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Enron's collapse probed
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December 12, 2001: 5:53 p.m. ET
Accountant tells Congress his firm was kept in dark by possible illegal acts.
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NEW YORK (CNN/Money) - The head of Arthur Andersen said Wednesday his firm was kept in the dark about some of the partnerships that helped bring down Enron Corp., adding the accounting firm had told the energy trading company's audit committee that some of the company's actions might have been illegal.
Testifying before two subcommittees of the House Committee on Financial Services, Arthur Andersen CEO Joseph Berardino admitted his firm also made mistakes while working as Enron's accounting firm, but he placed most of the blame for Enron's collapse on actions by Enron executives.
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Arthur Andersen CEO Joseph Berardino says the accounting firm was not told about some of Enrons' financial transactions. | |
Much of Berardino's testimony, and Enron's (ENE: Research, Estimates) problems, revolved around the arcane accounting practices of so-called Special Purpose Entities, or SPE's, which allow companies like Enron to raise capital without adding debt to the balance sheet. Problems with those SPE's caused the company to restate earnings Nov. 8, a move that eventually helped pushed it toward its Dec. 2 bankruptcy filing.
"On the larger of these, which was responsible for 80 percent of the SPEs -related restatement, it appears important information was not revealed to our team," Berardino testified. "We have notified the (Enron) audit committee of possible illegal acts within the company."
He also said that on the rest of the special entities that caused the earnings restatement "our team has made an error in judgment."
Enron executives did not appear at the hearing, saying the hearing conflicted with the organizational meeting of its creditors.
The company issued a statement Wednesday evening saying it was always its policy to be open with Andersen. "Enron is determined to get the bottom of these issues and began work on that effort before Andersen's advice," said the company's statement.
Separately, Enron announced plans to raise up to $6 billion by selling its key energy trading unit and other assets.
But lawmakers expressed anger at Enron executives' absence from Wednesday's hearing, and some threatened to use subpoenas to compel their testimony at future hearings.
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CNNfn's Chris Huntington reports on Enron's plans to raise money by selling assets.
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Meanwhile, the Securities and Exchange Commission said late Wednesday that it issued an action charging Enron's former Chief Financial Officer Andrew Fastow with failing to comply with a subpoena.
Attorney David Boies said he would be representing Fastow in any civil action, and another member of his firm would represent him in possible criminal matters. He denied Fastow had done anything improper regarding the subpoena and said Fastow was not aware of the details of the questionable transactions at Enron.
The SEC also said would seek new rules requiring greater disclosure of accounting practices by companies.
"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' important to the portrayal of a company's condition and results, and requiring management's most difficult, subjective or complex judgments," said the SEC statement.
As to Enron's asset sales plans, the company's current CFO Jeff McMahon, speaking at a creditors' meeting in New York, said that the humbled energy company plans to sell its Azurix Corp. water unit, its businesses in emerging markets and its wind energy assets, as well as the energy trading operations, a spokesman confirmed.
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Houston-based Enron, which filed the largest bankruptcy in United States history on Dec. 2, has said it plans to emerge from Chapter 11 protection within a year. The company plans to raise $4 billion to $6 billion from the sale of non-core assets but expects to keep its regulated businesses, wholesale and retail services as well as its exploration and production units, McMahon said.
Enron is already in talks to sell its lucrative trading operations with Citigroup Inc. and UBS AG. J.P. Morgan Chase & Co., which advised Enron in its failed merger with Dynegy Inc., sued Enron Tuesday to recover more than $2.1 billion.
Enron has $2 billion in secured bank debt and about $13 billion in unsecured debt, McMahon said Wednesday. 
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