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Enron auditor hires Paul Volcker

By DENNY GULINO   |   Feb. 3, 2002 at 6:02 PM   |   Comments

WASHINGTON, Feb. 3 (UPI) -- The big-five accounting firm Arthur Andersen Sunday said it has hired former Federal Reserve Chairman Paul Volcker to help it make changes in operational practices in light of the Enron collapse and allegations it ignored auditing standards in its reporting of the energy company's finances.

Joseph F. Berardino, managing partner and chief executive officer of Andersen Worldwide, issued a statement in New York that said Volcker will head an Independent Oversight Board that will make "fundamental changes" in the company's auditing practices.

Andersen has come under congressional and regulatory scrutiny following the collapse of bankrupt Enron, which fired it as its auditor.

"Mr. Volcker is one of the most independent and innovative thinkers in American finance," Berardino said in the statement.

The IOB will have its own staff and access to all the company information it needs, he added, as well as "full authority to mandate changes in such practices, as it may find necessary and desirable."

Volcker said in a statement one of his concerns has been the "profession of auditing and accounting is in crisis. That crisis is now evident to everyone."

Andersen also said Sunday it would no longer accept assignments from publicly traded U.S. clients to design and implement financial information systems but will fulfill existing commitments. The company also will "no longer accept engagements to provide internal audit services to publicly traded U.S. audit clients."

Former Enron Chairman and CEO Kenneth Lay -- who, according to a CNN report Sunday, refuses to testify Monday before a congressional committee -- and many of his top executives were blamed by investigators on Saturday for reporting $1 billion in profits that did not exist. They nevertheless often enjoyed immense personal gain.

A massive report submitted to federal bankruptcy court Saturday night disclosed several previously unknown allegations, including accusations that Enron was aided in its long list of failures by its auditor, Andersen, which seemingly ignored auditing standards. Also according to the report, lawyers appeared to fail their responsibilities.

"The tragic consequences of the related party transactions and accounting errors were the result of failures at many levels and by many people," the report said.

The problems included "a flawed idea, self-enrichment by employees, inadequately designed controls, poor implementation, inattentive oversight, simple and not-so-simple accounting mistakes and overreaching in a culture that appears to have encouraged pushing the limits." Much of what happened to Enron, "could and should have been avoided," the report concluded.

Andersen reacted quickly to the report, authored by an outside director brought in by Enron to investigate, calling it an an attempt "to shift blame to others."

The Enron Board, which the report said specifically approved some of the deficient arrangements, issued its own statement, saying the report "made the Board aware of numerous past events for the first time. These events are deeply regretted by the Board." There were no immediate responses from individuals named in the report.

The starkly negative report was authored by William Powers, Jr., dean of the University of Texas Law School and, as a new Enron outside director, the head of a investigating committee made up of former Securities and Exchange Commission analysts Raymond Troubh and Herbert S. Winokur.

Enron's management mechanisms failed or never existed to begin with, the report said. It bestowed little benefit of the doubt on the many current and former Enron executives identified by name.

Despite its wide-ranging findings of fault, there were many areas not touched upon in the report, including, pension and 401(k) fund management disclosures, the direct causes of the company's collapse and bankruptcy, its business models, and many insider stock transactions.

A key player in the Enron drama -- the company's former executive vice president and chief financial officer, Andrew Fastow -- appeared to be the main target of the report and refused to talk to the investigators and several other top figures, including Fastow's assistant Michael Kopper, who remained silent as well, the report said.

Investigators had only "limited access" to Andersen's working papers.

"Our investigation identified significant problems beyond those Enron has already disclosed," the Powers report said. "Enron employees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should never have received."

The report said the improper personal enrichment "was merely one aspect of a deeper and more serious problem," the report continued. "We believe these transactions resulted in Enron reporting earnings from the third quarter of 2000 through the third quarter of 2001 that were almost $1 billion higher than should have been reported."

"No one in management accepted primary responsibility for oversight; the controls were not executed properly; and there were structural defects in those controls that became apparent over time," the Powers report said.

Former Enron CEO Jeffrey Skilling "appears to have been almost entirely uninvolved in the process, notwithstanding representations made to the Board that he had undertaken a significant role," the report continued.

Despite the fact a transaction was "devastating" to Enron, Kopper reaped a financial windfall," the report said, "largely a result of arrangements that he appears to have negotiated with Fastow."

Kopper in one transaction, along with a friend, received a previously undisclosed $10 million, the report said, having invested only $125,000. Fastow, it said, got $30 million.

In one case, the report said that it was impossible to know whether a mistake in handling a partnership was the result of "bad judgment or carelessness on the part of Enron employees or Andersen or whether it was caused by Kopper or others putting their own interest ahead of their obligations to Enron."

What the company called "hedging" transactions intended to reduce risk "is not what happened here," the report said.

The "related party transactions," the report went on, "facilitated a variety of accounting and financial reporting abuses by Enron, they were extraordinarily lucrative for Fastow and others," the report said. "Fastow and other Enron employees received tens of millions of dollars they should not have received. These benefits came at Enron's expense."

The report castigated Enron executives and failed management mechanisms, saying, "Individually and collectively, Enron's management failed to carry out its substantive responsibility for ensuring that the transactions were fair to Enron -- which in many cases they were not."

While much of the report zeroed in on Fastow and Kopper, Lay was given the ultimate responsibility for failure.

"For much of the period in question," the report said, "Lay was the chief executive of Enron and, in effect, captain of the ship." Lay, it said, "had the ultimate responsibility for taking reasonable steps to ensure that the officers reporting to him performed their oversight duties properly. He does not appear to have directed their attention, or his own, to the oversight of the LJM partnerships," referring to a set of off-balance sheet but "related party" entities.

"Ultimately, a large measure of the responsibility rests with the CEO," the report said.

Lay, the investigators found, "functioned almost entirely as a director, and less as a member of management. It appears that both he and Skilling agreed, and the Board understood, that Skilling was the senior member of management responsible for the LJM relationship."

Skilling resigned as CEO in August, saying he wanted to spend more time with his family. "It is difficult to understand why Skilling did not ensure that those controls were rigorously adhered to and enforced," the report said. "Based upon his own description of events, Skilling does not appear to have given much attention to these duties," the report said.

Skilling, the report said, "bears substantial responsibility for the failure of the system of internal controls to mitigate the risk inherent in the relationship between Enron and the LJM partnerships."

The reports sorts through partnerships named Chewco, LJM1, LJM2, Southampton Place, and many others, saying Enron's Chief Accounting Officer cannot claim to be vindicated just because Andersen signed off on many of the arrangements.

Andersen, the report said, "did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board, or the Audit and Compliance Committee, concerns about Enron's internal controls over the related-party transactions."

Enron's longstanding outside law firm, Vinson & Elkins, "should have brought a stronger, more objective and more critical voice in the disclosure process," the report said. The law firm had no immediate reaction.

Several of Enron's top executives violated the company's code of conduct, the report said, accepting interests in partnerships without getting the permission of Lay.

Lay, 59, was to testify Monday to a Senate subcommittee, one of many investigating what happened. His attorneys said he will not seek the protection of the Fifth Amendment, as an Andersen executive did, but on Sunday CNN said Lay would refuse to appear.

The debacle comes three decades after Lay entered the world of power regulation as an assistant to a commissioner of the old Federal Power Commission, now the Federal Energy Regulatory Commission or FERC.

Lay became an undersecretary of the Interior Department, later a vice president of Florida Gas, switching to Transco, a Houston natural gas supplier, finally transformed into Enron.

In other developments, Gov. Gray Davis confirmed that he met with Enron Chairman Lay during the height of last winter's California electricity crisis, at the urgings of two White House administrations, and described the consultations as unproductive.

Although Lay's expertise in the energy industry was highly valued by the Clinton and Bush administrations, Davis told the Los Angeles Times that Lay's advice to California boiled down to simply paying the soaring prices that power producers and marketers such as Enron were charging for wholesale electricity.

Lay said on PBS's "Now with Bill Moyers" Friday night that he consulted not only with the Bush administration about energy matters but also with President Clinton and with Davis.

Davis made no apologies for his contacts with Enron even though he is running for re-election and his handling of the energy crunch is a key campaign issue.

Davis last week asked the Federal Energy Regulatory Commission to investigate the possibility that Enron manipulated the California electricity market in order to keep wholesale prices at all-time highs.

The White House Saturday operated under a Justice Department request to "preserve and maintain" all records connected to Enron Corp. from the final years of the Clinton administration through the beginning of the Bush administration.

© 2002 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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