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Andersen says warned Enron of legal dangers

Accounting firm Andersen told Congress on Wednesday that it warned long-time audit client Enron Corp about "possible illegal acts" last month after the energy trading giant failed to provide crucial data about its complex finances to Andersen.

Joseph Berardino, chief executive of the Big Five firm, also admitted for the first time that Andersen made a mistake in the way it treated one of several Enron special-purpose entities, financing vehicles widely used by Houston-based Enron to keep debt off its balance sheet.

"We made a professional judgment about the appropriate accounting treatment that turned out to be wrong," Berardino said at the first congressional hearing into how Enron, in a stunning few weeks, went from Wall Street darling to the largest bankruptcy court filing in American history.

"At the time our team made a very good faith, reasonable decision in terms of looking at these transactions. In hindsight, they made an error in judgment," Berardino said. "In no way do we think that this caused the collapse."

Enron failed to provide key information to its auditor about an agreement with a major financial institution for a financing vehicle called Chewco, Berardino told the House of Representatives Financial Services Committee.

If Enron had disclosed the agreement, Andersen would have required the company to consolidate the Chewco partnership and other similar vehicles on its balance sheet, Berardino said.

"It is not clear why the relevant information was not provided to us. We are still looking into that. On November 2, 2001, we notified Enron's audit committee of possible illegal acts within the company," he said.

But Enron late on Wednesday said it worked closely with Andersen on all significant financing vehicles. The company said its management discovered problems with an unnamed SPE and reported it to Andersen within 24 hours, as well as to a special committee looking into affairs at the company.

"Enron engaged in real time audit procedures with its auditors. It has always been Enron's policy to be open with its accountant, Andersen," said Enron Chief Executive Kenneth Lay in a brief statement.

ONCE RANKED 7TH ON FORTUNE 500

Enron -- once ranked No 7 on the Fortune 500 list of top companies -- filed for bankruptcy on December 2 after a dizzying downward spiral of events. Its stock ended trading on Wednesday at 66 cents a share, off from an August 2000 high of $90.56. Struggling with massive debts, Enron on Wednesday announced asset sales aimed at raising up to $6 billion.

At the heart of Enron's troubles were highly leveraged, SPE-style outside partnerships involving company officers, which were kept off the balance sheet. After some of the deals involving these vehicles turned sour, in early November Enron had to restate results to include the partnerships, reducing its earnings in the four years after 1997 by almost $600 million and triggering a crisis in investor confidence.

At the hearing, members of Congress questioned Securities and Exchange Commission chief accountant Robert Herdman at length about accounting rules on treatment of SPEs.

Herdman said the SEC will continue to push the Financial Accounting Standards Board, a US accounting rule-making body, for better guidance on when SPEs should or should not be consolidated on the balance sheet.

He declined to give lawmakers details about the SEC's investigation of Enron, which has been under way for several weeks. "In the coming weeks and months, we will learn more about what transpired at Enron, as many of the details are unknown at this time," Herdman told the committee.

Enron CEO Lay was invited by the committee to testify on Wednesday. But he said in his statement that he was unable to appear due to a pivotal creditors meeting.

Committee Chairman Rep. Michael Oxley, an Ohio Republican, said the panel could use subpoena power to compel individuals to appear at further hearings on Enron expected next year.

FINGER POINTED AT ANDERSEN

At the hearing, Richard Trumka, secretary-treasurer of the AFL-CIO labor confederation, pointed the finger at Andersen for not doing more to draw attention to Enron's murky finances.

"There was more than enough information in those statements alone to sound warning bells among the auditors that signed off on them," Trumka told lawmakers in remarks that focused on the enormous losses of workers and investors, many of them Enron employees, due to collapse of the company's stock price.

Rep Richard Baker, a Louisiana Republican, said: "Such a precipitous decline raises obvious questions, namely, how it could have happened, if it could have been avoided and how a similar collapse can be avoided in the future."

Separately, as the hearing got under way, the SEC issued a statement to companies and accounting firms that investors deserve full financial transparency.

"Today we are issuing cautionary advice to remind company management, auditors, audit committees, and their advisors that investors increasingly deserve and demand full transparency of accounting policies and their effects in the annual reports that public companies are required to file," the SEC said.

The federal regulatory agency said it may consider new rules next year to clarify disclosure requirements. "We intend to consider new rules during the coming year to elicit more precise disclosures about the accounting policies that company management believes are most 'critical,'" the SEC said.

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