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THE NATION | THE ENRON INQUIRY

Ex-Enron Employees Suggest Anderson Helped Veil Deals

January 17, 2002|MICHAEL A. HILTZIK and DAVID STREITFELD | TIMES STAFF WRITERS

HOUSTON — The conference room on the 48th floor of Enron Corp.'s Houston headquarters--the nerve center of the energy trader's convoluted and risky deals--was at the opposite end of the hall from the company's outside accounting firm, Andersen.

The room was entirely paneled in whiteboards and furnished with a full supply of colored markers. There Enron executives were briefed on the dizzyingly complex structures that Andersen consultants had layered onto deals that often had started out as straightforward. The experience often left some at Enron dumbfounded.

"You'd see things involving 30 or 40 different entities," said Clayton Vernon, a former research analyst and trading manager at Enron. "They would clear a whiteboard and draw a flowchart that would be absolutely incomprehensible."

Another former executive familiar with the conference room recalled: "They'd be drawing boxes and arrows going in every direction." The drawings would describe shell companies and offshore entities with intricate interrelationships, all headed by mysterious figures designated on the whiteboards as "Mr. X" or "Mr. Y."

When pressed, accountants would identify the mystery figures only as "somebody who's a friend of the company," according to the former executive, who asked to remain unidentified. These phantom executives, the Andersen accountants announced, were due payments of hundreds of thousands of dollars to play their shadowy roles in the transactions.

Chicago-based Andersen served Enron not only as its outside auditing firm, bound to ensure that the company's books complied with financial disclosure standards, but also as business consultants. The dual function, which may have subjected Andersen to a conflict of interest, is expected to come under intense scrutiny by Congress as it begins looking into the Enron collapse.

In many cases, the goal of the complex structures, the former employees say, was twofold: to keep them off Enron's corporate balance sheet and thus out of view of the public, and to enable Enron to record revenue from the deals before it was received--often more revenue than the deals were likely to produce.

Whatever the rationale, this process is behind the extraordinary complexity of Enron's financial dealings and helps explain how profound problems in its numerous businesses eluded the comprehension of auditors, shareholders, regulators and tax authorities for years.

Enron's 2001 annual report lists about 3,800 subsidiaries, of which more than 700 are located in the Cayman Islands or other offshore financial havens. Most of these are known as "special purpose entities," or SPEs, created by Enron as vehicles for its complicated transactions.

These deals were among those lambasted by Enron Vice President Sherron S. Watkins, who complained in a memo she wrote Aug. 15 to Enron Chairman Kenneth L. Lay. The memo was released earlier this week by a congressional committee.

Public documents and interviews with former Enron employees suggest that during the last two years the company's deals became more complicated and their economic rationales more suspect.

The effect was to create transactions that, rather than benefiting Enron, tended largely to enrich senior executives who were entitled to special compensation for their roles in the partnerships. Andrew S. Fastow, Enron's former chief financial officer, reportedly was entitled to $30 million in such compensation.

The aim also may have been to produce the illusion of continued revenue gains for the company, which was facing slowing growth in many of its core businesses.

Even before that, the labyrinthine character of Enron deals was a byword at the company. In early 2000, four months after he joined the company, Vernon said he first saw deals that didn't seem quite right.

"But the transactions were so complicated I assumed there was some part I was missing that meant they were at least reasonable business propositions for the Enron shareholders," he said. "In hindsight, they should have raised more red flags."

Vernon and others say there were indications within Enron that high-level executives of the company's outside auditing firm, formerly known as Arthur Andersen, approved of these maneuvers.

Andersen, which on Tuesday fired the Houston-based partner overseeing the Enron account and suggested that lax oversight of the company was limited to its Houston office, declined to reply to questions Wednesday about the firm's involvement in structuring the transactions. An Andersen spokesman said the firm is looking into its actions and is cooperating with investigators.

Vernon said he asked Enron Chairman Lay point-blank at a company "town hall" session Sept. 26 if he was comfortable with Andersen's integrity and oversight. At the time, the company was facing the first wave of criticism over the offshore partnerships that had shielded liabilities from public scrutiny.

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