Risk & Compliance

Enron Auditor Will Cooperate with Investigators, Say Reports

Bad timing for Andersen; talks with DOJ continue. Plus: U.Cal's Enron suit casts very wide net indeed, and what did three top CFOs earn last year?
Stephen TaubApril 9, 2002

David Duncan, the former Arthur Andersen partner who was Enron Corp.’s lead auditor, has reportedly agreed to plead guilty to obstructing justice and will cooperate with the government’s investigation.

By agreeing to the deal, Duncan will avoid more serious criminal liability, according to published reports, which cited people familiar with the case.

If Duncan has made such a decision, it couldn’t come at a worse time for Andersen. The embattled accounting firm has been indicted for obstruction of justice and is scheduled to go to trial on May 6. Currently, lawyers for Andersen are trying to negotiate a settlement with the Justice Department. But if Duncan does indeed cooperate with investigators, it may strengthen the government’s case against Andersen.

“As we’ve said from the beginning, Mr. Duncan continues to cooperate with the government’s investigation,” Robert Guiffra Jr., Duncan’s lawyer, told Bloomberg.

Andersen management continues to assert that Duncan—or others in Andersen’s Houston office—acted alone in destroying Enron-related documents. But finance managers appear to doubt the assertion. In an exclusive CFO.com poll, 76 percent of the respondents said they do not believe Duncan acted alone in shredding Enron-related documents. Of course, it has yet to be proven who ordered the destruction of documents related to the Enron audit, although Andersen management has conceded that the shredding of such documents did take place at the company’s Houston office.

Andersen Announces Layoff Plan

Meanwhile, Andersen officially announced plans to fire 7,000 people. The firm currently employs nearly 28,000 people in the United States.

Some of the cuts represent U.S. workers who provided services used by other member firms in the Andersen network, noted the auditor in a press release.

The largest areas affected by the personnel reductions are the firm’s audit practice and administrative services. According to data supplied to CFO.com by Bowen’s, Andersen’s audit practice generated $1.7 billion in revenues last year, or about 42 percent of the company’s turnover. Andersen’s tax practice accounted for 32 percent of the firm’s revenue, while its consulting practice only produced 26 percent of the accountancy’s gross income. Then again, Andersen spun off much of its consulting business in 2001.

(To see which Big Five accounting firm has the largest audit practice in the United States, click here.)

“Of all the issues we have confronted recently, none compare to actions we are now forced to take with our employees,” said Larry Gorrell, managing partner in the United States, in a statement. “This decision is even more painful in light of the loyalty, commitment, and hard work that our employees have demonstrated during this difficult time.”

Andersen management said it is providing all affected personnel with job-search services and allowing employees to stay on the payroll for a period determined by position and length of service. It will also continue to provide laid-off workers with health insurance, computers, and telephone access.

A Very Wide Net

Reportedly, an amended class-action lawsuit filed by the University of California board of regents on behalf of thousands of Enron shareholders claims that a whole host of lawyers, bankers, accountants, and executives helped perpetrate an alleged financial fraud that ultimately led to Enron’s bankruptcy.

Indeed, the complaint reads like a Who’s Who of world finance. Named in the suit: Merrill Lynch, Deutsche Bank, J.P. Morgan Chase, Credit Suisse First Boston, Citigroup, Barclays Bank, Canadian Imperial Bank of Commerce, Bank of America, and Lehman Bros.

Also being sued by the Golden Bears: Enron’s chief outside counsel, Vinson & Elkins; Chicago-based law firm Kirkland & Ellis; 29 Enron officers and directors; and accountancy Arthur Andersen. Not named in the suit: Britney Spears, Hannibal, and golfer Ian Woosnam.

Enron filed for Chapter 11 bankruptcy protection on December 2. It was the largest-ever bankruptcy in the United States.

Not-So-Reliant? Company Cans Executives

An employee in the accounting department and another in the risk-management department at Reliant Resources have been fired by the company. The firings come in the wake of Reliant’s recent earnings restatement for the second and third quarters of 2001.

Reliant recently received notice of an informal inquiry by the SEC’s enforcement division.

On February 5, Reliant management said its restatement of second- and third-quarter 2001 earnings would increase earnings by $100 million to $130 million, respectively, as it recognized profits in 2001 that it had expected to record in 2002 and 2003. The restatement stemmed from a reassessment of how the company accounted for derivative instruments.

CEO Steve Letbetter told Dow Jones there will be no more restatements on top of the ones it has already taken.

DIY Finance

Management at BASF, Europe’s largest chemicals group, said it has used the Internet to issue more than $1 billion in commercial paper since February.

The company noted it used the U.S. Internet marketplace cpmarket.com during a span of just six weeks. “We have exceeded what we expected to issue through this Internet platform,” said Klaus-Juergen Boehm, head of the capital and money markets department at BASF.

Cpmarket.com links institutional investors with issuers of commercial paper, thus saving issuers money. “For outstanding debts of $1 billion, we can save up to $500,000 by issuing through the Internet,” asserts Boehm.

CFO Compensation

It’s proxy season. This, of course, means shareholder resolutions and long, tedious meetings. It also means CFOs can find out how their compensation stacks up with that of other finance managers.

And according to some early releases, it would seem chief financial officers are making out just fine—despite the lousy economy.

Marriott International CFO Arne M. Sorenson, for example, took home $515,000 in salary and a $149,608 bonus, as well as more than $1.6 million in restricted compensation. He also received $46,315 in other compensation. All told, Sorenson’s total package exceeded $2.3 million last year.

McGraw Hill’s CFO, Robert J. Bahash, earned $644,000 in salary in 2001, a $788,701 bonus, $661,050 from long-term incentive payouts, and another $141,711 in other income. He also had other miscellaneous sources of income. All in, Bahash’s compensation last year was just north of $2.2 million.

And finally, Reebok executive vice president and CFO Kenneth I. Watchmaker earned $600,002 in salary in 2001. The finance chief also took home a $976,310 bonus and another $57,743 from other sources. In addition, Watchmaker exercised $1.46 million in stock options. His total package: $3 million.