Risk & Compliance

Defense Keeps Pressure on Enron’s Koenig

Management can sometimes go back and ''sharpen its pencil'' to make adjustments, suggests Daniel Petrocelli; ''it's wrong,'' counters Enron's forme...
Dave Cook and Stephen TaubFebruary 7, 2006

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On Tuesday, at the trial of former Enron executives Kenneth Lay and Jeffrey Skilling, defense lawyer Daniel Petrocelli resumed his cross-examination of former head of investor relations Mark Koenig, according to the Houston Chronicle.

Petrocelli, the lead attorney for Skilling, suggested that in 1999, when Enron altered its earnings by a penny per share, it was the result not of wrongdoing but rather of a routine exercise that most corporations go through. Earnings estimates are not set in stone, he reportedly maintained, and management can sometimes go back and “sharpen its pencil” to make adjustments.

“That is wrong,” countered Koenig, according to the paper. “Based on the fact that a consensus estimate has changed, it’s wrong to go back and sharpen the pencil.”

Asked if he knew how the accounting department made up for the one penny difference, Koenig replied, “I was not in accounting when they were adjusting the number.” According to the Associated Press, he added: “I know they figured out a way to come up with the extra penny. I didn’t inquire into the exact transaction or adjustment, no.”

Koenig — who testified on direct examination that Enron had changed earnings numbers to prevent its share price from falling — found himself at a loss when Petrocelli brought up the earnings release for the fourth quarter of 1997. According to the Chronicle, not only did the final release show that Enron missed the consensus by a penny, but the share price actually climbed $2.

Petrocelli ran with the ball, noted the paper, by asking, “When you make those mistakes it doesn’t mean you’re a criminal does it?”

“Not always, no,” Koenig reportedly responded.

Petrocelli continued in this vein later in his examination. Koenig — who earlier testified that operating expenses for Enron Broadband Services had not been published — was presented with an annual report and regulatory filings to the contrary.

“I was mistaken,” Koenig reportedly acknowledged. “They are disclosed.”

“When you made that mistake, you didn’t mean to mislead anyone, did you?” Petrocelli followed up? “No, I didn’t,” Koenig replied, according to the paper.

Petrocelli’s questioning of Koenig is expected to conclude by Wednesday, after which Lay’s lead attorney, Mike Ramsey, will begin his cross.