Key Enron Auditor to Take Stand

Young and ambitious, David Duncan put in long hours as the chief Arthur Andersen executive overseeing audits of Enron Corp. But he felt such a bond with his employer that he still devoted time to recruiting promising college students to join the firm, pointing out its influence and prestige.

The accountant, a 20-year Andersen veteran, intends to cast the firm in a much different light this week, when he is expected to tell a federal jury that top Andersen officials signed off on his effort to destroy Enron-related records to hamper a Securities and Exchange Commission inquiry in October. Duncan--who was dismissed from Andersen in January--has already pleaded guilty to obstruction of justice and is cooperating in the government’s broader Enron probe.

His testimony is likely to be the U.S. Justice Department’s most powerful weapon in seeking to convict Andersen of obstruction, an outcome that could prompt regulators to bar the firm from auditing public companies and could deliver a death blow. But lawyers for Andersen plan to blunt the effect of Duncan’s appearance by saying that he has provided differing accounts of his motives and that he cooperated with prosecutors not because he committed a crime but because he bended under government pressure.

Whatever the outcome, Duncan’s journey through the courts will be just beginning. Duncan can expect to spend much of the next year or so sitting through interviews with FBI agents and other investigators, providing a road map to Enron’s finances and laying the groundwork for other potential Enron-related prosecutions. Moreover, he has been named in dozens of lawsuits filed by Enron shareholders and employees.

“Mr. Duncan is at the beginning of a very long road,” his attorney, Barry Flynn, said last week.

People close to Duncan say he doesn’t know what he will do after his legal odyssey concludes. His agreement to plead guilty probably will result in the termination of his accounting license and make it harder for him to find work again.

“He won’t be writing a book,” one person said. Any attempt to sell his story probably would be prohibited under his cooperation agreement with the Justice Department.

Until this year, Duncan’s future appeared to be all but assured at Andersen. With his profile within Andersen’s Houston office steadily rising, he was named lead partner overseeing audits of Enron in 1997, eventually earning an estimated $1 million a year. Last year, Andersen’s chief executive asked him to serve on the chairman’s advisory council, a group of about 20 partners.

Andersen’s fees from Enron amounted to about $1 million a week. The firm rewarded Duncan last year with a hefty increase in his partnership stake, raising his annual pay by an estimated $150,000, according to testimony last week. In October he was one of several partners featured in a promotional video shown at an Andersen partners meeting in New Orleans--about two weeks before he initiated a campaign to shred Enron-related documents.

Duncan has spent almost his entire professional life at Andersen, joining the firm after graduating from Texas A&M; University. He is married with three children and lives in an upscale Houston suburb.

James Benjamin, the head of the university’s accounting department, where Duncan sits on an advisory council, said his peers consider him “engaging and caring.”

But Andersen executives in court last week portrayed him as a sort of accounting cowboy.

Benjamin Neuhausen, a partner and veteran member of the firm’s internal accounting-standards team, said Duncan “pushed to excess” in interpreting the rules and typically sided with Enron against his own firm’s experts when disputes arose.

In one instance last year, Duncan’s team backed a plan allowing Enron to keep hundreds of millions of dollars in losses from four so-called “special-purpose entities,” known as the Raptors, off Enron’s books, according to court testimony. Duncan proposed to let Enron account for the entities’ financial results together, allowing profits from two stronger Raptors to cover losses from the two weaker ones, testified Benjamin Neuhausen, of Andersen’s Professional Standards Group.

Neuhausen testified that accounting experts in his division told Duncan the technique didn’t comply with standards requiring such entities to report separately. Duncan’s team ultimately ignored the advice.

Last fall, after senior Andersen officials reexamined how Enron accounted for the Raptors, they determined the accounting-standards team had been correct and advised Enron to restate its financial results. On Oct. 16, Enron announced it would take a $1-billion charge, much of it arising from the Raptors’ losses, an event that contributed to its financial meltdown.

James Hecker, a partner in the firm’s Houston office, said Duncan and other members of the team handling Enron sometimes appeared too close to the energy-trading giant they were auditing, often traveling to golf tournaments and ski outings with Enron executives.

Indeed, Duncan--whose team members kept their own offices at Enron headquarters--developed relationships at Enron’s highest levels.

He assisted Enron Chairman Kenneth L. Lay with charitable efforts and United Way campaigns, once helping Lay organize a bid to get into the Guinness Book of World Records by trying to form the largest-ever human rainbow: 2,000 people wearing colorful T-shirts.

Now, however, he is persona non grata at both Enron and Andersen. In announcing Duncan’s dismissal in January, Andersen said, “It should be perfectly clear that Andersen will not tolerate unethical behavior, gross errors in judgment or willful violation of our policies.”

Months later, however, as it became clear that Duncan might cut a deal with the Justice Department, Andersen’s attorneys began suggesting that Duncan merely made a mistake amid confusion over what the firm now describes as its flawed document-retention policy, and that he didn’t break any laws.

Rusty Hardin, Andersen’s lead attorney, said at the time that Duncan “did what he thought was right.”

Since Duncan pleaded guilty, however, Andersen has begun raising questions about his credibility. Hardin said last week, “I don’t know who the real David Duncan is.”