Risk & Compliance

Dumb and Dumber?

Ex-Enron executive says Skilling and Fastow duped Lay. Elsewhere: Volcker says Enron wanted to influence accounting board. Plus: Qwest, Gap have ba...
Stephen TaubFebruary 15, 2002

Kenneth Lay was duped. And Jeff Skilling knew what was coming.

That was the thrust of the testimony provided by Sherron Watkins, the former Enron executive who appeared before the House Energy and Commerce subcommittee yesterday.

Watkins repeatedly told the amiable — and at-times apologetic — lawmakers that former chairman Ken Lay “didn’t get it” during their fateful meeting in August. In fact, she said she believes Lay was duped by former CEO Jeffrey Skilling and then-CFO Andrew Fastow, along with auditor Andersen and law firm Vinson & Elkins. “I do believe that Mr. Skilling and Mr. Fastow, along with two very well respected firms, did dupe Mr. Lay and the board,” Watkins told subcommittee members. “It is my humble opinion that he did not understand the gravity of the situation.”

On the other hand, Watkins found it hard to believe Skilling’s testimony last week when he claimed he was unaware of or didn’t remember key events and meetings.

Watkins claims she sent an anonymous letter to Lay in August, warning Lay about the possibility of a looming accounting scandal. When Fastow learned of her letter, “He wanted to have me fired,” she said. “He wanted to seize my computer.”

Watkins then got a big laugh out of the audience. She said she did indeed hand over the computer — but not before she downloaded all of her files to a laptop.

As for Skilling, Watkins said she found it very hard to believe that he knew nothing, as he testified last week. “It’s my opinion he could foresee these problems and he wanted to get as far away from it as possible,” Watkins asserted.

Watkins said she also told Lay she was concerned about a $700 million loss related to a partnership called Raptor. On Nov. 8, Enron restated its earnings, saying it had overstated earnings since 1997 by $600 million.

In other testimony in Washington on Thursday, former Fed Chairman Paul Volcker and Chairman of the IASC Foundation Trustees, said the international accounting standards group he belongs to solicited a donation from Enron last year. Volcker says a memo was sent by now-fired Andersen partner David Duncan saying former Enron chief accountant Richard Causey was interested in determining what kind of influence a donation would buy for Enron.

Volcker said the International Accounting Standards Board requested $500,000 but Enron agreed to give about half that sum. However, Enron never responded to an invoice.

“I don’t think there’s been any undue influence,” Volcker said. As you know, Volcker’s been recruited by Andersen to improve that firm’s internal procedures

Meanwhile, Edmund Jenkins, who is retiring as chairman of the Financial Accounting Standards Board, testified that new rules will address the accounting and disclosure of special partnerships. “Seeking loopholes to find ways around the language or intent of the standards obfuscates reporting and harms investors and other consumers,” Jenkins said. Investments in off-balance sheet partnerships ultimately led to Enron’s downfall.

Restate of the Union

  • Management at Petroleum Geo-Services ASA on Thursday said it would restate results for 1998, 1999 and 2000. The restatement, which reflects changed accounting practices, is expected to lower the company’s fourth-quarter results.

Company management said the restatements stemmed from changing the way Petroleum Geo-Services accounted for hedging its tax liability between U.S. dollars and Norwegian kronor, as well as the way it booked revenues from its seismic work. The restatements will pare $23.2 million from earnings in 1998, 1990 and 2000. In the first nine months of 2001, the accounting rejigging will add $19.2 million to the company’s earnings.

  • Software company Raining Data Corp. announced it will restate its results for the fiscal year ended March 31, 2001, and each of the quarters in the six quarterly periods ended September 30, 2001. The reason? Apparently, the company misapplied certain accounting standards. That mistake was discovered in the course of the company’s quarterly review conducted by its new auditor, KPMG.

Raining Data management said it will restate financial statements downward by about $2 million to reflect accounting misapplications regarding acquisitions in 2000. The company said it will restate revenues for the six quarters to Sept. 30, 2001 downward by $800,000, and for the fiscal year ended March 31, 2001 downward by about $1.2 million.

Raining Data management said KPMG found the accounting errors during an audit. The misapplications of accounting standards largely concern how the company accounted for its acquisition of PickAX Inc. in December 2000 and the acquisition of certain software in May 2000.

  • NVIDIA Corp. reported it is conducting an internal review of its financials in response to an inquiry from the SEC. The review concerns the recording of reserves and the timing of recording expenses in the fourth quarter of fiscal 2000, and the first three quarters of fiscal 2001.

“In connection with the SEC’s previously announced investigation of alleged insider trading by certain non-executive employees, NVIDIA provided emails and other materials to the SEC for the period from December 1999 to March 2000,” the company said in a statement. KPMG is NVIDIA’s AUDITOR.

Downgraded: Qwest, The Gap

Management at Qwest Communications International Inc. is beginning to feel the squeeze.

On Thursday, the voice and data services company needed to tap a $4 billion line of credit to pay off $3.2 billion in short-term debt, according to published reports. The move came as two credit rating agencies–Moody’s and S&P–downgraded the company.

Moody’s lowered the long-term debt rating of Qwest Communications International from Baa1 to Baa2. Both the long-term and short-term debt ratings of Qwest Corp. were also lowered, from A-2 to A-3 and P-1 to P-2, respectively.

“Qwest’s difficulty in rolling its commercial paper has required the company to utilize its $4 billion bank facility,” Moody’s noted in a statement. “Without access to commercial paper, the company’s alternate liquidity has been reduced by the drawdown on its bank facility. This lack of alternate liquidity considerably limits the company’s financial flexibility and poses a risk to damage Qwest’s overall competitive profile if not resolved expeditiously.”

Standard & Poor’s lowered its long-term corporate credit rating on Qwest Communications International Inc. and its subsidiaries to triple-B from triple-B-plus. Analysts at S&P said the outlook on Qwest is negative. The rating agency also lowered Qwest’s short-term corporate credit and commercial paper ratings to A-3 from A-2.

S&P wrote: “The downgrade is based on Qwest’s more limited financial flexibility and near-term liquidity concerns. The company’s current leverage profile is more reflective of a mid-triple-B rating.”

In other rating action, S&P cut the long-term rating on The Gap Inc. to double-B-plus from triple-B-plus and lowered its short-term corporate credit rating to B from A-2. The ratings were also removed from CreditWatch and the outlook is stable, said S&P.

“The downgrade is based on a protracted record of disappointing sales and earnings,” analyst Diane Shand said in a statement. “Management faces significant challenges in turning around the performance of each of its brands, as the weak economy has exacerbated an already poor retail environment. Because of this, no significant improvement in credit measures is likely to occur in the near term.”