Risk & Compliance

LLP or CYA? Andersen Employees Blame Duncan

Raft of Andersen workers testify that Enron shredding was David Duncan's idea; Duncan takes the Fifth. Plus: was Enron Energy Services also hiding ...
Stephen TaubJanuary 25, 2002

One by one they sat at the formal table, staring up at their inquisitors and trying to explain what happened at Andersen. And one by one they answered the question of the day with the same two words: David Duncan.

As a cadre of current and former Andersen executives appeared before the House Energy and Commerce Committee yesterday, the company line was crystal clear: Blame Andersen’s lead auditor at Enron Corp. for the shredding of critical documents.

James Greenwood, the republican Senator from Pennsylvania, set the tone for the session when he looked down at Duncan and said, “Mr. Duncan, Enron robbed the bank. Arthur Andersen provided the getaway car, and they say you were at the wheel.”

Duncan’s response: he invoked the fifth amendment and didn’t say another word. Then, after taking the fifth for a second time, the recently fired Andersen partner said, “Respectfully, that will be my response to all your questions.” He was excused for the day after that.

The big bombshell of the day, however, came in the form of a memo released by Greenwood. In the Oct. 24 memo, an Andersen manager working for Duncan said the auditor’s Houston employees were told to work overtime to shred Enron-related documents.

“We do expect that people will be able to do this on an overtime basis, if necessary, for the remainder of the week, or for however long it takes,” Kimberly Latham reportedly wrote in the memo released by the Committee, (one of two panels that convened Thursday to probe Enron’s collapse and Andersen’s role). “Notes folders, personal hard drives, network current year project folders, prior year project folders, CYA documentation.”

Latham’s letter was written one day after Duncan is said to have met with managers and allegedly ordered an “expedited” destruction of files. “The memo is just one of the results of David Duncan’s destruction efforts,” Andersen spokesman Patrick Dorton told Bloomberg.

Andersen managing director Dorsey Baskin Jr. testified that on Oct. 23, several days after the SEC began probing whether Enron mislead its investors about its partnership losses, Duncan called a meeting to organize the document destruction. Duncan “directed the purposeful destruction of a very substantial volume of documents just as a government investigation was beginning,” Baskin said. “This effort was undertaken without any consultation with others within the firm so far as we know.”

Baskin said the shredding ended on Nov. 9 when Duncan learned in a voicemail that the SEC had subpoenaed Enron’s documents. “Why didn’t the top brass at Andersen immediately send out word to everyone not to touch a document?” Greenwood asked.

“We rely on the engagement partner (Duncan) to make the judgment what to do,” said C.E. Andrews, worldwide head of Andersen’s global auditing.

Greenwood asked why top management, including CEO Joseph Berardino, didn’t better supervise Duncan after learning of the SEC inquiry. “Knowing this meltdown, Mr. Berardino sat silently just assuming Mr. Duncan would do the right thing?” Greenwood asked. “They gave him no direction whatsoever?”

“Mr. Duncan had been advised of policies,” Andrews responded.

One person who seemed noticeably shaken by the events and the testimony was Andersen lawyer Nancy Temple. Temple was grilled about why she waited until Nov. 10–two weeks after she had learned of the SEC’s inquiry–to write a memo advising auditors at her firm to “keep everything, do not destroy anything.” She was also questioned whether her Oct. 12 memo reminding her colleagues about the company’s document retention and destruction policy was “interpreted as a shredding order.”

Following some intense questioning, Temple responded simply, “I did not instruct Mr. Duncan to shred documents.” She said that she told Duncan’s team “to retain the relevant documents.”

After the hearings ended, Andersen continued to pile on Duncan, issuing a press release blaming Duncan for leading the shredding brigade.

“Andersen learned that at the direction of David Duncan, the lead partner on the Enron engagement, an expedited effort to destroy documents in Houston was undertaken,” the statement said. “The effort was initiated following an urgent meeting the lead partner called on Oct. 23 to organize the expedited effort to dispose of Enron-related documents. This meeting occurred shortly after David Duncan learned that Enron had received a request for information from the SEC about its financial accounting and reporting and that Enron had recently reported a substantial loss for the third quarter of 2001 and could be at risk for litigation.”

The statement continued: “This effort was undertaken without any consultation with others in the firm and at a time when the engagement team should have had serious questions about their actions. As far as Andersen knows at this time, David Duncan was not authorized by anyone at Andersen to engage in this activity.”

A number of the legislators didn’t seem to buy the notion that the shredding was led by Duncan–and Duncan alone. “A lot of questions still remain about whether Mr. Duncan was a rogue or a scapegoat,” Greenwood said.

And you thought there was nothing good on TV during the day.

In other Enron-Andersen developments:

  • The Texas State Board of Public Accountancy disclosed Thursday that it began an investigation in November of Andersen’s audit of Enron.
  • Former SEC Chairman Arthur Levitt challenged auditors and securities analysts to be more independent from the corporations they cover. “It’s well past time to recognize that the accounting profession’s independence has been compromised,” he said, testifying before the Senate Governmental Affairs Committee.
  • Rep. John Conyers (D-Mich.) asked the Justice Department to appoint a special counsel to investigate ties between Enron, Andersen and the Bush administration.
  • Federal Reserve Chairman Alan Greenspan on Thursday said the collapse of energy-trading giant Enron showed weaknesses in the corporate accounting system. “The incentive structures … in audit committees, within the corporation, amongst accountants, is, at least in my judgment, is not optimum for appropriate allocation of capital,” Greenspan told the Senate Budget Committee.

Another Enron Bombshell

Meanwhile, back at the ranch, there’s another major Enron-related scandal.

As first reported by the Houston Chronicle and then Reuters and on Friday by the New York Times, major questions have been raised about the financial viability of Enron’s energy management unit, Enron Energy Services (EES). According to these reports, very aggressive accounting principles were used to give the illusion that this was a very profitable business when in fact it was hemorrhaging cash.

One former Enron employee claims the company, which provided energy management services to large corporations with the promise of lowering their utility bills, hid losses of $500 million by transferring the losses to other parts of the company, according to the published reports.

According to this account, an e-mail–oh, those e-mails–sent on Aug. 29 to Chairman Ken Lay and the Enron board by Margaret Ceconi, a former sales director for EES, “said it was apparent as soon as she started working for the unit in late 2000 that it had been losing money on almost all of its deals for two years,” according to the wire service story.

Reuters said the employee wrote the e-mail after she was laid off former her job as sales director, a post she held for nine months.

“What motivated her memo to Enron’s senior management was a genuine concern on her part that EES had essentially been playing a shell game, window-dressing its own alleged profits,” Ceconi’s attorney, Demetrios Anaipakos, told Reuters on Thursday.

Ceconi said Enron knowingly misrepresented earnings at EES. “This is common knowledge among all the EES employees and is actually joked about. But it should be taken seriously,” she said, according to Reuters.

According to the Times, EES aggressively relied on mark-to-market accounting to boost its results. Instead of booking profits when services were actually delivered to customers, as soon as it signed a contract with a corporate customer it immediately estimated the total profits over the life of that contract and booked them immediately. These projections included aggressive estimates of future energy prices, energy use and even the prospects for the imposition of deregulation in many states.

Huge bonuses were even paid based on these aggressive forecasts. Among the financial beneficiaries: Thomas White, former vice chairman of EES. White’s current job? Secretary of the Army.

Other Stuff

  • Electronics distributor Avnet Inc. said it would take an undetermined charge and restate first and second quarter earnings to comply with new accounting rules governing the treatment of goodwill.
  • IBM is introducing its first mainframe that will run the open source Linux operating system. The new Z-series mainframe is aimed at processing transactions at large businesses. It will cost $400,000, compared with $750,000 for IBM’s non-Linux mainframes.