Andersen Partner: Duncan Pushed the Rules

HOUSTON – The Arthur Andersen LLP official in charge of Enron Corp. audits stretched accounting rules "to excess" and ignored advice from an in-house watchdog, another Andersen partner testified Thursday in the firm's obstruction of justice trial.

Chicago-based Andersen partner Ben Neuhausen testified that David Duncan, who led the Enron audit team until Andersen fired him earlier this year, had argued before the firm's "professional standards group" in favor of an accounting approach that would help Enron avoid posting a $300 million loss in the first quarter of 2001.

The in-house group advises Andersen auditors on complicated matters.

Enron and its audit team wanted to allow Enron to account for results from its four "Raptor" entities together, allowing proceeds from two successful Raptors to be assigned to cover losses of two unsuccessful ones.

Neuhausen said professional standards colleagues John Stewart and Carl Bass concluded Enron's plan "did not change the requirement needed for entities to be reported separately," but Duncan's team ultimately disregarded the advice.

"I thought [Duncan] pushed to excess on aggressive interpretation," Neuhausen said.

Bass testified later Thursday that the Andersen audit team approved a different method of hiding the Raptor problems with which he also disagreed, saying they weren't a "substantive fix."

Bass, who said he was relieved of auditing duties on an Enron subsidiary in 1999 because the company thought he was "too rule-oriented," was removed from Enron matters by the professional standards group after Enron complained in March about him being too "cynical" toward Enron's transactions.

"I was upset about it for two different aspects," Bass said. "Enron was our largest engagement [in Houston] and this was a high-profile situation. Also I was upset over ... the fact we had a client telling the firm basically who or who not to have the [auditor team] consult with on transactions."

Duncan said he appealed on Bass' behalf to Enron, Bass testified, but Enron chief accounting officer Rick Causey held firm. Causey later was ousted by Enron's post-bankruptcy management team.

Five months later, Enron vice president Sherron Watkins separately voiced her worries about the Raptors to then-chairman and chief executive Kenneth Lay and Andersen partner James Hecker, who was not on the Enron account. Neither Enron nor Andersen took direct action. Watkins was hailed by some when her warning became public during a congressional investigation last winter.

When Andersen began reconstructing the events in a flurry of conference calls in September and October, the firm determined Bass was right and advised Enron its previous financial treatment of the Raptors needed to be restated.

Enron unwound the murky Raptor transactions last autumn as its stock collapse was well under way. The company ultimately removed about $1 billion in shareholder equity from its books, news that sent Enron's stock further skidding and the company filed for bankruptcy Dec. 2.

Andersen is charged with one count of obstruction of justice for the alleged mass destruction of Enron documents as a Securities and Exchange Commission inquiry loomed. Duncan individually has pleaded guilty to the same charge and is scheduled to testify against Andersen and perhaps shed light on sensitive Enron workings.

Duncan visited the Houston federal courthouse Thursday but did not testify or enter the courtroom. Andersen attorney Rusty Hardin said he thought Duncan would take the stand Monday or Tuesday.

Neuhausen testified that he deleted most of his Enron-related e-mails in October soon after receiving a memo reminding employees of the firm's "document retention policy," which includes destruction of material considered outdated or unnecessary.

However, on cross-examination by Andersen attorney Rusty Hardin, Neuhausen said he might have begun deleting the e-mails before seeing the memo. Either way, Neuhausen denied erasing the e-mails because he wanted to hide something.

"No, that didn't dawn on me at all," he said.

Another witness, former Andersen audit manager Kate Agnew, was called to testify but allowed to take Fifth Amendment protection from possible self-incrimination at a bench conference outside the presence of the jury.

If convicted, Andersen could face up to a $500,000 fine and five years of probation. It also could be fined up to twice any gains or damages the court determines were caused by the firm's action and would be suspended from auditing publicly traded companies, effectively dooming the firm.