Congressional Panel Probes Enron Audit

Memo about destroying documents is at focus.

By: Michael Schroeder and Tom Hamburger

A House committee is seeking information about an Oct. 12 memo from Arthur Andersen LLP management, which committee aides believe advised the firm's Enron Corp. audit team to abide by an Andersen policy to destroy electronic and paper documents relating to audits.

The memo was issued days before Enron reported a $618 million loss for the third quarter last year. Last week, Arthur Andersen confirmed the destruction of documents and said it is investigating further. "We acknowledge that there were internal communications that raise questions. Until we know more, it would be inappropriate to comment further", said David Tabolt, a spokesman at Arthur Andersen. He wouldn't confirm the existence of the memo, which was reported by Time magazine. The congressional inquiry is also looking into possible tax violations by Enron, Capitol Hill aides said. Enron filed for Chapter 11 bankruptcy-court protection on Dec. 2, the largest ever, following a series of recent financial setbacks, including a restatement of financial results dating back to 1997. The collapse of the Houston energy-trading giant is being investigated by the Securities and Exchange Commission and the Justice Department, as well as various congressional committees.

On Friday, Rep. Billy Tauzin (Rep-LA), chairman of the House Energy and Commerce Committee, wrote Arthur Andersen's chief executive, Joseph Berardino, for documents and information concerning the destruction of Enron documents. He asked for a copy of the Oct. 12 memo and subsequent correspondence from Arthur Andersen's professional-standards group at the firm's Chicago headquarters. In addition, the committee has requested information about whether the Enron auditors continued to destroy documents after the SEC issued a subpoena Nov. 8 related to its formal investigation of Enron. In another development, the Senate Governmental Affairs Committee sent out 51 subpoenas Friday to Enron and Andersen. Each Enron board member received a subpoena, including Wendy Gramm, former chair of the Commodities Futures Trading Commission and wife of Texas Sen. Phil Gramm.

Sen. Carl Levin, Michigan Democrat and chair of the investigations subcommittee, said on ABC's This Week that the panel is "focusing on... the failures of this corporation, the deceptive practices of this corporation and the failure of its auditors and board". The SEC launched a formal investigation into potential accounting fraud at Enron on Oct. 31 and later expanded its inquiry to include Arthur Andersen's audit work. Last week, Arthur Andersen disclosed that it had destroyed documents related to its Enron audit work after investigators from the House committee raised questions about missing documents. The existence of missing documents was turned up by Davis Polk & Wardwell, an outside law firm hired by Arthur Andersen to assist in the SEC investigation. The accounting firm informed the law firm that it couldn't comply with part of the SEC's request for documents because many had been destroyed, according to people with knowledge of the probe. As a result, Arthur Andersen informed the SEC before last week that it was missing some of the documents requested by the agency, including e-mails and audit partners' paper files that were shredded, these people say. None of Arthur Andersen's audit-work papers, which are most critical to the investigation, were destroyed. After learning about the document destruction, the SEC subpoenaed Arthur Andersen's computer hard drives and tapes, these people say. Davis Polk now has the tapes and hard drives and has hired outside computer technical people to recover the e-mails, these people say. The SEC is particularly interested in recovering e-mail correspondence among audit partners, they say. SEC spokeswoman Christi Harlan said the agency doesn't comment on investigations.

Also last week, the Justice Department confirmed that it has set up a task force of U.S. Attorneys offices to investigate Enron's collapse. The criminal probe has been under way since early December. As a result, the SEC, which had assigned a team to conduct a rapid investigation, may now be taking a back seat to the Justice Department's probe.

The SEC is hunkering down for a long-term probe that has been slowed by a parallel criminal investigation, according to people with knowledge of the matter. The SEC and criminal authorities are looking at whether Enron officials intended to deceive investors through improper accounting and by failing to properly disclose transactions between Enron and partnerships affiliated with Enron executives. Meanwhile, congressional aides said tax issues are increasingly surfacing as a focus in the various Enron investigations. Aides said, for instance, that Enron might have excluded some of its hefty debt from its shareholder books but counted it as debt for tax purposes, in order to take interest deductions. That might or might not be appropriate, the aides said.

Officials also are interested in other complex investment vehicles that accomplished much the same thing for Enron — treating investments as equity for accounting purposes but as debt for tax purposes. The location of some of the company's numerous partnerships and accounts in the Cayman Islands — a Caribbean tax haven — also is generating interest. It is likely the Internal Revenue Service will become active in the various investigations, tax experts said. An IRS spokesman declined to comment Sunday.

Regarding the SEC probe, the agency wouldn't file a case until after criminal authorities have completed their probe, regardless of when the SEC might prepare a civil enforcement action. Criminal cases take precedence because defendants face possible jail time and restitution, while the SEC imposes less onerous civil fines and sanctions. The facts of both civil and criminal securities-fraud allegations are similar, but the Justice Department has a higher threshold of proof that can cause criminal investigations to take longer. Prosecutors must prove allegations "beyond a reasonable doubt". The SEC must produce a "preponderance" of evidence of wrongdoing. While the SEC has interviewed numerous Enron officials at various levels and has received hundreds of thousands of documents, the existence of the criminal probe has begun to affect the SEC. Witnesses who are being criminally investigated are often reluctant to answer SEC questions, claiming the Fifth Amendment right against self-incrimination. Andrew Fastow, Enron's former chief financial officer, invoked the Fifth Amendment in his interview with the SEC in late December, according to people with knowledge of the matter. Mr. Fastow's lawyer couldn't be reached. Meanwhile, the attorney for Jeffrey Skilling, Enron's former chief executive, said that Mr. Skilling answered all questions. Enron Chairman Kenneth Lay hasn't yet been interviewed by the SEC. Despite SEC Chairman Harvey Pitt's push for "real-time enforcement" to speed resolution of securities-fraud cases, the complex facts surrounding the investigation of Enron and Arthur Andersen will prevent the agency from finishing its probe before year end, these people say. Arthur Andersen's role in the Enron probe suggests a clear-cut reason for Mr. Pitt to recuse himself from action on the matter. Mr. Pitt's former law-firm clients include Arthur Andersen and the other Big Five accounting firms. The SEC's Ms. Harlan declined to comment on whether Mr. Pitt will recuse himself from the Enron probe. Mr. Pitt has said he wouldn't take part in decisions by the commission related to his former law-firm clients for a year, she said. But ethics rules would allow Mr. Pitt to act on a possible Enron case after August when he completes his first year as chairman. "It's not the general practice of public officials to announce each time they decided not to participate in a matter", said David Becker, the SEC's general counsel. He added that "there are many circumstances in which it's unwise to announce a recusal. It might involve information that's not public or it might allow people to game the system and cause people to be recused".

Attorney General John Ashcroft, who received Enron contributions when he was a U.S. Senator, recused himself from the criminal probe last week, as did the whole U.S. Attorney's office in Houston, where Enron has its headquarters.