January 15, 2002

Major Business News
Enron Employee Told Lay Last Summer Of Concerns About Accounting Practices
By MICHAEL SCHROEDER and JOHN EMSHWILLER
Staff Reporters of THE WALL STREET JOURNAL

WASHINGTON -- A House committee asked Enron Corp. for information related to a newly discovered letter written by an Enron employee last summer warning the company's chairman about its accounting practices, which prompted an internal investigation.

That inquiry, conducted by Enron's outside law firm, Vinson & Elkins, "has the appearance of a whitewash," said House Energy and Commerce Committee spokesman Ken Johnson.

A committee investigator combing through 40 boxes of documents supplied by Enron found the letter over the weekend. The author, Sherron Watkins, an Enron Global Finance executive who wasn't identified further, questioned the propriety of accounting methods, writing: "I am incredibly nervous that we will implode in a wave of accounting scandals."

Enron, suffering from a crisis of confidence by investors, filed for Chapter 11 bankruptcy-court protection on Dec. 2, shielding it from creditors as it seeks to reorganize.

See full coverage of Enron's downfall.

See a timeline of events in the Enron saga.

In concluding its review of the matters raised in the letter, Vinson & Elkins told Enron that "further widespread investigation by independent counsel and auditors" was unwarranted. But the firm warned that "bad cosmetics" involving the transactions and the decline of Enron's stock posed the "serious risk of adverse publicity and litigation."

The internal review was dated Oct. 15, 2001 -- one day before Enron announced its big third-quarter loss and a $1.2 billion reduction in shareholder equity because of losses later associated with various partnerships involving Enron officials.

Ms. Watkins's letter and the lawyers' conclusion were quoted Monday in a request for additional documents from the House committee to Enron Chairman Kenneth Lay; the firm's outside auditor, Arthur Andersen LLP; and Vinson & Elkins. The panel is seeking additional information about the letter and Enron's response to it.

Joe Householder, a spokesman for Vinson & Elkins, said the firm had received the committee's request for information, but that "we're not prepared to respond yet to the specific questions in the letter."

An Enron spokesman didn't return a call seeking comment. Ms. Watkins, who no longer works for Enron Global, couldn't be reached for comment.

Her letter to Mr. Lay questioned special-purpose entities that Enron used to help keep its debt off its books, the adequacy of public disclosure and the financial impact of the decline of Enron's stock.

The committee said the existence of the internal investigation suggests that "senior officials at Enron and Andersen were aware of the controversial financial transactions and accounting practices that would ultimately contribute significantly to Enron's demise."

Mr. Johnson said Vinson & Elkins "had one hand tied behind its back" by Enron officials as it began its review of Ms. Watkins's warnings. "As part of Vinson & Elkins's mandate for investigating the letter, they were told [by Enron officials] not to second guess Arthur Andersen and not to analyze specific transactions," he said.

Ms. Watkins wasn't the first Enron insider to raise concerns about partnerships related to Chief Financial Officer Andrew Fastow. Sometime before the end of 2000, then-Enron Treasurer Jeffrey McMahon went to company President Jeffrey Skilling and complained about potential conflicts of interest posed by partnerships operated by Mr. Fastow, which began in 1999 and early 2000. Mr. Fastow quit the partnerships last July.

Mr. Skilling didn't share Mr. McMahon's concerns, say people familiar with the matter. Mr. McMahon requested and received reassignment to another post. In October, Mr. McMahon was named as successor to Mr. Fastow as Enron's chief financial officer in the face of rising controversy over the partnerships.

Ms. Watkins's August 2001 letter came when what now appears to be the first major crack in Enron's facade appeared. Mr. Skilling, who had been given the chief-executive post earlier in the year, unexpectedly resigned on Aug. 14. He initially cited unspecified personal reasons.

But in an interview the next day, he said that his frustration over Enron's falling stock price played a major role in his decision to quit after only six months as chief executive. That remark has since raised questions about whether Mr. Skilling saw problems ahead for Enron because some of its partnership arrangements relied heavily on the use of Enron stock and their stability could be threatened by a falling price.

Separately, Andersen issued a statement providing more details about an e-mail sent by an in-house attorney that resulted in the destruction by Andersen employees of numerous Enron-related audit documents.

Read the full text of a Jan. 14 letter from House Energy and Commerce Committee Chairman Billy Tauzin to Enron Chairman Kenneth Lay.

Read the full text of Andersen's statement regarding Ms. Temple's email to Mr. Odom.

Read the full text of Andersen's policy regarding retention and destruction of documents. You will need Adobe Acrobat, available free at www.adobe.com.

Andersen said that attorney Nancy Temple, who wrote the e-mail, maintains she "never told the audit team that they should destroy documents for past audit work that was already completed."

The e-mail was sent Oct. 12 to Michael Odom, the risk-management partner responsible for the Houston office, before Enron reported its large third-quarter loss. It read: "Mike -- It might be useful to consider reminding the engagement team of our documentation and retention policy."

Mr. Odom forwarded the e-mail to David Duncan, the partner in charge of the Enron audit as a reminder of the firm's existing policy, Andersen said. The firm added that the e-mails "are not a representation that there were no inappropriate actions" and said it is continuing to investigate the matter.

Andersen's records-retention policy goes into great detail about what documents should be kept for what periods of time and when they should be disposed of. But the policy does note, "In cases of threatened litigation, no related information will be destroyed." At the time the e-mail was sent, no subpoenas had been issued, but Enron's problems were mounting and drawing the attention of attorneys representing shareholders.

Write to Michael Schroeder at mike.schroeder@wsj.com and John Emshwiller at john.emshwiller@wsj.com

contact: David Tabolt, 1 312 931 9000, david.w.tabolt@andersen.com
Patrick Dorton, 1 312 931 8695, patrick.m.dorton@andersen.com

Statement of Andersen January 14, 2002

As the firm has repeatedly stated, Andersen is committed to getting the facts, and taking appropriate actions in the Enron matter. We are moving as quickly as possible to determine all the facts.

The author of the October 12 email which has been widely reported on is Ms. Nancy Temple, an in-house Andersen lawyer. Her Oct. 12 email, which was sent to Andersen partner Michael Odom, the risk management partner responsible for the Houston office, reads "Mike - It might be useful to consider reminding the engagement team of our documentation and retention policy. It will be helpful to make sure that we have complied with the policy. Let me know if you have any questions" and includes a link to the firm's policy on the Andersen internal website. The firm policy linked to her email prohibits document destruction under some circumstances and authorizes it under other circumstances.

At the time Ms. Temple sent her email, work on accounting issues for Enron's third quarter was in progress. Ms. Temple has told the firm that it was this current uncompleted work that she was referring to in her email and that she never told the audit team that they should destroy documents for past audit work that was already completed. Mr. Odom has told Andersen that when he received Ms. Temple's email, he forwarded it to David Duncan, the Enron engagement partner, with the comment "More help" meaning that Ms. Temple's email was reminding them of the existing policy.

It is important to recognize that the release of these communications are not a representation that there were no inappropriate actions. There were other communications. We are continuing our review and we hope to be able to announce progress in that regard shortly.

Attached are copies of the two emails and the Andersen records retention policy referred to in the email.

The following files are available for download in PDF format:

Copy of two emails (15k, 1 page)

Policy statement: Client Engagement Information - Organization, Retention and Destruction, Statement No. 760 (140k, 26 pages)

Policy statement: Notification of Threatened or Actual Litigation, Governmental or Professional Investigations, Receipt of a Subpoena, or Other Requests for Documents or Testimony (Formal or Informal), Statement No. 780 (106k, 8 pages)


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