WASHINGTON – Enron financial auditor Arthur Andersen had an inkling that Enron's books were a mess about a week before the energy company shocked stockholders and regulators that its third quarter 2001 losses would exceed $600 million.
Auditor Mark Zajac wrote a "red alert" in an October memo, warning that a computer analysis of Enron's financial activities indicated "a heightened risk of financial statement fraud," congressional investigators said Friday.
The e-mail, released by Rep. John Dingell, D-Mich., ranking member of the House Energy and Commerce Committee, added to mounting evidence that Enron's outside accounting firm had strong misgivings about Enron business practices.
Enron declared bankruptcy in December, leaving thousands of shareholders and employees holding worthless stock certificates.
On Thursday, Congress began the first of several hearings into the complex business practices at Enron, whose collapse is the biggest bankruptcy in U.S. history.
Efforts to learn about Enron's activities, however, did not get off to an auspicious start Thursday, when an auditor who was fired for shredding the company's financial documents invoked his Fifth Amendment right against self-incrimination.
Officials from the Houston-based energy company's accounting firm, Arthur Andersen, then told skeptical lawmakers that the fired auditor, David Duncan, was solely responsible for the massive destruction of Enron documents.
Andersen senior officials Dorsey Baskin and C.E. Andrews, appearing as subpoenaed witnesses, repeatedly pinned the blame on Duncan, whom Andersen fired last week. Andersen itself has been fired by Enron as its accounting firm.
"This effort was undertaken without any consultation with others in the firm or, so far as we are aware, with legal counsel," Baskin said of the shredding.
Andrews insisted that Duncan, as Andersen's lead auditor for Enron, was solely responsible for preserving documents.
Nancy Temple, a lawyer for Andersen, said she reminded auditors about the firm's policy for retaining documents but didn't order their preservation or destruction after learning of a federal investigation of Enron.
"I was unaware of any shredding activity," she insisted under intense questioning by the subcommittee panel.
Lawmakers demanded to know why it took Temple so long — from the Securities and Exchange Commission's first informal inquiry into Enron on Oct. 17 until the day after the SEC's subpoena to Andersen for documents on Nov. 8 — to direct auditors to keep the documents.
"This guidance never went out when it should have gone out," declared Rep. Billy Tauzin, R-La., chairman of the full committee.
And why, Tauzin wanted to know, did "scores and scores" of Andersen employees work overtime to destroy records if the firm's policy favored preservation, as its officials have said? Preserving the documents would only have taken a few hours of locking them up, he suggested.
Lawmakers disclosed that the Andersen attorneys had hired an outside law firm on Oct. 9, in large part in anticipation of possibly being sued over Enron accounting. That showed that Temple and other Andersen officials had an early indication of trouble and should have ordered all Enron-related documents to be saved, the House members said.
"I knew there was a possibility of litigation but we did not discuss it," Temple testified.
Duncan was the first witness but did not speak at the hearing, other than to assert his Fifth Amendment right against potentially incriminating himself.
"Enron robbed the bank, Arthur Andersen provided the getaway car and they say you were at the wheel," Rep. Jim Greenwood, R-Pa., told him.
When Greenwood began to question Duncan, asking him if he had given an order to destroy documents to "subvert governmental investigations," Duncan cited his constitutional right to silence.
Duncan invoked it twice amid the banks of camera lights. "Respectfully, that will be my response to all your questions," he told the panel. He was not questioned further and was excused.
Afterward, Greenwood said, "I still haven't made up my mind on whether Mr. Duncan was a rogue employee or whether Mr. Duncan was set up as a scapegoat."
Senate Majority Leader Tom Daschle said Duncan should be compelled to testify. "Those who had any role or part to play ought to be brought before the Congress and we'll make sure that happens on the Senate side," he told a news conference.
Duncan previously told committee investigators that he was following company guidance on document destruction laid out in an Oct. 12 e-mail from Temple, who is based at Andersen's Chicago headquarters. Under questioning Thursday, Temple disclosed that she wrote the e-mail on the basis of discussions with her supervisor, senior Andersen attorney Don Dreyfus.
With Andersen already under scrutiny by Congress, the SEC and the Justice Department, the Texas State Board of Public Accountancy disclosed Thursday that it began an investigation in November of the firm's audit of Houston-based Enron.
As Congress' sprawling inquiry into Enron's collapse stepped up, Senate Governmental Affairs Committee Chairman Joseph Lieberman said he will ask that panel to issue subpoenas for Enron's and Andersen's documents regarding their contacts with politicians and several federal agencies on regulations affecting the energy-trading company.
— Former SEC Chairman Arthur Levitt, testifying before the Senate Governmental Affairs Committee, called on auditing firms and Wall Street analysts to be more independent from the corporations they cover. "It's well past time to recognize that the accounting profession's independence has been compromised," he said.
— Rep. John Conyers, D-Mich., asked the Justice Department to appoint a special counsel to investigate ties between Enron, Andersen and the Bush administration in light of "massive campaign contributions."
— White House spokesman Ari Fleischer said regardless of the administration's ties to the energy company, "nothing is going to stop the president and this administration from pursuing justice."
The Associated Press contributed to this report.