HOUSTON – Enrontried to do an end-run around accounting rules by dropping a plan to sell assets in a failed water business for a $1 billion growth strategy, instead, a former accountant who handled the company's books said on Monday.
John R. Sult, a former Arthur AndersenLLP auditor who oversaw the books on Enron's Azurixwater venture, told jurors that tossing aside the plan to shed Azurix's assets would have saved Enron from recording hundreds of millions of dollars in losses.
"By merely standing up and making the assertion that the strategy exists somehow makes the problem go away," he testified, explaining his view of Enron's plan.
But Sult, who kicked off the eighth week of the fraud and conspiracy trial of Enron executives Kenneth Layand Jeffrey Skilling, said on cross-examination that he never discussed Wessex Water Ltd. or Azurix with Lay, nor was Lay involved in accounting analyses related to a possible writedown.
An accounting rule that took effect in January 2002 would have required Enron to book losses of $700 million or more.
That was the difference between the inflated value of Wessex, Enron's British water utility, and its true value. Had Enron maintained its plan to sell Wessex and other Azurix assets, the new accounting rule would have forced the energy company to reconcile the book values with true fair market values.
Enron bought Wessex for $2.2 billion in 1998. In 2002, a subsidiary of Malaysian energy group YTL Power International bought the company from the bankrupt parent for $777 million and nearly $1 billion in assumed debt.
The charges against Lay, Enron's founder, include an allegation that he lied to outside auditors in October 2001 by claiming Enron planned to invest in Wessex rather than sell it so the energy company could avoid the writedown. Lay told analysts in a late October 2003 conference call -- a few weeks before the company sought bankruptcy protection -- that Andersen had examined the issue and determined no writedown was necessary.
The indictment alleges that such a writedown could have prompted credit rating agencies to downgrade Enron's rating, which was vital to the energy company's ability to borrow millions to support its trading operation.
Another former Andersen accountant, Thomas Bauer, who oversaw books for Enron North America, the energy company's profitable trading arm, was expected to testify after Sult.
Skilling, the energy company's former chief executive officer, faces 31 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces seven counts of fraud and conspiracy. Both are accused of repeatedly lying about Enron's financial strength when they allegedly knew accounting tricks propped up the company's successful image.
Both men say there was no fraud at Enron and negative publicity coupled with diminished market confidence fueled the company's swift descent into bankruptcy protection in December 2001.
Bauer was among several auditors disciplined shortly after Andersen disclosed in January 2002 that the firm had destroyed tons of Enron-related audit documents and e-mails in October and November 2001 as the Securities and Exchange Commission began investigating the energy company's finances.
During Andersen's obstruction of justice trial in 2002, Bauer invoked his Fifth Amendmentright not to testify.
Andersen was convicted, but the U.S. Supreme Court last year overturned that conviction, citing vague jury instructions that allowed jurors to convict without finding criminal intent fueled Andersen's actions. Andersen argued throughout the trial that auditors destroyed documents as required by company policy.
Bauer was a top lieutenant to David Duncan, the former head of Andersen's audit team, who pleaded guilty to obstruction in April 2002 and testified against his former employer. During that testimony, he said Enron's accounting was proper.
Last December Duncan withdrew his guilty plea, without government opposition, on grounds that he didn't admit to criminal intent. Prosecutors can re-indict him, so he is expected to invoke his Fifth Amendment rights if the defense calls him to testify in Lay and Skilling's trial. He is not on the government's witness list.