Lead Enron Accountant Fired; Stock Shelved
Jan. 15, 2002 -- A day after the public release of an explosive memo in which an Enron executive warned CEO Kenneth Lay of impending "accounting scandals," the firm's accountant, Arthur Andersen, fired its auditor in charge of Enron matters.
In a statement released today, Arthur Andersen announced it was dismissing its manager in charge of auditing on Enron's books, David B. Duncan, and was placing three other high-level employees involved in the case on "administrative leave."
"This was a painful decision, but it was absolutely the right thing to do," said Arthur Andersen's CEO, Joseph Berardino. "We are prepared to take all appropriate steps necessary to maintain confidence in the integrity of our firm."
Arthur Andersen is also the subject of subpoenas from the House Energy and Commerce Committee and in the federal investigations into Enron. The company announced last week it had destroyed thousands of documents pertaining to Enron.
In today's statement, Andersen says that in October, as Enron's troubles became public knowledge, "at the direction of the lead partner an expedited effort to destroy documents in Houston was undertaken."
On Nov. 8, the Securities and Exchange Commission sent a subpoena to Arthur Andersen over the Enron case, and the next day, the lead partner's assistant sent an e-mail to co-workers asking them to "stop the shredding."
Through representatives, Duncan released a statement today saying he "is cooperating with all investigations in this matter. He did nothing wrong. He followed the instructions of an Andersen in-house lawyer in handling documents."
On Dec. 2, Enron filed the biggest bankruptcy petition in U.S. history. The New York Stock Exchange suspended trading of Enron shares today as a prelude to delisting the stock, which has been trading at under $1 per share for more than a month.
Enron will begin trading on the over-the-counter market on Wednesday.
Letter Predicted 'Wave of Accounting Scandals'
Excerpts from the startling internal Enron letter were released Monday by Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee, one of a handful of congressional committees planning to hold hearings soon on the spectacular collapse of Enron.
The memo, sent to Lay in August by Sherron Watkins, Enron's vice president of corporate development, expresses concern that the energy trading company "will implode in a wave of accounting scandals," and raises further questions about Lay's knowledge of his company's inner workings.
"I thought he should know the facts and look into them," Watkins told ABCNEWS this afternoon, when asked why she sent the letter to Lay. She said the CEO's reaction was one of "concern, surprise, and he assured me he would look into it."
Read the Letter from Sherron Watkins to Kenneth Lay
Watkins took a confrontational tone in her note, beginning with a pointed question: "Has Enron become a risky place to work? For those of us who didn't get rich over the last few years, can we afford to stay?"
Watkins went on to complain about a "veil of secrecy" surrounding the so-called special-purpose entities in which Enron masked hundreds of millions of dollars of debt and investment losses. Watkins added that company officials "consistently and constantly" complained about the investment vehicles to former Enron CEO Jeffrey Skilling, who was replaced by Lay in August.
"I am incredibly nervous that we will implode in a wave of accounting scandals," wrote Watkins, who noted: "We are under too much scrutiny and there are probably one or two disgruntled 'redeployed' employees who know enough about the 'funny' accounting to get us in trouble."
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.
What Did Management Know?
Watkins' letter is just the latest indication that the highest levels of Enron management knew about the working of the investment vehicles, whose financial assets were not publicly disclosed until October.
On Oct. 16, Enron announced a $638 million quarterly loss, and said the company's value was a staggering $1.2 billion less than it had previously reported. After additional bottom-line revisions in November and an aborted takeover deal by rival Dynegy Inc., Enron declared bankruptcy.
"This is huge," said House Energy and Commerce Committee spokesman Ken Johnson on Monday. "This clearly shows that top Enron officials and Ken Lay himself were warned of serious financial problems months before the company reported its third-quarter loss. The committee is concerned that some people tried to hide the truth."
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.
In addition to the inquiry from Tauzin's committee and at least three others in Congress, the Department of Justice and the SEC are also investigating Enron and Arthur Andersen's role in the affair.
White House Scrutiny
Additionally, the White House has been the subject of intense scrutiny in the last week after disclosing a variety of contacts between Lay and other Enron executives and members of the Bush administration.
The White House disclosed today that Lay called Mitch Daniels, director of the Office of Management and Budget, in October to discuss the possible passage of an economic stimulus package. At the time, the administration favored a stimulus package repealing the corporate alternative minimum tax.
Two Cabinet members — Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans — have acknowledged they had been contacted by Lay about the company's troubles in October. And earlier this month, Vice President Dick Cheney detailed a series of meetings that took place in 2001 between himself and his energy task force staff, and Lay or other Enron officials.
There is no indication that administration officials are a target of the ongoing federal investigations.
ABCNEWS' Ariane DeVogue, David L. Herndon and Ramona Schindelheim contributed to this report.