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Enron Exec Warned Auditors on Practices

Probe: Watkins alerted Andersen last summer about accounting policies now at center of an investigation.


WASHINGTON — Enron Vice President Sherron S. Watkins warned the company's auditors, Andersen, about a series of questionable accounting practices that now are the focus of investigations of the energy company's collapse, congressional investigators said Wednesday.

Watkins alerted the company in an Aug. 20 phone call with an unidentified Andersen employee, who in turn relayed the concerns to senior Andersen management on the Enron account and in Andersen's Houston office, officials said.

Investigators said Watkins' warning cast further doubt on claims by Enron and Andersen officials that they were unaware of the company's dire financial straits last summer. The disclosure followed release of a letter this week showing that Watkins had given a similar warning to Enron Chairman Kenneth L. Lay in August.

"It's clear now to us that key players at Andersen as well as Enron knew of the growing problem months before the company imploded," said Ken Johnson, a spokesman for the House Energy and Commerce Committee.

As part of the continuing probe, committee investigators in Washington met for about 4 1/2 hours with an Andersen partner, David Duncan, who was fired Tuesday by the company for allegedly ordering the destruction of thousands of Enron-related documents beginning in late October.

Duncan, who has said through his attorney that he was following company orders, was among the Andersen officials briefed about Watkins' concerns, investigators said Wednesday. Johnson said Duncan was cooperative, answering all questions and providing "some valuable leads that we are now pursuing."

An Andersen spokesman, Patrick Dorton, said the firm is still conducting an internal investigation. "If we find that anyone did anything improper, we'll take the appropriate action," he said.

Enron said that Andersen, formerly known as Arthur Andersen, reviewed and approved the company's accounting practices. "We placed very heavy reliance on Arthur Andersen, as will become very clear," said Robert Bennett, Enron's Washington attorney.

Investigators are attempting to apportion responsibility for the collapse last year of the energy company, which filed for bankruptcy protection Dec. 2, and to determine whether questionable accounting and lax audits helped deceive investors and employees. The collapse cost investors and Enron employees billions of dollars.

The latest revelations suggest that the rapidly evolving investigation could turn on the testimony of insiders such as Duncan and Watkins. The Justice and Labor departments, the Securities and Exchange Commission and several congressional panels are investigating whether Enron and its auditor withheld information from employees and investors that led to billions of dollars in losses as the company's stock plummeted.

Much of the inquiry is focusing on a series of partnerships to which Enron shifted debt, keeping it off the company's books, where it could have a negative effect on Enron's financial picture.

Investigators said they found the Andersen memo articulating Watkins' concerns while digging through 80 boxes of documents.

The three-page internal memo written by the unidentified Andersen employee said in reference to Watkins' concerns, "Based on our discussion, I told her she appeared to have some good questions."

On Aug. 21, the employee called an emergency meeting with other Andersen employees, including Duncan, to discuss what Watkins had said. They "agreed to consult with the firm's legal advisor about what actions to take in response to [Watkins'] discussions of potential accounting and disclosure issues," according to an excerpt of the memo.

An Andersen spokesman said that after Watkins contacted the firm, officials notified Enron's general counsel and were told that law firm Vinson & Elkins was conducting an investigation. That investigation acknowledged that the accounting treatment of the suspect partnerships was "creative and aggressive" but that it was not "inappropriate from a technical standpoint."

Rep. James Greenwood (R-Pa.), chairman of the Energy and Commerce Committee's subcommittee on oversight and investigation, said the newly discovered internal Andersen memo "raises additional concerns about Andersen's knowledge of potential accounting irregularities and the subsequent destruction of Enron-related documents."

The disclosure came as Duncan met with a team of eight House Energy and Commerce Committee investigators in his lawyer's Washington office. Duncan spoke without any promise of immunity.

Investigators called it an "informal" interview. Duncan was not sworn in, but he was warned about the prohibition against giving false statements to Congress or its investigators.

The discussion ranged from the destruction of documents to internal memos to his handling of the Enron account.

"Clearly, we're trying to determine who knew what and when they knew it," Johnson said.

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