Risk & Compliance

”Goodwill Games” at Enron?

''This stuff is not elective," testifies a former auditor for Arthur Andersen. ''If there's an impairment, there's an impairment. It has to be reco...
Stephen TaubMarch 20, 2006

Examine our Enron archive

Jurors at the trial of Kenneth Lay and Jeffrey Skilling finally heard from witnesses who served at Arthur Andersen, the former Big Five accounting firm that Enron took down with it.

John Sult, who oversaw Andersen’s audit of Wessex Water, testified that Lay misled investors about the health of the water-distribution unit when Enron was trying to avoid a goodwill write-down and credit-rating downgrade, according to The Wall Street Journal.

In the fall of 2001, the newspaper continued, Lay reportedly told investors that “our outside auditors have reviewed Wessex and have, in fact, determined that there is no impairment required.” According to the Houston Chronicle, Sult testified that at the time, his review was still under way, so Lay’s statement was false.

Prosecutors also introduced emails from 2001 that Sult found “alarming,” though he had not seen them at the time. One email reportedly said Azurix was “not willing to take any goodwill impairment on Wessex.”

“This stuff is not elective,” asserted Sult. “If there’s an impairment, there’s an impairment. It has to be recorded.”

On cross-examination, Sult conceded that he wasn’t privy to what Lay might have been told by Andersen’s Enron audit partner, David Duncan, at an October 12 meeting. According to the Associated Press, Sult also testified that he never discussed Wessex or its parent, Azurix, with Lay, nor was the CEO involved in accounting analyses related to a possible write-down.

The next witness, former Andersen accountant Tom Bauer, said that he did attend that October 12 meeting to discuss goodwill, according to the Chronicle. Bauer reportedly testified that at the meeting, Duncan asked Lay about the future of Azurix; Lay reportedly said that water was “the commodity of the 21st century” and that Azurix would be Enron’s platform for it.

One way that Enron could avoid a write-down of the Azurix/Wessex goodwill, the newspaper explained, would be to maintain that Enron intended to continue to invest in the business. (As of mid-November, Sult earlier testified, Andersen decided not to pursue this path to avoid the write-down; according to Sult, he could find no proof of such a growth strategy.)

Prosecutors then used Bauer to introduce documents that show that Skilling filed false statements to auditors in annual representation letters, according to the Chronicle; Lay also signed these letters, the newspaper noted

On cross-examination, Lay attorney Randy Oppenheimer and Bauer went back and forth for some time, the paper also reported. Oppenheimer reportedly tried to convince the witness that using reserves to hit earnings targets was sometimes acceptable, but Bauer would have none of it, wrote the Chronicle.

Bauer’s cross-examination will conclude on Tuesday, followed by testimony from Standard & Poor’s analyst Ron Barone. Following Barone: former Enron treasurer (and CPA) Ben Glisan. The former protégé of Andrew Fastow, now serving five years in a minimum-security prison after pleading guilty to criminal conspiracy, may appear in court in prison coveralls, the Chronicle observed. Won’t that make an impression.