajac advised Duncan presciently, “because of the significant adverse impact of failing to detect a material financial statement fraud.”
What steps, if any, Duncan and the other Andersen executives took in response could not be learned.
Congress Questions Firm’s Passivity
At Thursday’s hearing, members of Congress questioned their assertion that Duncan acted “without any consultation with others in the firm” before destroying documents.
And they expressed skepticism that senior executives were as passive as they now say they were in October when federal agencies were known to be zeroing in on Enron, a $50-million-a-year Andersen client.
“Is Mr. Duncan being made a scapegoat?” Rep. Cliff Stearns (R-Fla.) asked, declaring that “it seems maybe an explicit order was given to destroy documents, yet backsides were covered.”
And Rep. Michael Bilirakis (R-Fla.) told the four senior Andersen executives seated before the committee: “You should be ashamed.”
Enron filed for Chapter 11 bankruptcy on Dec. 2, less than a month after it restated earnings to account for $586 million in previously unreported losses since 1997. More than 4,000 workers lost their jobs; many more lost their retirement savings. In the last year the company’s stock price plunged from more than $80 a share to less than a dollar.
Duncan, the man at the eye of the storm, appeared briefly before the House subcommittee but was dismissed after invoking his 5th Amendment right against self-incrimination.
“Mr. Duncan, Enron robbed the bank, Arthur Andersen provided the getaway car, and they say you were at the wheel,” said Rep. James C. Greenwood (R-Pa.), the subcommittee chairman.
Later, after hearing from Andrews and other executives at Andersen, known until last year as Arthur Andersen, Greenwood said: “I still haven’t made up my mind on whether Mr. Duncan was a rogue employee or whether Mr. Duncan was set up as a scapegoat.”
On the other side of Capitol Hill, former Securities and Exchange Commission Chairman Arthur Levitt Jr. told a Senate committee that Enron’s collapse underscores the need to eliminate apparent conflicts of interest among auditing firms, stock analysts and others the public relies on for investment information.
Thursday’s House hearing focused on the shredding of documents, an aspect that could result in criminal charges.
Andrews and the other Andersen witnesses insisted that, at the time, they knew nothing about what they now concede was large-scale destruction of Enron-related documents.
But they were questioned closely about an e-mail memo sent from headquarters in Chicago by staff attorney Nancy A. Temple, directing Andersen units to stay current with the company’s program of destroying all documents except those classified as official audit papers.
The shredding policy covered working-level memos, e-mails and notes on meetings--material investigators now consider important to unraveling the Enron crash and Andersen’s role in it.
Temple and others said the message, sent Oct. 12, was merely a routine reminder to comply with a company policy against what some have called the “pack-rat” tendencies of accountants.
“I did not instruct Mr. Duncan to shred documents,” Temple said repeatedly.
“We do not condone that. It is not what the firm’s policy would require,” Andrews said.
Yet the Andersen executives acknowledged that the firm’s Chicago headquarters did not specifically order employees to preserve Enron materials until Temple made a call Nov. 9, a day after the company received an SEC subpoena and weeks after a federal investigation was known to be underway.
It was this failure to take earlier, proactive steps that seemed to leave subcommittee members incredulous.
“What we can’t understand--what I’d like to know--is why . . . didn’t the top brass at Andersen immediately send out word to everyone in the company, and particularly those involved in the Enron case obviously, to not touch a document, not shred a document?” Greenwood asked.
“Why didn’t that come down from the top immediately?”
Scores of Andersen employees participated in the shredding, Greenwood said.
“Yet to date,” he said, “committee investigators have been unable to locate or learn about a single Andersen employee who raised any concerns or objections about destroying Enron-related documents, even after the SEC inquiry became public.”
Greenwood called Andersen’s explanation “hard to swallow.” And Rep. John D. Dingell (D-Mich.), top Democrat on the full committee, said the shredding was “criminally stupid, stupidly criminal or both.”
Auditor Scolded for Disposal Policy
Rep. W.J. “Billy” Tauzin (R-La.), chairman of the full House Energy and Commerce Committee, scolded Andersen executives for a policy that left it to an accountant, rather than to lawyers, to decide what documents should be kept or destroyed.
Baskin, managing director of Andersen’s assurance professional standards group, told the committee that the firm follows a standard industry practice of disposing of documents other than work papers--personal notes, for example--when no longer needed, but that such records should be retained when litigation has commenced or is threatened.
Baskin testified that shortly after Oct. 23, Duncan organized the destruction of thousands of documents. The SEC investigation began Oct. 17.
Tauzin asked Temple why she didn’t sent out a memo after the SEC investigation was underway, specifically telling employees: “Don’t destroy anything . . . because we’re under investigation and there’s litigation coming, and you’d better make sure that nothing is destroyed for the sake of the reputation of our company and for the sake of the integrity of the investigation.”
“The issue was not raised with the legal group,” she responded.
Tauzin shot back: “Does it have to be raised, Ms. Temple, when you are the counsel representing this company internally on litigation?”
Andrews said that company policy--now being revised--left it with the lead auditor, Duncan in this case, to decide what documents to save.
“With an accountant, not a lawyer?” Tauzin asked in apparent disbelief.
“Every accounting firm who’s listening to this had better listen very carefully: If all of your policies are to let accountants decide when it’s legal to destroy documents in a pending investigation, an awful lot of people are going to be in trouble down the road, not just in this case,” he said.
In one exchange, Tauzin asked Temple about her Nov. 10 memo that followed her call the day before.
“It says, ‘We don’t want anybody to falsely accuse Arthur Andersen of destroying documents. . . . Save everything,’ ” he said.
“You didn’t find it necessary to write this memo the date that SEC upgraded its investigation from informal to a formal investigation,” Tauzin said. “You only found it necessary to write this memo saying, ‘Keep everything; don’t destroy anything,’ the day a subpoena was issued.”
Duncan has told committee investigators that he read Temple’s Oct. 12 e-mail as a directive to clean up the Enron files.
Simon and Cooper reported from Washington and Hiltzik from Los Angeles.
