Risk & Compliance

Enron Was Economic–Not Accounting–Failure, Says Andersen CEO

But audit firm's risk manager said to confirm existence of document-destruction memo. Also: Tyco talks, Moody's speeds up, Connecticut investigates...
Stephen TaubJanuary 21, 2002

Michael Odom, the head of risk management for Andersen’s Houston office, told congressional investigators that he was reminded of the firm’s document-disposal policy in an Oct. 12 e-mail he received from the auditor’s Chicago office. This, according to The Wall Street Journal.

Odom’s statement seems to contradict the assertions of Andersen management that the document destruction was the act of a few irresponsible and reckless employees in the firm’s Houston office. In fact, on NBC’s “Meet the Press” Sunday, Andersen Chief Executive Joseph Berardino said Enron’s lead auditor, David Duncan (who Andersen axed last week for overseeing the document destruction), was fired after “he displayed extremely poor judgment” in his role in the disposal of Enron-related documents. But Duncan reportedly told Congressional investigators he too received the Oct. 12 e-mail reminding employees of Andersen’s document disposal policy.

In his spot on “Meet the Press,” Berardino belittled the notion that Andersen was not vigilant in uncovering Enron’s accounting maneuvers because the firm was getting $100 million a year in consulting fees from the energy trader. “That’s a lot of money, we understand that,” Berardino conceded. “But we’re also a $10 billion organization. This client was a fraction of 1 percent of our fees,” Berardino said.

In addition, Berardino blamed Enron’s collapse on a failed business model, not accounting errors. “A company has failed and it has failed because the economics didn’t work,” he said. “To my knowledge, there was nothing that we’ve found that was illegal. The accounting reflects the results of business activities. And the way these events were being accounted for were clear to management and to the board. But at its base, this is an economic failure.”

Berardino has a point. Enron may have gone down in flames, and taken a lot of investors and employees with it. But so far, the only thing Enron senior management appears to be guilty of is poor judgment and creative accounting. You don’t lock people up for that.

Shredding documents related to an ongoing SEC investigation… that’s a different story.

Incidentally, Connecticut’s accounting regulatory board said Friday it too is investigating Andersen. The investigation could result in the auditor losing its license in the state, according to published reports. Connecticut Attorney General Richard Blumenthal called for an investigation “into evidence of potential legal and ethical breaches by Arthur Andersen that may merit suspension or revocation” of its license.

The Charter State investigated Andersen back in 1993 for its involvement with the Colonial Realty Co., say reports. At the time, Andersen was accused of–yup–destroying documents and files relating to its work for Colonial. Andersen wound up settling with the state for $3.5 million before charges were brought against the firm, according to the reports.

Greenspan Won Enron Award; Not On His Mantle, However

Now Alan Greenspan is being dragged into the Enron-Andersen imbroglio.

It seems the Federal Reserve Chairman accepted the Enron Award for Distinguished Public Service just a few days after the energy trading company restated several years worth of results, says the current issue of Newsweek. The magazine claims the award ceremony took place three weeks after Enron appealed to Greenspan to help it survive by intervening with credit-rating agencies. Enron apparently got nowhere with Greenspan, who turned down the $10,000 honorarium that goes with the award. The Federal Reserve Bank also declined the $15,000 sculpture that accompanies the prize.

Why did Greenspan even attend the function? A press aide to the Fed Chairman was quoting as saying that Greenspan had committed a year earlier to former Secretary of State Jim Baker to accept the honor. The James A. Baker Institute of Public Affairs awards the prize, which is funded by Enron.

Besides, Greenspan appears to have gotten his shots in at Enron. In a Q&A during the ceremony, a student apparently asked the Central Banker how new college graduates can succeed in a difficult job market. “The best chance you have of making a big success in this world,” Greenspan reportedly responded, “is to decide from square one that you’re going to do it ethically.”

N’even More on Enron

In other news about the Enron scandal:

— On Friday, it was reported that Enron Chairman Kenneth Lay told employees on Sept. 26 that the company’s stock was “an incredible bargain.” A few weeks later, Enron collapsed, making the stock less of a bargain.

In reply to an employee question on Enron’s ”ethink” intranet site, Lay reportedly wrote: “My personal belief is that Enron stock is an incredible bargain at current prices and we will look back a couple of years from now and see the great opportunity that we currently have.” Thanks Ken. And you have how much set aside for retirement?

— SEC chairman Harvey Pitt said on ABC’s “This Week” that his agency doesn’t have enough money or manpower to directly police the accounting industry in the wake of Enron Corp.’s collapse. Last week, however, Pitt called for the creation of a new regulatory body to oversee the accounting profession.

— Vice President Dick Cheney spoke to Indian government officials last year about Enron’s investment in a $2.9 billion power project, Bush administration officials said on Friday. The White House said Cheney’s involvement was justified to minimize the exposure of American taxpayers to potential losses.

— Andersen has received tens of millions of dollars in contracts with the federal government. The Big Five firm’s clients include the Justice Department, the FBI and the Pentagon. Total government bookings through Q3 of fiscal 2001? Almost $36 million, according to an analysis by the AP.

Rival KPMG LLP was the biggest government auditor, with $165 million in contracts, followed by PricewaterhouseCoopers LLP, $129 million. Ernst & Young LLP had $6 million in government contracts. Deloitte & Touche only received $357,000 worth of contracts.

The General Services Administration, which oversees many of the contracts for the rest of the government, reported $34.4 million in contracts with Andersen last year, according to the AP.


— On Friday, the SEC suspended trading of New Energy Corp. through Feb. 1. The suspension was triggered by concerns about New Energy’s financial disclosures. The SEC said questions were raised about the “adequacy and accuracy of information concerning the value of certain power generation contracts, the existence and size of certain purchase orders for solar chips and its partner’s relationship with the Los Angeles Department of Water and Power.”

— Moody’s is mulling changes in how it rates companies, according to reports. The changes could cause ratings to rise or fall faster. That, in turn, would likely affect companies’ ability to raise money. “We are considering a number of measures to improve the timeliness of rating actions, in response to criticism from the market about that timeliness,” Debra Perry, Moody’s senior managing director in corporate and public finance, told Reuters.

— Tyco International, whose accounting practices have been regularly questioned by critics, will hold a special analyst meeting on Tuesday. The agenda? “To respond to the continuing stream of baseless rumors that are depressing our stock, and to discuss ways in which we plan to enhance shareholder and debtholder value,” company management said in a statement.

— Goodyear Tire & Rubber Co.’s debt rating was cut to junk status on Friday by S&P, which said the largest U.S. tire maker is not cutting costs fast enough. Hey, at least their tires don’t blow up.