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Enron Auditor Says Fired Partner Drove Shredding

January 25, 2002|RICHARD SIMON MICHAEL A. HILTZIK and RICHARD T. COOPER | TIMES STAFF WRITERS

WASHINGTON — Senior Andersen accounting firm executives told Congress on Thursday that a fired partner destroyed potentially revealing Enron documents in an apparent attempt to keep them away from federal investigators.

Partner David B. Duncan "gave every appearance of destroying these materials in anticipation of a government request for documents," Andersen executives C.E. Andrews and Dorsey L. Baskin Jr. testified before the oversight and investigations subcommittee of the House Energy and Commerce Committee, which is taking the lead in what promises to be an extensive congressional inquiry into the bankruptcy of the seventh-largest company in the U.S.

Documents released by the House subcommittee indicated that personnel at Andersen's Chicago headquarters specifically warned Duncan in early October that Enron's financial results harbored "a heightened risk of financial statement fraud."

The results had set off a red alert in FIDO, a proprietary software program Andersen used to test financial statements for unusual patterns, according to two e-mails sent to Duncan by Mark B. Zajac, a risk-management executive in Chicago. The e-mails were sent Oct. 9, or about the time that Duncan allegedly undertook a large-scale effort to destroy documents related to Enron.

The e-mails covered a test apparently run on Enron's results for the year ended June 30. Although the test was incomplete because some of Enron's figures were missing, Zajac said the figures that did exist had set off an alarm.

Zajac further advised Duncan to run the test on the results for the quarter ended Sept. 30--figures that Duncan was reviewing at the time. He sent copies of one message about the alert to two of Duncan's superiors, including Michael C. Odom, one of the Andersen executives who testified Thursday. The House subcommittee did not bring the issue up with Odom, however.

Zajac cautioned Duncan that FIDO occasionally generated red alerts because of "legitimate business activities" and therefore did not indicate that fraud necessarily existed. But he advised the Andersen partner that the alert was serious enough to warrant discussions between Duncan and senior Andersen executives aimed at a resolution of the alert.

"It is imperative that you evaluate the results carefully and objectively before reaching any conclusion," Zajac advised Duncan presciently, "because of the significant adverse impact of failing to detect a material financial statement fraud."

What steps, if any, Duncan and the other Andersen executives took in response could not be learned.

Congress Questions Firm's Passivity

At Thursday's hearing, members of Congress questioned their assertion that Duncan acted "without any consultation with others in the firm" before destroying documents.

And they expressed skepticism that senior executives were as passive as they now say they were in October when federal agencies were known to be zeroing in on Enron, a $50-million-a-year Andersen client.

"Is Mr. Duncan being made a scapegoat?" Rep. Cliff Stearns (R-Fla.) asked, declaring that "it seems maybe an explicit order was given to destroy documents, yet backsides were covered."

And Rep. Michael Bilirakis (R-Fla.) told the four senior Andersen executives seated before the committee: "You should be ashamed."

Enron filed for Chapter 11 bankruptcy on Dec. 2, less than a month after it restated earnings to account for $586 million in previously unreported losses since 1997. More than 4,000 workers lost their jobs; many more lost their retirement savings. In the last year the company's stock price plunged from more than $80 a share to less than a dollar.

Duncan, the man at the eye of the storm, appeared briefly before the House subcommittee but was dismissed after invoking his 5th Amendment right against self-incrimination.

"Mr. Duncan, Enron robbed the bank, Arthur Andersen provided the getaway car, and they say you were at the wheel," said Rep. James C. Greenwood (R-Pa.), the subcommittee chairman.

Later, after hearing from Andrews and other executives at Andersen, known until last year as Arthur Andersen, Greenwood said: "I still haven't made up my mind on whether Mr. Duncan was a rogue employee or whether Mr. Duncan was set up as a scapegoat."

On the other side of Capitol Hill, former Securities and Exchange Commission Chairman Arthur Levitt Jr. told a Senate committee that Enron's collapse underscores the need to eliminate apparent conflicts of interest among auditing firms, stock analysts and others the public relies on for investment information.

Thursday's House hearing focused on the shredding of documents, an aspect that could result in criminal charges.

Andrews and the other Andersen witnesses insisted that, at the time, they knew nothing about what they now concede was large-scale destruction of Enron-related documents.

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