- The Washington Times - Wednesday, January 16, 2002

Arthur Andersen LLP yesterday fired its lead Enron auditor after finding he ordered the destruction of "thousands of e-mails" and other documents sought by the Securities and Exchange Commission in an investigation of questionable financial practices at the two companies.
The "expedited" document shredding ordered by David B. Duncan, a Houston partner of the "Big Five" accounting firm, started Oct. 23, a few days after the firm first received a request for information from the SEC about Enron's financial filing. It continued until Nov. 9, the day after Andersen received an SEC subpoena for documents.
On that day, Mr. Duncan's assistant sent an e-mail to other secretaries in the Houston office directing them to "stop the shredding," the company said in a statement.
The burgeoning cover-up scandal at the century-old accounting firm highlights the weakness of the SEC's self-policing system for financial auditors. Outside auditors, which are hired to certify the accuracy of company financial statements, are supposed to play a critical role in informing and protecting investors in the securities markets.
The Enron scandal erupted last fall when the Houston energy giant said its financial statements, as certified by Andersen, since 1997 had overstated the company's profits by $586 million because of improper accounting for shell corporations or partnerships set up by company officers to mask liabilities.
At issue in investigations by the SEC, several congressional committees, and the Justice Department is whether executives of Enron and Andersen acted improperly in creating the shell corporations and knowingly defrauded shareholders as well as pensioners who held company stock in their retirement accounts.
As it catapulted toward its historic bankruptcy filing on Dec. 2, Enron made various disclosures that led to the collapse of the company's stock and credit rating. The New York Stock Exchange formally suspended trading in the company's stock yesterday, as it had fallen below $1 in value and was last trading at 67 cents. The stock hit a record high of $90.56 in August of 2000.
Andersen said yesterday that the disposal of documents ordered by Mr. Duncan was not in keeping with the company's high ethical and professional standards.
The company said it also is relieving four other Houston partners of their management duties, and other disciplinary actions are possible in connection with the Enron case.
But yesterday's revelations by Andersen only deepened concerns about the adequacy of self-regulation by the accounting industry, whose practices rarely come into the public spotlight.
House Energy and Commerce Committee aides said Andersen's document shredding activities appear "criminal" in nature. The fired partner is scheduled to meet today with committee investigators.
"Now that he's been fired, he may have a little more motivation to be cooperative," said Ken Johnson, spokesman for Committee Chairman Billy Tauzin, Louisiana Republican. The committee also plans to meet with Sherron Watkins, an Enron executive who questioned the company's use of shell corporations in an internal letter last summer.
The SEC, which began its investigation of Enron in October and widened it last week to include Andersen, prosecutes some of the most egregious cases of foul play by companies and their auditors. But for the most part it enforces the financial-reporting laws by relying on and overseeing an extensive network of self-regulatory organizations set up by the accounting industry.
The main rule-making body, the Financial Standards Accounting Board, has looked into the use of shell corporations and other issues raised by the Enron case but has been slow to take action. On Monday, the board announced it is undertaking a review of rules on how to recognize revenue and value intangible assets in corporate financial statements.
The board's rules in the past have given wide latitude to companies like Enron in deciding how and when to book the value of assets like the energy futures contracts and other "derivative" securities traded by Enron in its market-making business.
An even larger issue for the SEC and Congress are the conflicts of interest that have cropped up in recent years as auditors like Andersen have sought to supplement their business by selling consulting services to the same firms they audit.
In the Enron case, Andersen served not only as the energy company's outside auditor, but also worked as an in-house accountant. Critics say that was a conflict that led the company to go along with the cover-up of Enron debt and inflated earnings estimates, and ultimately to destroy Enron-related documents.
Rep. John Dingell, ranking Democrat on the House committee, yesterday called Andersen's move to dismiss Mr. Duncan "a useful beginning but there is much more to be done" to prevent further abuses.
The Michigan Democrat believes that Enron officers also engaged in illegal insider trading of the company's stock before it collapsed, erasing billions of dollars of stockholders' wealth and the life savings of many Enron employees who held shares of company stock in their 401(k) retirement accounts.
Shareholders are pursuing the insider-trading charges in a class-action lawsuit. The Labor Department is investigating whether the company improperly restricted sales of the company stock in the retirement plans, forcing employees to bear huge losses while company officers reaped profits from the sale of their shares.
Senate Banking Committee chairman Paul Sarbanes said the Enron bankrupcty "raises significant issues about the adequacy of our laws and their enforcement," and has asked the General Accounting Office to investigate. The Maryland Democrat's committee has asked five former SEC chairmen to testify on the Enron scandal next month.

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