Jan. 17, 2002 -- Formally terminating a troubled relationship, bankrupt energy company Enron today fired its accounting firm, Arthur Andersen LLP.
"While we had been willing to give Andersen the benefit of the doubt … we can't afford to wait any longer in light of recent events, including the reported destruction of documents by Andersen personnel," said Enron CEO Kenneth Lay in a statement released this evening.
Andersen issued a sharp response later in the evening.
"As a matter of fact our relationship with Enron ended when the company's business failed and it went into bankruptcy," said a statement released by the firm. "Andersen is committed to continuing to address the issues related to the collapse of Enron in a forthright and candid manner."
The two firms are entangled in a federal investigation of Enron's stunning collapse late last year. Justice Department officials and congressional committees are trying to determine how much executives at both firms knew about enormous losses at Enron which were not disclosed in the company's financial statements.
The move also comes after revelations that officials at Andersen discussed irregularities at Enron as far back as last February. Congressional investigators have released an internal memo from Feb. 6, 2001, showing officials at the accounting firm conferred about the structure of Enron's finances at a meeting the day before.
Senior managers at Andersen apparently discussed whether or not the firm should retain Enron as a client, and tried to assess the size of the losses Enron was masking through its use of off-the-books investment partnerships.
"Significant discussion was held regarding the related party transactions with LJM including the materiality of such amounts to Enron's income statement and the amount retained 'off balance sheet,'" notes the memo. LJM was one of the partnerships in which Enron hid bad financial news.
An Andersen spokesman said the conference was a "routine annual meeting." Nonetheless, Congressional investigators sent a letter to Andersen today demanding the company turn over all documents related to the February meeting.
The firing also comes as reports emerge that Enron managed to avoid paying income tax in four of the last five years. The embattled energy company used almost 900 offshore companies as tax havens and may still have to reduce its past earnings by $1.3 billion more than it already has.
Enron Whistle-Blower Warned Andersen, Too
On Wednesday, members of congressional committee indicated that Sherron Watkins, the Enron employee whose August letter to CEO Kenneth Lay warned of potential "accounting scandals" at the energy company, also disclosed her concerns to officials at the accounting firm at the same time.
On Aug. 20, Watkins, an Enron vice president, called a friend in senior management at Andersen's Houston office and discussed her concerns. A meeting of Andersen's top Houston-based officials followed, which included David B. Duncan, Andersen's chief auditor for Enron, who was very publicly fired by Andersen on Tuesday.
A resulting Andersen memo described Watkins' concerns as serious, but the accounting firm did not take immediate action.
For his part, Duncan, a day after being fired, told congressional investigators his side of the story Wednesday.
Duncan was dismissed by Andersen after it was discovered that thousands of documents pertaining to the collapse of Enron had been shredded and destroyed last fall by workers reporting to him. But the former Andersen partner told investigators Wednesday that he was just following the advice of his firm's lawyers.
'Rushed Disposal' of Documents
The destruction of Enron-related documents, which Andersen surprisingly announced on Jan. 10, apparently started soon after Enron's Oct. 16 announcement of a $638 million third-quarter loss. At the same time, Enron said its value was a staggering $1.2 billion less than it had previously reported in publicly filed financial documents.
Andersen, as Enron's accountant, was responsible for approving the financial statements.
According to the company's statement, the Securities and Exchange Commission sent a subpoena to the company concerning the Enron case on Nov. 8, and the next day, Duncan's assistant sent an e-mail to co-workers asking them to "stop the shredding."
In correcting its financial statements, Enron acknowledged that it had been using off-the-books investment vehicles to mask large amounts of debt and trading losses. On Dec. 2, Enron filed the biggest bankruptcy petition in U.S. history.
The August internal Enron letter from Watkins, warning of potential "accounting scandals," was released Monday by the House Energy and Commerce Committee.
Watkins' memo expressed concern that the energy trading company "will implode in a wave of accounting scandals" and raised further questions about Lay's knowledge of his company's inner workings. Read the Letter from Sherron Watkins to Kenneth Lay
In response to Watkins' concerns, Lay asked Enron's law firm, Vinson & Elkins, to investigate the matter. But Enron also asked its lawyers to refrain from "second-guessing the accounting advice and treatment" given by Arthur Andersen.
New SEC Plan for Oversight
In another development today, the Securities and Exchange Commission unveiled a new plan for regulating corporate accountants.
"Well before Enron's collapse, we called upon the accounting profession to work with us to resolve its vulnerability and weaknesses," said SEC Chairman Harvey Pitt at a news conference in Washington. He added: "There should be a reform of the current peer-review process … which has been criticized and with some merit."
The SEC is proposing to replace the current peer-review process in which the five major accounting firms issue reports about each other's standards once every three years. In its place, the SEC wants to build a permanent staff making more frequent reviews of the practices used by accounting firms.
Among the other ramifications of Enron's collapse, thousands of company employees lost a large portion of their savings because the company's 401(k) plan relied so heavily on Enron stock.
ABCNEWS' Ariane DeVogue, Peter Dizikes and Linda Douglass contributed to this report.