Capping a series of stunning disclosures, Arthur Andersen LLP fired a partner it charged with directing the hurried destruction of thousands of e-mails and paper documents related to its audit of troubled Enron Corp., declaring that he acted after learning that federal regulators were probing the energy giant's finances.
In an extraordinary statement, Andersen said David Duncan -- the Houston-based lead partner on the Enron account -- led "an expedited effort to destroy documents" after he learned "that Enron had received a request for information from the SEC about its financial accounting and reporting." In addition to firing Mr. Duncan, Andersen placed three other Houston partners responsible for the Enron audit on administrative leave.
The purge marked an effort by Andersen to contain the Enron affair to its Houston office and shield itself from more serious charges, as Congress and the Justice Department intensify their scrutiny of the case. "If they can show that this was a rogue partner, acting beyond his authority, that will help them fashion a defense," said Joseph di Genova, a former U.S. attorney in Washington, D.C., who isn't involved in the case.
Just what more senior officials at Andersen knew, and when they knew it, will become central questions, as the embattled firm struggles to salvage its tattered reputation and credibility, and to limit its possible civil and criminal liability.
While Andersen insisted that its higher-ups didn't know until recently about the destruction of documents, a person close to Mr. Duncan and speaking on his behalf said the firm is unjustly trying to pin the blame on him. Mr. Duncan merely was following instructions in an Oct. 12 e-mail from an Andersen lawyer that advised the Enron auditors to follow company procedure that allows for the disposal of many documents, this person said. Congressional and Justice Department investigators expect to question Mr. Duncan in Washington, D.C., Wednesday.
Separately, even as Andersen moved to contain the damage to its Houston office, there were new indications Tuesday that Andersen's Chicago headquarters knew details about controversial Enron financing arrangements that contributed to the company's downfall. These arrangements included partnerships that kept huge amounts of debt off the company's balance sheet and inflated earnings.
After investigating an Enron employee's warnings in August about improper accounting for the partnerships, the company's outside law firm, Vinson & Elkins, wrote in a report to Enron that "all material facts" about the partnerships were "disclosed and reviewed by Arthur Andersen." The Oct. 15, 2001, report, a copy of which was obtained by The Wall Street Journal, said that Andersen officials in Houston consulted with colleagues in Chicago about the accounting treatment of the partnerships. The nine-page report made clear that Enron's board of directors approved of the outside partnerships and had suspended its code of ethics to allow the partnerships to be headed by a top Enron executive who stood to benefit financially from them.
Asked for comment on the Vinson & Elkins report, an Andersen spokesman Tuesday would only refer to the recent congressional testimony of Andersen Chief Executive Joseph Berardino. Mr. Berardino told lawmakers that in one case, Andersen made an error in judgment in accepting Enron's accounting for one of its off-balance-sheet financing vehicles. In another case, he said that if Andersen had known everything about the deal it wouldn't have signed off on it.
Deepening financial problems related to its hidden debt and overstated earnings forced Enron in December to become the biggest company ever to file for bankruptcy-court protection. Its collapse has been painful to investors, and especially Enron employees, who have seen once-valuable company stock become almost worthless. In recent weeks, attention increasingly has focused on Andersen's failure to flag the giant energy-trading company's problems in audits and on Enron's unsuccessful efforts to use its influence in Washington to keep the company from going under.
The scandal widened last Thursday with the disclosure by Andersen, initially with few details, of the document destruction. On Monday, congressional officials revealed a letter written by an Enron employee last August, expressing worry that the company would "implode in a wave of accounting scandals." It also emerged Monday that Vinson & Elkins, in its Oct. 15 report, had concluded that nothing wrong had gone on at its client, Enron.
Frantic Effort
In its announcement Tuesday, Andersen depicted a frantic effort last October, allegedly directed by Mr. Duncan in its Houston office, to get rid of sensitive documents. The disposal took place as troubles mounted at Enron and after questions arose about accounting deficiencies that may have contributed to the company's downfall.
Andersen said in its statement: "The effort [to destroy documents] was initiated following an urgent meeting the lead partner called on Oct. 23 to organize the expedited effort to dispose of Enron-related documents. This meeting occurred shortly after the lead partner learned that Enron had received a request for information from the [Securities and Exchange Commission] about its financial accounting and reporting. This effort was undertaken without any consultation with others in the firm and at a time when the engagement team should have had serious questions about their actions. Nothing in an Oct. 12 e-mail, almost two weeks earlier, or so far as we know, other conversations around that time, authorized this activity."
The firm added that the document destruction "appears to have ended shortly after the lead partner's assistant sent an e-mail to other secretaries on Nov. 9 -- the day after Andersen received a subpoena from the SEC -- telling them to 'stop the shredding.' " By that time, huge volumes of e-mails and written documents had been destroyed. Andersen said, "These activities were on such a scale and of such a nature as to remove any doubt that Andersen's policies and reasonable good judgment were violated."
Andersen said that it couldn't assure that document destruction ended after the firm officially came under scrutiny in the SEC investigation. "The firm is still looking into this issue," Andersen said, noting that "if anyone is found to have acted in this way, they will be dismissed."
The Andersen spokesman wouldn't comment Tuesday on whether people in any office other than Houston knew about the document shredding as it was happening.
'Too Early to Say'
Andersen's Mr. Berardino said in a brief interview that he first learned of the document destruction on Jan. 3 and that the firm notified the Justice Department and the SEC the following day. "We came out with this as soon as we had enough facts," he said. It is "too early to say" what the debacle's impact will be on Andersen's ability to attract new clients, he added. In an advertisement appearing in Wednesday's Wall Street Journal, Mr. Berardino said, "In the near future Andersen will announce comprehensive changes in our practices and policies that we believe will reaffirm confidence in the independence and quality of our work."
A Justice Department spokesman declined to comment on the latest revelations from Andersen. But Mr. di Genova, the former federal prosecutor, predicted that the accounting firm's fast action signals it may seek to cooperate with the government's criminal investigation.
"If prosecutors can cut a deal with Arthur Andersen, they may be able to get to the bottom of what happened at Enron pretty quickly," said Mr. di Genova, who is now a private white-collar defense lawyer. The purge and admission about document shredding amount to "a really nice piece of evidence [for prosecutors]," he said. If it can be shown that anyone at Andersen destroyed documents "in the middle of a criminal or congressional investigation," that person could be charged with obstruction of justice, a crime punishable by prison time, he said.
On Capitol Hill, the investigation by the House Energy and Commerce Committee, led by Republican Chairman W.J. "Billy" Tauzin, is accelerating rapidly. Boxes of documents are pouring into the panel's office from Enron and Andersen. Committee aides are preparing for a series of imminent interviews with central players in the financial drama.
Mr. Duncan is scheduled to be interviewed Wednesday by investigators from the committee, as well as by officials with the Justice Department, congressional aides said. "Now that he's been fired he may have a little more motivation to cooperate with us," said Mr. Tauzin's spokesman, Ken Johnson. "Today, we heard one side of the story. Tomorrow we'll hear the other."
Classic Strategy
The firing and other actions by Andersen mirror classic strategy in white-collar criminal-defense cases: Hand prosecutors a few scalps and pledge cooperation in hopes of gaining lenient treatment in the future. Securities-law specialists say it's likely only the beginning of a wave of acts of contrition by Andersen in an attempt to restore its reputation and appease authorities.
In its prepared statement, Andersen took care to cite the document destruction as the only reason that Mr. Duncan and the other partners were being fired or placed on leave. The firm didn't link Enron's audit failure to the personnel actions. In past cases of audit failures, such as those involving Waste Management Inc. and Sunbeam Corp., Andersen chose not to fire the partners responsible for those companies' audits, partly out of concern that they would turn against the firm in subsequent litigation.
Taking action against employees doesn't necessarily shield Andersen from being criminally prosecuted itself, Ted Fiflis, a securities-law professor at the University of Colorado at Boulder, said.
Andersen's Houston office has been one of its biggest and most successful, employing more than 1,400 people, out of Andersen's world-wide work force of 85,000. The firm said it has the largest operation of any of the Big Five accounting firms in Houston, even though it is the smallest of the Big Five overall.
Mr. Duncan, 42 years old, has been at the firm since 1981, except for a nine-month period in 1992, and was made partner in 1995. He has been the Enron "engagement partner" since 1997, and over the past three years has taken on broader responsibility within Andersen, people close to him said. In 1999 and 2000, he was part of a firm-wide strategic advisory council and last year, Mr. Berardino asked him to be on the chairman's advisory council, a group of 21 partners who discuss firm-wide issues. He was informed of his dismissal in a phone call Tuesday morning, the people close to him said.
These people said that no Enron documents had been destroyed before Houston officials received the e-mail from an Andersen lawyer on Oct. 12. That long and detailed policy statement, while ordering auditors to save crucial documents, told them to destroy many other documents. If the firm wanted the auditors to save all the Enron-related documents, it should have sent a different memo, a person close to Mr. Duncan said.
"When you want to preserve documents, you say it with bold-faced letters with exclamation points," this person added. "The notion that there was some kind of instruction from him that there be some form of expedited, extraordinary activity, it's just not correct," the person close to Mr. Duncan said. Mr. Duncan is cooperating fully with government investigators, according to the people close to him.
The Houston-based Andersen partners put on administrative leave for their roles in the Enron document destruction are Thomas H. Bauer, Debra A. Cash and Roger D. Willard. Peter Anderson, an attorney for Mr. Willard, denied that his client had been involved in any wrongdoing. Andersen's "action suggests that my client has done something wrong or had acted in violation of the firm's policy, and we have no evidence ... that has been communicated to us or that we're even aware of that would suggest that that's the case," he said.
Mr. Anderson said he was told by attorneys for Andersen that the leaves were imposed "out of an abundance of caution." The attorney added that his client, Mr. Willard, "acted in a belief that he was acting in accordance with Andersen policy."
Mr. Bauer and Ms. Cash didn't return phone calls to their homes and offices.
The firm also relieved four Houston-based partners of their management responsibilities. They are D. Stephen Goddard Jr., Michael M. Lowther, Gary B. Goolsby and Michael C. Odom. None of the four returned calls to their homes and offices.
Continuing Probe
Even as attention Tuesday was focused on the document destruction, investigators continue to probe the controversial aspects of Enron's accounting. One of the central questions has been how much Andersen -- and in particular top-level partners -- knew about certain partnerships, including some run by Enron's officers. One of the partnerships, whose existence Enron didn't disclose for four years, was part of an arrangement that inflated earnings by several hundred million dollars. And Enron's debt level was much higher than it revealed, thanks to the off-balance-sheet treatment.
Andersen partners were apparently concerned enough about the structure of these deals that they "consulted with its senior technical experts in its Chicago office," according to the report to Enron from Vinson & Elkins, the outside law firm.
The report also suggested ongoing contact between Enron and Andersen over the partnerships. "The relationship between Enron and AA was an open one," the report said, citing Enron's chief accounting officer, Richard Causey, a former Andersen employee. "Enron consults AA early and often on accounting and audit issues as they arise."
On more than one occasion, Mr. Causey told other company officials that Andersen's Houston office took decisions about the accounting treatment of the partnerships to the accounting firm's top levels in Chicago, an Enron insider said in an interview. "Duncan would run these things way up the chain," this person said. The company insider didn't know who specifically in Andersen's Chicago headquarters received the information.
Asked about whether Andersen's Houston office routinely sought approval from the Chicago headquarters in this manner, an Enron spokeswoman said, "We were aware that in many cases the Houston office of Andersen consulted with the national office on the accounting treatment of various partnerships."
While many big companies have close relationships with their outside auditors, the relationship between Enron and Andersen was particularly close. In 1993, when Andersen took over Enron's internal-audit operation, 40 people moved from the company's payroll to Andersen's. Andersen employees occupied a large space in Enron's office tower.
Mr. Duncan, the Andersen audit partner, was a frequent golfing partner of Mr. Causey, the chief accounting officer for Enron. And Mr. Duncan also moved in some of the same philanthropic circles as Kenneth Lay, Enron's chairman and chief executive. The two men both serve on the 36-member board of directors of a nonprofit organization called the American Council for Capital Formation, according to the council's Web site. The organization says its mission is to promote "economic growth through sound tax, regulatory, and environmental policies."
-- John R. Emshwiller and Tom Hamburger contributed to this article.
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