by John M. Curtis
(310) 204-8700

Copyright January 16, 2002
All Rights Reserved.

tretching damage control to the breaking point, Andersen canned chief Enron auditor David H. Duncan, claiming its dutiful executive VP organized and staged a renegade shredding operation without company approval. Andersen also placed three other partners on "administrative leave," and stripped four others' executive duties at the Houston office, proving that the nation's 5th ranking accounting firm finally cleaned house. "Based on our actions today, it should be perfectly clear that Andersen will not tolerate unethical behavior, gross errors in judgment or willful violation of our policies," said Joseph F. Berardino, Andersen's managing partner and CEO in a carefully worded public statement. Nowhere did Berardino admit ethical breaches and acknowledge possible fraud and obstruction of justice. Cleverly worded denials can't hide Andersen's incestuous relationship with Enron, earning Andersen more than $1-million per week in consulting fees—over 5 fold those paid by Microsoft. Corporate grandstanding and well crafted damage control makes good PR but doesn't erase egregious misconduct.

      Enron's spectacular collapse stunned an already shell-shocked investment community, still reeling from the merciless stock market meltdown begun in March 2000. Enron's failure was bad enough, but news about Andersen's involvement hit like a stray torpedo. Prestigious accounting firms aren't supposed to engage in unscrupulous behavior. "When the watchdog for the public turns out to be the dog that ate the papers there's a big problem," said Lynn Turner, the director of Colorado State University's center for Quality Financial Reporting and chief former accountant for the Securities and Exchange Commission. Unfortunately, the problem gets worse. Accounting firms like Andersen are supposed to serve as the eyes and ears of real watchdog agencies like the SEC. With accounting firms raking in unprecedented sums of cash from corporate clients, whistle blowing isn't too popular. Like the stock market, brokerage houses that perform both investment banking and stock analysis/rating get themselves into hot water.

      Many people are now wondering whether Enron represents a fluke or the tip of the iceberg. "This problem is not limited to Enron. There are other ticking time bombs out there with smoke-and-mirrors earnings," said Rep. John D. Dingell (D-Mish.), ranking minority member of the House Energy Committee. Whether Dingell's right is anyone's guess, but Enron's sudden meltdown gives investors the willies. Watching the 7th largest American corporation go poof reminds investors that speculative bubbles aren't confined only to dot-coms. Enron's undoing began on Oct. 16 when they reported a $638 million loss and a $1.2 billion markdown in shareholder equity. While most investors bailed out too late, corporate insiders had already dumped holdings before the bottom fell out. Now calling for more oversight in private accounting firms, the SEC offers too little, too late for out-of luck investors.

      New oversight regulations can't hurt, but the SEC still has to reconcile how auditing firms can ethically perform standard accounting and auditing at the same time. Now engaged in conspicuous damage control, Enron thinks that firing Andersen Consulting clears its good name. In reality, Enron will have to perform more than brazen publicity stunts. Andersen's CEO Berardino and board claim that the "the company" never authorized the shredding of documents in response to mounting concerns and pending SEC subpoenas. Fingering Ducan diverts attention, but it can't ignore the fact that Anderson was really on Enron's payroll. It was hard for Anderson to turn down $1-million per week in consulting fees. No one disputes that. But accounting firms and professionals also must adhere to ethical standards preventing them from cooking the books. Sullivan & Cromwell, the New York Law firm representing Duncan, assert that Duncan just followed orders when he began shredding documents. "It's about as close to an admission of guilt that you can get with actually saying it," said Lynn Turner, the SEC's former chief accountant.

      Indeed, a recently discovered memo dated Feb. 6 from Enron VP Sherron Watkins indicated that Enron executives—including CEO Ken Lay—knew then about the massive debt kept off the books. Last summer, Watkins voiced concerns about off-balance-sheet accounting with an unnamed Anderson partner, over 6 months before share prices crashed and the company filed for Chapter 11 on Dec. 2. "I know it would be devastating to all of us but I wish we would get caught. We're such a crooked company," said Watkins in response to the LJM overseas partnership managed by Enron Chief Financial Officer Andrew S. Fastow—a clever tool to move massive liabilities off Enron's balance sheet. At that time, Enron turned over Watkin's memo to its board who engaged Enron's law firm Vinson & Elkins for review. In typical fashion, Enron's Washington lawyer Robert S. Bennett—Clinton's former outside legal counsel—dismissed Watkin's memo, insisting "the good faith of Ken Lay and the company . . . It shows that they meaningfully looked into this." According to Bennett, Enron did nothing more than "creative accounting."

      Enron's collapse wouldn't bother too many people if employees and small investors were given equal chance to save their rear ends. What frosts Sen. John McCain (R-Ariz.) is not Enron's failure but the revolting corporate greed that left rank-and-file employees holding the bag. Without help from the Justice Department, congress is going to have difficulty coordinating coherent investigations. If ever a scenario called for an independent counsel, the Enron/Anderson scandal demands one. Not only must congress get to the bottom of Enron's astonishing meltdown, it must find out how the nation's 5th ranked accounting firm abandoned ethical standards to serve a lucrative corporate client. While the finger pointing goes on, the public still needs to know when Enron insiders decided to liquidate their holdings, instruct auditors to destroy important documents, and cover up the largest bankruptcy in U.S. history. Dramatic publicity stunts aren't enough to change too many minds. Firing Anderson doesn't put the bad genie back in the bottle.

About the Author

John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He's director of a Los Angeles think tank specializing in political consulting and strategic communication. He's the author of Dodging The Bullet and Operation Charisma.

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