Risk & Compliance

Mr. Skilling Goes to Washington

Former Enron CEO tells committee company was in "strong financial condition." How'd that turn out? Elsewhere: a flair at Elan, and Whirlpool comes ...
Stephen TaubFebruary 8, 2002

It started off slow and fairly predictable.

Four current and former Enron executives invoked the Fifth Amendment, refusing to testify to a House Subcommittee on Thursday. The non-talkers: former chief financial officer Andrew Fastow and ex-executive Michael Kopper, as well as two current Enron executives, Richard Buy and Richard Causey.

Things livened up in the afternoon, however. Jeffrey McMahon, Enron’s new chief operating officer, told the committee he transferred to a new job after he complained about a number of questionable Enron partnerships in a March 2000 meeting with then-CEO Jeffrey Skilling. McMahon was treasurer at the time.

“His parting words to me were he understood all my concerns and he would remedy the situation,” McMahon said. McMahon added that Skilling called shortly afterward and offered him a different job within the company.

The main event, however, took place in the afternoon when former Enron Chief Executive Jeffrey Skilling appeared before the House Energy and Commerce oversight and investigations subcommittee. Admitting he was very nervous and anxious, the former Enron top man started the session with a fairly deferential tone. Skilling said he was “devastated by and apologetic about what Enron has come to represent.” He added: “I honestly, unequivocally thought the company was in good shape.”

But Skilling became more strident in his testimony as the lawmakers grilled him about his oversight of Enron’s special purpose entities. Skilling said the SPEs were set up solely as private equity ventures, not to hide company debt. “I am not aware of any financial arrangements designed to conceal liabilities or inflate profits,” he told legislators.

Of course, he also told committee members that he could not recall if Fastow discussed the SPEs in a crucial 1999 board meeting. He said he could not recall the board agreeing that Skilling would have sign-off responsibilities on those SPEs — even though the minutes from that meeting seem to indicate that’s exactly what occurred. Skilling’s reason for his lack of focus at that meeting? There was a power failure at the time in Palm Springs, where the meeting was being held.

That lack of memory, along with Skilling’s contention that he could not know everything that was going on at the company, seemed to rankle the legislators the most. Said Rep. James Greenwood (R-Pa), who chairs the subcommittee: “Mr. Skilling, a massive earthquake struck Enron right after your departure. People in far inferior positions to you could see cracks in the walls, feel the tremors, feel the windows rattling. And you want us to believe that you sat there in your office and had no clue that this place was about to collapse?”

Skilling’s response: “On the day I left … I believed the company was in strong financial condition.” He added: “It is my belief that Enron’s failure was due to a classic run on the bank, a liquidity crisis spurred by a lack of confidence in the company.”

In fact, Enron attorney Jordan Mintz testified that chief accounting officer Richard Causey and chief risk officer Richard Buy warned Mintz not to express his concerns to Skilling about the controversial SPEs. The reason? CFO Fastow, who was in charge of Enron’s off-balance sheet ventures, was Skilling’s protégé. Said Mintz: “Both Ricks shared with me that Jeff was very fond of Andy [Fastow] — don’t go there.”

They’re going there now.

Flair for Creative Accounting? SEC Probing Elan

Management at Elan Corp., the Ireland-based pharmaceutical giant, said that the SEC has begun an investigation into the company’s accounting practices. “Today’s announcement of the SEC’s investigation is not surprising given the events of the past few weeks. We welcome this opportunity to explain our operating practices and we intend to cooperate fully,” Elan spokesman Max Gershenoff told the Associated Press.

Elan’s troubles began about a month ago, when the company announced that clinical trials for its new Alzheimer’s treatment had to be suspended after four people suffered unexpected side effects. The big damage came about two weeks ago, however, when the Wall Street Journal questioned Elan’s accounting, particularly its use of numerous partnerships to mask some of its loss-making enterprises.

“The Wall Street Journal report was one-sided, and omitted the promise of our many pipeline products in our strategic partnerships,” Gershenoff said. Nevertheless, since late last year, Elan’s share price has plunged from a high of $63.80 to a low of $11.70 earlier this week.

Revenge is Mine

Yesterday, Whirlpool Corp. management said it may take legal action against the person who allegedly spread rumors that caused the company’s share price to plummet. CEO David Whitwam told Reuters he knows who this person is, but won’t offer more details. “There was an indication from a particular source that we had accounting issues and there may be a potential that we would have to restate our financials,” Whitwam said. “Both things are untrue and no major shareholder felt they were true but [they] wanted us as a company to take action to correct this information.”

Given the publicity surrounding the Enron scandal, it’s hardly surprising that a number of companies now find themselves fending off allegations of accounting improprieties. Last week, for example, Kmart management said it was investigating a claim leveled by a lone employee that the bankrupt retailer had engaged in questionable bookkeeping practices.

The real question in most of these cases: were the companies truly running scams? Or, have disgruntled employees simply found a new way of extracting their pound of flesh?

Understanding Which ERP Modules Your Business Needs – And When