FRIDAY JANUARY 18 2002
FROM CHRIS AYRES IN NEW YORKENRON yesterday sacked Andersen, its accountancy firm, as it emerged that the collapsed energy company may have overstated its profits by nearly $2 billion (£1.4 billion), rather than the $600 million previously stated.
Investigators believe a memo could become the “smoking gun” that they have been searching for since Enron collapsed on December 2 Questions over the accuracy of Enron’s results came as Andersen admitted that it held suspicions over accounting practices at the energy company as far back as last February. However, the Big Five firm said that it did not suspect any “illegal action”.
Enron said it had sacked Andersen in the wake of the auditor’s massive destruction of documents. A lawyer for Enron said: “We’re very troubled about the destruction of the documents, and we’re very concerned about the accounting advice we got.”
It also emerged yesterday that Kenneth Lay, Enron’s chief executive, put three of his four properties in the ski resort of Aspen, Colorado, up for sale for $15.5 million only days before the company filed for bankruptcy.
The extent to which Enron overstated its profits is being questioned after the discovery of a letter by Sherron Watkins, an Enron vice-president, to Mr Lay. She outlined her concerns that Enron risked becoming embroiled in an accounting scandal.
The letter discloses, for the first time, an Enron-affiliated partnership called Condor. Ms Watkins’s letter also mentions another Enron-related partnership called Raptor. Condor and Raptor contributed $800 million and $500 million to Enron’s accounts respectively, amounts that are now being questioned. Enron funded both entities by lending them hundreds of millions of dollars of its own stock.
It emerged yesterday that Ms Watkins had called a former colleague at Andersen to raise exactly the same issues as contained in her letter to Mr Lay. The next day four Andersen officials, including David Duncan, met to discuss Ms Watkins’s concerns. Mr Duncan later ordered the destruction of documents related to Andersen’s auditing work for Enron, a move for which he was fired earlier this week.
Congressional investigators are studying an internal Andersen memo, dated February 6, 2001, which gives details of a meeting at which senior auditors considered dropping Enron as a client because of concern over the energy company’s accounting policy. The memo mentions concern over “conflicts of interest” by Andrew Fastow, Enron’s former finance director.
The memo ends: “Ultimately, the (decision) was reached to retain Enron as a client (because) it appeared that we had the appropriate people and processes in place to serve Enron and manage our engagement risks.’’ It also noted that Enron’s fees to Andersen could eventually top $100 million, making Enron the firm’s biggest client.
If prosecutors can prove that Enron was involved in fraudulent activities, and that Andersen knew about it in February but decided to keep quiet about it, the auditing firm could become liable for the amount wiped off Enron’s stock market value since it first restated its accounts.
In another development yesterday, Mr Duncan told congressional investigators that he destroyed Enron documents after taking advice from Andersen’s lawyers.