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Andersen Knew of Enron Risks Last February

Probe: E-mail memo indicates executives in Chicago were aware of questionable issues. Also, the energy trader's board fires the auditor.


WASHINGTON — Top executives at the Chicago headquarters of accounting firm Andersen discussed Enron's financial problems in February, but two months later its auditors gave the energy giant's books a clean bill of health, documents show.

The Feb. 5 meeting represents the earliest known date that senior Andersen officers--including its head of U.S. operations--knew about such issues as Enron's aggressive deal making, internal conflicts of interest and huge compensation packages for its senior management.

The meeting, held by telephone between Chicago and the Houston branch office that handled the Enron account, was detailed in an e-mail the next day. Andersen has contended that it was unaware of serious problems until August.

The e-mail memo reported that Andersen considered dropping Enron as a client, though it noted that the accounting firm could earn fees from Enron reaching $100 million a year.

"Ultimately, the conclusion 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," the e-mail read.

Andersen auditors in April signed off on Enron's financial statement for fiscal years 2000 and 1999, saying it "fairly represented" the company's condition.

It wasn't until Oct. 16 that Enron reported serious financial losses, although Andersen had the ability to rescind its approval of the company's financial statements at any time.

The new disclosures came as Enron's board fired Andersen as its auditor and Congress pushed ahead with its probe of the Houston-based company's collapse.

After obtaining the e-mail, congressional investigators on Thursday sent a letter to Andersen's chief executive, Joseph F. Berardino, seeking more information about the senior-level meeting.

The e-mail from Andersen executive Michael E. Jones to partner David B. Duncan related to a meeting the day before in which Andersen executives discussed some of the Enron accounting methods that have become the subject of criminal and congressional probes.

The e-mail raised concerns about conflicts of interest from a partnership managed by Enron's then-chief financial officer, Andrew S. Fastow, which investigators say was used to hide the energy company's debts. The meeting is significant because until its disclosure, attention has focused on Andersen's Houston office, where Duncan--chief auditor on the Enron account--was fired and seven others disciplined Tuesday because of the destruction of Enron-related records.

An Andersen spokesman, Patrick Dorton, said Thursday that "nothing in the meeting or the memo indicated that any illegal actions or improper accounting was suspected." He said it was not until Enron Vice President Sherron S. Watkins alerted auditors in August that the accounting firm "became aware that individuals within Enron believed that there may have been accounting improprieties."

But Ken Johnson, a spokesman for the House Energy and Commerce Committee, one of several congressional panels investigating Enron's collapse, said: "From our perspective, the memo made it clear that some Andersen officials were clearly aware of the risks of having Enron as a client but decided in the end the company was too much of a cash cow to cut loose."

The e-mail also said that during the conference call, executives discussed how Enron "often is creating industries and markets and transactions for which there are no specific rules." The memo said Fastow faced potential conflicts from his role both as an officer of the energy trader and a paid manager of the LJM partnership that was doing business with the company.

The question was left unanswered as to whether the Securities and Exchange Commission would view Fastow and LJM as an affiliate of Enron, which would have obligated Andersen to wrap the financial results of LJM into the figures for the larger company.

Once disclosed, the debt and losses at LJM and other partnerships led to a rapid decline in Enron's credit rating, pushing the company to file for bankruptcy protection Dec. 2.

A spokesman for Fastow declined to comment on the House investigation but added that Enron's former chief financial officer did not hide his involvement with off-balance-sheet partnerships.

"The Enron board of directors had full knowledge and understanding of Mr. Fastow's potential conflicts and gave its full approval," said his spokesman, Gordon Andrew. "Business law does not say that conflicts of interest per se are illegal in any regard as long as they are disclosed and approved."

When Enron issued its annual report in April, Andersen asserted that in its opinion the financial statements "present fairly . . . the financial position of Enron Corp. and subsidiaries as of Dec. 31, 2000, and 1999 . . . in conformity with accounting principles generally accepted in the United States."

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