Enron So Far

Scandal-mongers will want to keep an eye on four central issues.

Michael W. Lynch | January 17, 2002

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With every passing day, it's harder to imagine that the top executives and auditors didn't know everything. One clue is that Andersen's chief Enron auditor, David Duncan, ordered "an expedited effort to shred documents" the day after the SEC announced an investigation of Enron. The shredding occurred until November 9, when his secretary sent out another message: "Stop the shredding."

Another gun barrel spewing smoke is the memo by former Enron Vice President Sherron S. Watkins, supposedly written to Ken Lay sometime in August. The letter is a bit too perfect, with two especially suspicious aspects. There's no date on it: It's simply reported to be from August. And though the letter was supposed to be written to Lay, at one point it refers to him in the third person. Wrote Watkins, "I believe Ken Lay deserves the right to judge for himself what he believes the probabilities of discovery to be and the estimated damages to the company from those discoveries..."

But she nailed it, writing, "I am incredibly nervous that we will implode in a wave of accounting scandals." And: "I realize that we have had a lot of smart people looking at this and a lot of accountants including AA & Co. have blessed the accounting treatment. None of that will protect Enron if these transactions are ever disclosed in the bright light of day."

Watkins raises an interesting point. It may be a good idea for companies to have smart chefs in their executive dining rooms, lest the food get boring and the suits start wandering out for expense-account lunches at Gentlemen's Clubs. (This is especially a problem in Texas.) Companies may even want to retain smart lawyers. But accountants, like journalists, should think of themselves as dumb. That way they'll do their jobs, by asking plenty of dumb questions.

What's their job? For Watkins, "The overriding basic principle of accounting is that if you explain the 'accounting treatment' to a man in the street, would you influence his investing decisions? Would he sell or buy the stock based on a thorough understanding of the facts? If so, you best present it correctly and/or change the accounting."

Watkins' letter also made it clear that other employees inside Enron had raised similar questions with executives or considered the company "crooked."

Screw Your Neighbor

It appears not only that Enron executives realized their accounting was fantasy, but that the company's outside auditor and perhaps even its law firm did as well. That's what all those noisy, annoying legislators are looking into now.

David Duncan -- the man in charge of the Enron account, who Andersen fired on Tuesday -- made rounds in D.C. on Wednesday, presumably ratting on his former firm. "Any half-witted investigator has all the tools now, with the names of lawyers, accountants, and employees involved to play one against the other in their statements and inconsistencies," says a former Hill staffer. "They'll be able to pry out some truth as the threat of jail and penury are present and real serious in dimension."

The suspects have already started to turn on each other. Enron, for example, blames its outside auditors and counsel. "All of those partnerships had been through review processes and approval processes that were set up with and in many cases worked out with Arthur Andersen as our outside auditors, plus outside legal counsel," company mouthpiece Mark Palmer told the Associated Press.

Meanwhile, Andersen's global managing partner is pointing the finger at Enron, even as he admits his own company's "errors in judgement." "The company did not reveal to us that it had this agreement with the financial institution," C.E. Andrews told the Senate Commerce Committee on December 18. "We have notified Enron's audit committee of possible illegal acts within the company," he later added.

The law firm, Vinson & Elkins -- conveniently shielded by Texas law from being sued for malpractice by anyone but Enron -- points to both, indicating that the practices were known all the way to the top. "Arthur Andersen consulted with its senior technical experts in its Chicago office regarding the technical accounting treatment on the Condor/Whitewing and Raptor transactions, and the Andersen partners on the Enron account consulted with AA's senior practice committee in Houston on other aspects of the transactions," Vinson & Elkins wrote in a report addressing Watkins concerns. "Enron may also take comfort from AA's audit opinion and report to the Audit Committee which implicitly approves the transactions involving Condor/Whitewing and Raptor structures in the context of the approval of Enron's financial statements."

Lay blames the lawyers, speaking through Enron's recently-retained attack attorney (and former counsel to President Clinton) Robert Bennett. "Mr. Bennett argues that Mr. Lay would have conducted a more thorough investigation of the partnerships if his attorneys had recommended it," reports Wednesday's Wall Street Journal. "I think this shows Ken Lay's good faith in the matter," Bennett told the Journal.

Beltway Boys

Back in the Washington, Bennett complains that the issue is becoming too political, which of course is why he was hired. Yet so far, the financial scandal hasn't become a political one. Not that no one's tried to make it one.