- The Washington Times - Friday, January 18, 2002

Securities and Exchange Commission Chairman Harvey Pitt, in a reference to Arthur Andersen’s shredding of documents, yesterday vowed to reserve the “harshest punishment” for those who lie and obstruct justice.
“We will turn the full wrath of our enforcement powers against those individuals” found to have lied or destroyed documents, Mr. Pitt said in response to a question about the destruction of thousands of e-mail messages and documents by David B. Duncan, Andersen’s lead Enron auditor in Houston, after learning that the SEC was looking into Enron’s financial dealings.
His comments came as Enron Chairman Kenneth L. Lay, citing the destruction of documents, said he is firing the accounting firm. In an apparent case of tit for tat, the firing comes only a day after inside documents revealed that Andersen considered dumping Enron as a client nearly a year ago because of its “aggressive” use of creative accounting to mask major liabilities from stockholders.
The SEC chairman said the Enron scandal has damaged the public’s confidence in the SEC’s system of self-regulation for accountants and financial disclosures. Financial reports have become increasingly fanciful in recent years and of little help to average investors seeking to cut through the hype about company stock put out by corporate executives and Wall Street.
In Enron’s case, investors and lower-level Enron employees were in the dark about the company’s failing finances until it was on the verge of collapse and major liabilities were revealed. The SEC, Justice Department and a half-dozen committees of Congress are investigating the possibility of a criminal cover-up by the officers of Enron and Andersen who developed the company’s creative finance scheme to hide massive debts while inflating profits.
Mr. Pitt called the Enron case a “tragedy” that provoked much self-examination at the SEC. He proposed aggressive action to step up the SEC’s prosecution of wrongdoers and overhaul the financial reporting system.
He said he will start with the creation of an independent board to police the Big Five accounting firms that put their blessings on financial reports that are the principal source of information for investors in the United States. Congress may decide to do even more to tighten the rules governing the profession, which have not been updated or changed for decades.
“Restoring public confidence is my number one goal,” he said. “The commission cannot, and in any event will not, tolerate this pattern of growing restatements, audit failures, corporate failures and investor losses.”
“Today, disclosures are made not to disclose but to avoid liability,” he said. “Financial reports are dense and impenetrable under the best of circumstances. We call for plain English.”
Mr. Pitt, who was an attorney for major accounting firms before joining the SEC, has come under fire from Democrats in Congress who say he should recuse himself. He dismissed those calls as “misdirected” yesterday and said he has not been involved in the Enron investigation other than to join with other commission members in voting to authorize it.
“There is no way that I would ever do anything to compromise the integrity of this agency’s actions,” he said.
Some legislators and analysts say Mr. Pitt’s accounting expertise makes him uniquely qualified to direct the overhaul of accounting and disclosure practices resulting from the Enron scandal. Mr. Pitt once advised accounting firms, for example, to delete audit documents only if they are not expecting any legal action or a subpoena from the SEC.
The SEC chairman yesterday jokingly described that advice, offered in 1994, as “brilliant” in view of Andersen’s actions.
Andersen said this week that Mr. Duncan started destroying documents after the SEC first notified the accounting firm about its Enron investigation in October and did not stop the shredding until after Andersen received an SEC subpoena Nov. 8.
Andersen fired Mr. Duncan, saying he acted alone, but Mr. Duncan told congressional investigators that Andersen executives authorized his actions.
Documents released by congressional investigators yesterday show that top Andersen executives knew about and in a February 2001 meeting questioned Enron’s creative accounting, which was used to enrich company officers as well as mask liabilities. Andersen said the meeting held to discuss “retention” of Enron as a client was “routine” and happens every year.
A Feb. 6 e-mail from Houston manager Michael T. Jones to Mr. Duncan recounting the meeting raised concerns about Enron’s extensive use of “off balance sheet” transactions and conflicts of interest raised by the involvement of Enron’s chief financial officer, Andrew Fastow, in the off balance sheet corporations.
Mr. Jones at one point describes Enron’s calculation of earnings as “intelligent gambling” and noted that there are “no specific rules” governing how to book many of Enron’s complex energy-trading transactions. The memo concludes that Andersen’s “engagement risk” was acceptable and that the accounting firm could expect to double its fees from Enron to $100 million if it stayed with the energy firm.

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