Risk & Compliance

Wanted: Auditor. Must Be a Document-Saver, Work Well With Congressional Investigators

Citing destruction of documents, Enron fires Andersen as auditor. Termination of consulting contract would cost accounting firm over $50 million.
Stephen TaubJanuary 18, 2002

Embattled energy trader Enron went on the offensive on Thursday.

First of all, the bankrupt energy trader fired Andersen as the company’s auditor? The reason? Because the accounting firm destroyed critical documents, said Enron’s management. “While we had been willing to give Andersen the benefit of the doubt until the completion of that investigation,” said Kenneth Lay, Enron chairman and CEO, “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.”

Enron management said it will immediately search for a new external auditor.

This news came the same day that Reuters reported that Andersen confirmed the existence of an Enron-related memo dated Feb. 6. In that memo, which reportedly chronicled a meeting among the firm’s executives, Andersen managers discussed whether the Big Five firm should keep Enron as a client.

In fact, the memo is purported to have noted that Andersen executives discussed off balance sheet transactions and the materiality of third party transactions with LJM. LJM was one of a number of partnerships Enron kept off its balance sheet. Losses at that investment vehicle eventually triggered the downfall of the energy trading giant.

According to Reuters, the Feb. 6 memo also discussed conflicts of interest issues, and the role played by Enron’s then-CFO Andrew Fastow. Andersen spokesman Charlie Leonard confirmed the Feb. 6 memo, according to Reuters.

In other Enron developments:

  • Here come the lawyers.

A number of Enron debt holders sued the underwriters of two of the company’s securities issues. The lenders argue the Enron bonds are currently almost worthless.

The suit, filed on behalf of Toronto-based investment companies, names Salomon Smith Barney, Goldman Sachs, and Bank of America Securities. Salomon participated in an offering of almost $2 billion of Enron’s zero coupon bonds issued in July, 2001. Goldman Sachs and Bank of America underwrote Enron’s January 1999 issue of 7 percent exchangeable notes

In a statement, Joseph Cotchett of Cotchett, Pitre & Simon, which is representing the plaintiffs, said his clients lost over $120 million on these transactions. Cotchett added, “While the country has been watching the events in Houston and Washington, the focus should be on the Wall Street underwriters and brokers who sold billions of dollars of basically worthless securities to pension funds and senior citizens all over the country.”

Stanley Grossman, of New York-based Pomerantz Haudek Block Grossman & Gross said in a statement that “the losses suffered by investors exceed those suffered in the entire savings and loan crises.”

The complaint alleges that the underwriters and brokerage firms totally failed to exercise their obligations to conduct proper due diligence investigations of Enron when they were hawking the bonds. The underwriters had extensive dealings with Enron over the years, and participated in multiple offerings of Enron debt securities, for which they received hundreds of millions of dollars in commission, the suit alleges.

Enron filed for bankruptcy on December 2, only a few months after some of the bonds were issues.

  • The White House Thursday denied charges by California Rep. Henry Waxman that the Bush Administration’s energy plan was crafted to benefit Enron

Waxman, the senior Democrat on the House of Representatives’ Government Reform Committee, argued that at least 17 policies in the White House energy plan were advocated by Enron or benefited Enron. These policies include deregulation initiatives promoted by Enron, support for trading in energy derivatives and proposals to facilitate natural gas projects.

“This creates the unfortunate appearance that a large contributor received special access and obtained extraordinarily favorable results in the White House energy plan,” Waxman wrote in a letter to Vice President Dick Cheney, according to wire service reports.

  • Meanwhile, Congress has a possible PR problem as well. It seems that Enron donated money to 71 senators and 188 House members–nearly half of Congress.

According to research conducted by the Center for Responsive Politics, members of the seven congressional committees that are currently investigating Enron received more than $700,000 in campaign donations from the company over the past 12 years. While some of the legislators have returned the contributions, none have disqualified themselves from the investigations.

The two biggest beneficiaries on Enron’s largesse: the Lone Star state’s two Republican senators, Phil Gramm and Kay Bailey Hutchison. Gramm, whose wife Wendy sits on Enron’s board of directors and audit committee, received $97,350 from the company. She has been named in a lawsuit by investors against Enron executives and directors.

Hutchison, who sits on the Commerce Committee, received $99,500 from Enron from 1989 through 2001. In what seems like a pretty transparent bit of damage control, Hutchison said on Thursday she would donate $100,000 to a charitable organization for laid-off Enron workers. Touching.

  • Three of the four Aspen properties owned by Enron Corp. Chairman Kenneth Lay have been listed for sale. The asking price for the properties? All told, more than $15 million. The properties include two single-family homes and an undeveloped lot at the base of Red Mountain, according to Reuters, citing an Aspen broker. The properties have been on the market since–surprise–mid-November.

Yes, Virginia, There Is Other News

Things are actually happening besides the Enron soap opera:

  • Oracle Corp. announced it is cutting the price on its 11i e-business suite of products. The software automates accounting, human resources and customer relationship management.
  • Moody’s Risk Management Services said that the average probability of firms defaulting on debt across North America over the next year declined in December 2001 to 3.9 percent. That’s down from 4.4 percent in October 2001. Moody’s added that declines in debt default probabilities will continue in 2002.
  • Moody’s downgraded the senior unsecured rating of Adolph Coors Co. to Baa2 from Baa1. The rater cited concerns over Coors’ planned acquisition of U.K.-based Carling from Interbrew for about $1.75 billion. “The downgrade reflects the large size of the acquisition relative to Coors’ existing business, and the competitive challenges that Coors continues to face in the U.S. market,” Moody’s said in a statement. “Further, the Carling acquisition represents a challenge to Coors management as the company has never made an acquisition of this magnitude. It also reflects the significant increase in debt that will result, as well as the decrease in Coors’ financial flexibility.”
  • There has not been a single initial public offering so far this year. But on Thursday, another company filed plans for an IPO. Management at MedSource Technologies, Inc., an engineering and manufacturing services provider to the medical device industry, said the company plans to go public in the near future. MedSource did not offer details about the number of shares to be offered, or the price range.