Risk & Compliance

Enron Examiner Cites Auditors, Banks

Three of the firms, he adds, should have their Enron claims subordinated to those of other creditors. Also: twenty months, four auditors, one compa...
Stephen TaubDecember 8, 2003

Enron examiner Harrison Goldin came down hard on two of the Big Four accounting firms and two major investment banks in a new report addressing transactions involving the controversial special-purpose entities at Enron Corp.

Accounting firms KPMG LLP and PricewaterhouseCoopers LP, as well as Bank of America Corp. and Royal Bank of Canada, bore the brunt of Goldin’s criticism.

Goldin said that Bank of America and Royal Bank of Canada knew of fraud in Enron-related transactions, according to Reuters. He added, however, that UBS AG was not aware of fraud.

The report also found that auditor KPMG LLP committed “negligence” in work it did for Enron, according to a wire service account. Goldin said a fact finder could conclude that the auditor had actual knowledge of former Enron CFO Andrew Fastow’s unauthorized personal benefits from deals he helped set up, and that KPMG “was, at a minimum, willfully blind to the fraudulent nature” of those transactions, according to the Associated Press.

A further finding, Goldin reportedly wrote, could be that “KPMG provided substantial assistance to Fastow in his breaches of his fiduciary duty to Enron and that Enron suffered damages as a result of those breaches.”

The examiner reportedly concluded that the banks and KPMG, because of their actions, should have their claims against Enron subordinated to those of other creditors. On the other hand, said Goldin, since UBS was unaware of fraud in various special-purpose entity (SPE) transactions, that bank should not have its claims subordinated.

Goldin also criticized PricewaterhouseCoopers LP for being “grossly negligent” in preparing for Enron two fairness opinions concerning SPEs in 1999 and 2000, Reuters noted.

The AP pointed out that Goldin reviewed the roles of these banks and auditors because another Enron examiner, Neal Batson, had worked for law firm Alston & Bird LLP, whose clients have included these companies.

Batson had previously concluded that several other banks that had worked with Enron, including Citigroup Inc., J.P. Morgan Chase & Co., and Toronto-Dominion Bank, should also have their claims subordinated to those of other creditors, Reuters noted.

Meanwhile, U.S. Bankruptcy Judge Arthur Gonzalez allowed Batson, who published a 4,000 page report detailing Enron’s Byzantine partnership structures, to return to his law firm now that the final report on the bankruptcy is complete. The AP added that Judge Gonzalez granted Batson’s request that he and his associates be free from liability in connection with their reports on the case.

Last week the Houston Chronicle had reported a bankruptcy judge’s ruling that Enron’s creditors may sue two Houston law firms, an auditor, and about three dozen former executives in connection with the energy company’s collapse.

The ruling cleared the way for creditors to add law firms Vinson & Elkins LLP and Andrews & Kurth LLP, accounting firm Arthur Andersen, and others to a civil fraud and negligence lawsuit brought last year in Montgomery County, Texas, the paper reported.

Among the new potential defendants is Enron’s former general counsel, James Derrick, said the paper.

The lawsuit alleges wrongful conduct on the part of nine former Enron executives, including former chairman Kenneth Lay, former CEO Jeffrey Skilling and former CFO Andrew Fastow.

In another Enron-related development, former Enron trader John Forney, who was arrested in June on charges related to the company’s manipulation of California power markets, was indicted on 11 counts of conspiracy and wire fraud, according to Reuters.

The United States Attorney’s Office for the Northern District of California and the Justice Department’s Enron Task Force said that 10 were added to the one Forney was charged with when arrested.

He was the third former Enron energy trader to be charged with a federal crime for his role in Enron’s schemes to manipulate energy prices during California’s energy crisis in 2000 and 2001.

Twenty Months, Four Auditors, One Company

Last week SureBeam Corp., which manufactures systems to kill food-borne bacteria, named Peterson & Co. LLP as its new auditing firm — the company’s fourth auditor in little more than a year and a half.

The appointment comes a little more than three months after the company fired Deloitte & Touche LLP, which had raised concerns regarding SureBeam’s accounting treatment for certain transactions beginning in 2000.

When SureBeam dumped Deloitte, the company stated that it believed its financial statements were appropriate based on the facts and circumstances that existed at the time. The company added, however, that its board “has determined that the issues raised by Deloitte & Touche are sufficiently important that it wants these issues to be definitively resolved. Accordingly, the board’s audit committee is interviewing other national accounting firms for the purpose of conducting an independent review of these issues.”

Deloitte had been SureBeam’s auditor for only two months since replacing KPMG LLP in June. KPMG had signed on in April 2002 to replace Arthur Andersen, which was unraveling after it was implicated in the Enron scandal.

SureBeam, which went public in 2000 and was fully spun off by former parent Titan Corp. in 2001, was recently delisted from Nasdaq for failing to file quarterly earnings reports.

Many Investors Insist on Dividends

Want to attract investors to your stock? Pay a dividend. If you already do, increase the payout.

That’s the message from an online survey of 200 professional investors conducted by business communications agency Financial Dynamics. The participants in the study represented buy-side and sell-side investors and analysts covering all market capitalizations and investment styles.

More than 80 percent of the investment professionals said dividends had increased in importance over the past year, and more than 75 percent indicated that the attractiveness of a cash dividend had increased, compared with share buybacks.

All else being equal, 60 percent of respondents said that shares of a company that does not pay a dividend are less attractive than shares of peer companies that do.

During the 1990s, dividend yields and payouts sank to record lows as more and more companies looked to buy back their stock. Clearly, the major reason Wall Street pros are more infatuated with dividends is because the tax on these payouts was reduced earlier this year.

Not all investment professionals are hungry for dividends, however — for example, those investors who focus on fast-growing companies. According to the survey, small-cap and micro-cap investors were generally less enthusiastic about dividends than GARP (growth at a reasonable price) and value-oriented investors.

“If a company is generating more working capital than can be profitably reinvested in its operations,” said Gordon McCoun, senior managing director and director of investor relations for Financial Dynamics, “the results of our survey indicate that management would be advised to seriously consider a dividend.”

Short Takes

  • Enron Corp.’s 50-story downtown Houston headquarters was purchased at auction for $55.5 million by a group led by local cardiologist Antonio Pacifico.
  • Freddie Mac, which is trying to recover from an accounting scandal and a turnover of top management, named former American Express Corp. chief financial officer Richard Goeltz to its board of directors.
  • Alcan Inc., which in September agreed to buy French rival Pechiney, creating the world’s largest aluminum company, issued $1.25 billion of global debt in two parts, led by Citigroup, Morgan Stanley, and RBC Capital Markets. Alcan sold $500 million of 10-year notes priced to yield 5.226 percent, or 83 basis points more than comparable Treasurys, and $750 million in 30-year bonds, priced at 103 points over Treasurys. The paper was rated Baa1 by Moody’s and A-minus by Standard & Poor’s.
  • Intel Corp. warned it will take a $600 million goodwill impairment charge related to its Wireless Communications and Computing Group when Intel reports fourth-quarter results. “The long-term growth expectations for this business are no longer projected to be as high as previously expected,” the company added in a press release.
  • Richard Atkinson has joined wood products and pulp maker Pope & Talbot Inc. as chief financial officer. He was formerly CFO at Sierra Pacific Resources, where chairman and CEO Walter Higgins will assume Atkinson’s duties until a successor is named.
  • The U.S. unemployment rate dropped to 5.9 percent in November as the economy added 57,000 jobs.

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