Risk & Compliance

Look Who’s Not Talking

Citing inflammatory public comments, former Enron CEO decides not to appear before Congress. Also: Enron internal report says CFO Fastow made $4.5 ...
Stephen TaubFebruary 4, 2002

They’re starting to circle the wagons.

On Sunday, one day after an internal Enron investigation blamed the company’s executives, auditors, directors and lawyers for the energy trader’s stunning collapse, the key players in the drama went on the defensive.

Former Enron chairman Kenneth Lay cancelled his scheduled testimony for Monday in the Senate and Tuesday in the House, saying lawmakers’ “inflammatory” public comments following the report’s release had prejudged the outcome. “I have instructed Mr. Lay to withdraw his prior acceptance of your invitation,” Lay attorney Earl Silbert said in letters to the Senate and House panels.

Jeffrey Skilling, Enron’s former chief executive officer, is scheduled to testify on Thursday. Later this week, former Enron CFO Andrew Fastow and an aide, Michael Kopper, are scheduled to appear before the House Energy and Commerce Committee. But, Rep. Billy Tauzin, the Louisiana Republican who chairs the committee, said the duo will likely invoke their constitutional right against self-incrimination. “They will be before the committee on Thursday and Fastow will take the Fifth, Kopper will take the Fifth,” Tauzin said on NBC’s “Meet the Press.”

They wouldn’t be alone in taking that tack. Last week, fired Andersen partner David Duncan invoked his Fifth Amendment rights before a congressional panel. Other Andersen auditors and managers claim Duncan ordered the destruction of key documents relating to the Enron case.

Enron Probe Skewers Enron, Fastow

While Enron’s 217-page internal report lays the blame for the company’s downfall on a host of players, CFO Fastow was singled out for his contributions to the company’s downfall. Specifically, the report criticizes Fastow’s dual role as both Enron CFO and general partner in a number of the company’ special purpose entities (SPE). The report says Fastow’s dual role was a means of “enriching himself personally and facilitating manipulation of Enron’s financial statements.” Adds the report: “Both of these objectives were inconsistent with Fastow’s fiduciary duties to Enron and anything the board authorized.”

The Enron internal report also states that the evidence suggests that Fastow:

  • Placed his own personal interests and those of the LJM partnerships ahead of Enron’s interests.
  • Use his position in Enron to influence (or attempt to influence) Enron employees who were engaging in transactions on Enron’s behalf with the LJM partnerships.
  • Failed to disclose to Enron’s board of directors important information the directors were entitled to receive.

The report cites one instance where Fastow proposes to Lay and Skilling that he run the LJM Cayman SPE. “Fastow presented his participation as something he did not desire personally, but was necessary to attract investors to permit Enron to hedge its substantial investment in (Internet service provider) Rhythms NetConnections, and possibly to purchase other assets in Enron’s merchant portfolio.”

The report also details how Fastow and other executives apparently enriched themselves from the questionable partnerships they helped to created. In one case, the former Enron CFO allegedly made $4.5 million from a $25,000 investment–in two months. Kopper, one of Fastow’s employees, is said to have earned at least $10 million from a $125,000 investment in one of the partnerships, the report notes.

The report also says that Chief Accounting Officer Richard Causey, Chief Risk Officer Richard Buy and Jeff Skilling, former chief executive officer, as well as the entire Enron board, failed to rigorously control how the partnerships operated. “No one in management stepped forward to address the issues as they arose, or bring the apparent problems to the board’s attention,” the report asserts.

Further, the report states that auditor Andersen advised Enron managers on these partnerships–and billed the company $5.7 million for advice on two of them.

Andersen’s Oversight Board

Speaking of which: on Sunday, Andersen named former Federal Reserve Board Chairman Paul A. Volcker to head up an Independent Oversight Board (IOB) to help the Big Five accounting firm make fundamental changes to its audit practice. “We are pleased that Paul Volcker has agreed to help us in this effort,” said CEO Joseph Berardino. “Mr. Volcker is one of the most independent and innovative thinkers in American finance. Andersen, our clients, and America’s investors will jointly benefit from his active participation and leadership.”

The oversight board will be provided with a professional staff and assured free access to all information relevant to a full review of the policies and procedures of the firm, Andersen said in its statement. The board will also have full authority to mandate changes in such practices.

“Some months ago, in addressing the International Conference of Financial Executives, I stated that my concern was that ‘the profession of auditing and accounting is in crisis.’ That crisis is now evident to everyone,” Volcker said in a statement. He is also the current chairman of the trustees of the International Accounting Standards Committee Foundation.

“I trust that the efforts of the Oversight Board and the Andersen partners will together reaffirm Andersen’s leadership in quality auditing. I anticipate that our work will assist in the broader effort toward needed reform of a profession that, by its nature, must be the trustee of truth and transparency in our capital markets,” he added.

Andersen management also said the accounting firm will no longer accept assignments from publicly traded U.S. audit clients for the design and implementation of financial information systems. In addition, Andersen will no longer accept engagements to provide internal audit services to publicly traded U.S. audit clients.

“The overriding purpose of these measures — and those that follow — will be to provide assurance to clients and the investing public that the firm will be restructured to achieve one essential objective: quality auditing,” Berardino said.

Short Takes

  • Regeneration Technologies, Inc. announced on Friday that CFO Richard Allen and James Abraham, vice president, sales and marketing, have resigned. The health products company also said it is delaying the release of its fourth quarter and 2001 results and is determining whether to restate previously reported quarterly results, citing “inventory issues.” The review will take into account whether those issues affected previously reported quarterly results, Regeneration management said in a statement.
  • Montreal is the most cost-competitive business location in the world among large international cities, according to a recent study by KPMG. The study measured 27 location-sensitive cost components, including labor, telecommunications, utility, transportation and financing costs, in 86 cities across North America, Europe and Japan. According to the study, Montreal has “significantly lower costs” than U.S. cities, “with low costs for labor, construction, office leasing, and corporate taxes driving the advantage.”

The next four large international cities (cities with a metro area population over 2 million) ranked behind Montreal are Atlanta, Phoenix, St. Louis and Chicago. New York ranked 16, two notches below Newark.