[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
DESTRUCTION OF ENRON-RELATED DOCUMENTS BY ANDERSEN PERSONNEL
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JANUARY 24, 2002
__________
Serial No. 107-80
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
77-569 U.S. GOVERNMENT PRINTING OFFICE
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____________________________________________________________________________
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__________
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
JAMES C. GREENWOOD, Pennsylvania, Chairman
MICHAEL BILIRAKIS, Florida PETER DEUTSCH, Florida
CLIFF STEARNS, Florida BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio TED STRICKLAND, Ohio
STEVE LARGENT, Oklahoma DIANA DeGETTE, Colorado
RICHARD BURR, North Carolina CHRISTOPHER JOHN, Louisiana
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
Vice Chairman JOHN D. DINGELL, Michigan,
CHARLES F. BASS, New Hampshire (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Andrews, C.E., Senior Executive, Andersen LLP; Michael C.
Odom, Audit Partner, Andersen LLP; Dorsey L. Baskin, Jr.,
Managing Director, Professional Standards Group, Andersen
LLP; and Nancy Temple, Attorney, Andersen LLP.............. 30
Duncan, David, Former Andersen Partner-in-Charge of Enron
Engagement................................................. 26
(iii)
DESTRUCTION OF ENRON-RELATED DOCUMENTS BY ANDERSEN PERSONNEL
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THURSDAY, JANUARY 24, 2002
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:40 a.m., in
room 2322, Rayburn House Office Building, Hon. James C.
Greenwood (chairman) presiding.
Members present: Representatives Greenwood, Bilirakis,
Stearns, Burr, Whitfield, Bass, Tauzin (ex officio), Deutsch,
Stupak, Strickland, DeGette, John, Rush, and Dingell (ex
officio).
Also present: Representatives Ganske, Fossella, Waxman,
Markey, Engel, Green and Jackson-Lee.
Staff present: Tom DiLenge, majority counsel; Jennifer
Safavian, majority counsel; Mark Paoletta, majority counsel;
David Cavicke, majority counsel; William Carty, legislative
clerk; Peter Kielty, legislative clerk; Shannon Vildostegui,
majority counsel; Edith Holleman, minority counsel; Consuela
Washington, minority counsel; and Jonathan Cordone, minority
counsel.
Mr. Greenwood. The hearing will come to order. The Chair
recognizes himself for the purposes of making an opening
statement.
We are here this morning to confront one critical aspect in
the collapse of the Enron Corporation. This is only the first
step in a thorough and rigorous examination by the Energy and
Commerce Committee into what the chief executive officer of
Andersen, Mr. Berardino, referred to in recent testimony as a
tragedy. It is surely that. More than 4,000 employees lost
their jobs. Thousands more lost their life savings. Millions of
investors, both great and small, watched in disbelief as $70
billion in wealth vanished, but not before 600 Enron employees
divvied up more than a $100 million in bonuses this past
November.
The essential tenet in our Nation's unparalleled
achievement is that private enterprise in a well-regulated
marketplace is a great engine for human freedom, innovation,
improved standards of living, better quality of life, and
individual liberty. That is why when the marketplace endures a
collapse such as this, we have a duty to restore confidence by
putting real and effective safeguards in place for the future
and by bringing any wrongdoing into the bright light of public
scrutiny so that those responsible suffer the consequences.
Today's hearing will explore how one of the world's
premiere professional organizations could have actually
compounded the catastrophic business failure by allowing the
systematic destruction of Enron-related audit documents at a
time when it was clear to everyone, certainly to Andersen, that
government investigators and civil litigants would soon be
demanding the documents needed to understand how things could
have gone so wrong so quickly.
To its credit, Andersen voluntarily disclosed the
destruction to this committee and the Department of Justice and
then promptly provided us with most requested information on
this subject.
While committee investigators have not had a full
opportunity to interview all those involved, and while we have
not yet received all of the documentation requested, we have
interviewed the key witnesses, including Mr. Duncan, Ms. Temple
and Mr. Odom, of whom the latter two will be testifying today.
I thank these three individuals for their timely cooperation
with the committee. I am, however, disappointed that while Mr.
Duncan has complied with the subpoena requiring his appearance
today, by invoking his fifth amendment rights, as we expect he
will today, he will hamper the important work of this committee
in our search for the truth about what transpired at Andersen
during the critical period we are examining.
But before we begin the litany of what we know and what we
have learned, I want to say what I find most troubling. It is
clear that scores of professionals and support staff were
involved in the shredding of paper and deletion of computer
files relating to the Enron audit. Yet to date, committee
investigators have been unable to locate or learn about a
single Andersen employee who raised any concerns or objections
about destroying Enron-related documents, even after the SEC
inquiry became public. That behavior is a far cry from the
American Institute of Certified Public Accountants first
principle of professional conduct, which states that, quote, in
carrying out their responsibilities as professionals, members
should exercise sensitive professional and moral judgments in
all of their activities.
So what have we learned so far? Some key points seem
uncontrovertible. First, there was an unusually high degree of
concern throughout the Andersen chain of command in the fall of
2001 about ensuring that individuals working specifically on
Enron matters complied with Andersen's document retention
policies, which might better be termed destruction policies
since they call for disposal of all nonessential draft or
conflicting documentation relating to an audit, including the
e-mails, voicemails and desk files of those working on the
audit.
This may be commonplace and even appropriate in most cases,
but when a high-profile client is about to implode in an
accounting scandal, those, quote, nonessential documents may be
just what investigators and litigants will be looking for, and
it is clear that Andersen's senior management knew just that.
How could they not, given their recent and embarrassing
experience with the firm's audit of Waste Management, Inc.?
Second, Andersen's legal group waited until November 9,
after Andersen had already received a subpoena from the
Securities and Exchange Commission and had been named in at
least one civil lawsuit relating to Enron, to give instructions
to its Enron audit personnel to suspend normal document
destruction policies. We now know the destruction of records
continued up to that last day, maybe even beyond, according to
Andersen and others.
Andersen's managing partner and CEO Mr. Berardino said over
the weekend that the firm's policy was that all document
destruction should have stopped once Andersen learned in mid-
October about the SEC inquiry into Enron's related party
transaction. So why didn't the firm advise its personnel of
that until nearly 3 weeks later?
Third, Andersen has sought to place the blame for this
debacle solely on Mr. Duncan, the partner in charge of the
Enron account, who, according to Andersen, orchestrated an
expedited effort among the engagement team to destroy documents
after he learned of the SEC inquiry. Mr. Duncan surely has a
lot of explaining to do, given the facts as the committee has
uncovered them. He certainly is guilty of poor judgment, if not
worse. Even if he truly believed he was instructed by
Andersen's legal counsel on October 12 to clean up the Enron
files, as he has told the committee investigators, that does
not explain why he waited until October 23, after learning of
the SEC inquiry, to call an urgent meeting of his Enron audit
managers to discuss compliance with the firm's document
retention and destruction policies. It is also inexplicable
that he would not seek legal counsel before doing so, rather
than relying on an e-mail from Ms. Temple sent prior to the SEC
inquiry.
Fourth, the now well-publicized e-mails from Ms. Temple to
Andersen's personnel working on Enron matters in the mid-
October timeframe to remind them of the firm's retention and
destruction policies were by all accounts highly unusual and of
questionable timing. She has told committee investigators that
her intent was to ensure that proper documentation of key
conclusions was being generated and retained at this critical
juncture in the Enron account. We have no reason at this point
to doubt her good intentions, but as she herself conceded, the
policy also requires the destruction of all other records, and
it was absolutely reasonable for recipients of those e-mails to
view her reminders in exactly that way.
And the fact that she never acted to instruct or advise
Andersen personnel otherwise until November 9 only served to
confirm such interpretations and to compound these errors.
Indeed, the November 10 memorandum confirming her November 9
voicemail to Mr. Duncan makes plain that Andersen's legal group
believed the obligation to start preserving all Enron-related
documents did not kick in until that time. This is particularly
hard to swallow, given what Andersen already knew by then,
accounting errors with billion-dollar impacts, serious
allegations from within Enron about accounting scandals,
internal investigations and reviews by Enron and Andersen, a
plummeting Enron stock price, an SEC inquiry, civil lawsuits
and daily press reports raising the specter of much worse to
come.
This is not to say that Ms. Temple alone was at fault. It
appears clear that she was consulting closely with her
superiors in that legal group, as well as outside counsel that
had already been retained by Andersen by the mid-October time
period.
Perhaps it is too late to save the reputations and careers
of many of those caught up in the web of the Enron collapse,
but for those in business and the professionals who may watch
these proceedings, it would be wise to recall the admonition of
an ancient Japanese proverb: The reputation of a thousand years
may be determined by the conduct of 1 hour.
The Chair would note that a number of members of the full
Energy and Commerce Committee who are not members of this
subcommittee have asked to participate in today's hearing. We,
of course, are happy to do that. While the members of the
subcommittee will be recognized for opening statements, the
members of the full committee who are not members of the
subcommittee will not be afforded the opportunity for opening
statements, but will have the opportunity to ask questions, and
I will now recognize the ranking member of the full committee
Mr. Dingell for 5 minutes.
Mr. Dingell. Mr. Chairman, you are most courteous and
gracious. I commend you, Mr. Chairman, the chairman of the full
committee Mr. Tauzin, and Mr. Deutsch for these hearings today,
and I would note that we on this side are anxious to join you
in an effort to develop all of the facts and to pursue
wrongdoers as far as is necessary.
We are here today to address a serious breach in corporate
integrity, the destruction of documents by an accounting firm
bearing on the corporate wrongdoing of its client and perhaps
on its own wrongdoing, during a time when accounting wrongdoing
was at issue in the press and a matter of regulatory attention.
The event was either criminally stupid or stupidly criminal, or
both. We must confront why were senior Arthur Andersen
employees especially reminded by their lawyers to implement
their document retention policy, in other words, get rid of
papers, just as concerns about Enron's accounting were reaching
a fever pitch.
Why didn't Arthur Andersen's litigation attorney or its
outside litigation counsel send Andersen's Enron team a memo on
October 22, the day Enron announced an SEC inquiry, and tell
them to retain all documents? Mr. Berardino, who refuses to be
with us today, told us Sunday on Meet the Press that Andersen's
policy was to do so, yet Ms. Temple did not write such a memo
until November 10, after Andersen had received a subpoena. Why
did Arthur Andersen management let this happen? Why did anyone
at Andersen in their right mind think that document
destruction, when an SEC inquiry involving accounting practices
was under way, was in any way appropriate? Was that the real
Andersen policy, which is what company officials told our staff
in interviews?
Today we start to learn what happened. Today we start the
process of holding people accountable. Today we start to
determine what kind of tough action is required to prevent this
kind of affront to our system of laws from happening again. And
if these witnesses can't tell us, Mr. Chairman, I look forward
to hearing from others who can. And I suspect we will have to
hear from others before we have gotten the answers we seek
today on these matters.
I also look forward to additional hearings on the
accounting skullduggery that flourished. How should all of
these shadowy special partners and partnerships have been
disclosed; and how were they not and why not? How did Arthur
Andersen's overlapping roles as outside and insider auditors
and its conflicting roles as auditors and consultant hurt full
and fair disclosure? How did the lack of transparency,
accountability and enforcement for the accounting industry
enable the Enron shell game to go undiscovered? Or was it
discovered and not told? How has the additional legal
perfection and protection given the accounting industry by
Congress over President Clinton's veto hurt the ability of
victims to seek redress?
What happened here? Are Andersen's document destruction and
accounting shenanigans a matter of individual conceit of--
wayward individuals intent on protecting their own careers and
futures? Are those a matter of corporate conceit--a company
thinking that it was above the law and acting in that fashion?
Are these a matter of industry conceit--an industry thinking
that its powerful political patrons would protect it once again
as they did when we sought to see to it that the practice of
consulting and auditing were separated?
I look forward, Mr. Chairman, to a most vigorous hearing,
and we on this side look forward to working with you and seeing
to it that we have a most vigorous inquiry and pursuit of
wrongdoing and look forward to a continuation and expansion of
a vigorous, thorough and careful investigation. Thank you, Mr.
Chairman.
[The prepared statement of Hon. John D. Dingell follows:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
We are here today to address a serious breach in corporate
integrity--the destruction of documents by an accounting firm bearing
on the corporate wrongdoing of its client during a time the accounting
wrongdoing was at issue in the press and a matter of regulatory
attention. This destruction was criminally stupid, or stupidly
criminal.
Why were senior Arthur Andersen employees especially reminded by
their lawyers to implement their document retention policy--in other
words, to get rid of paper--just as concerns about Enron's accounting
were reaching a fever pitch? Why didn't Arthur Andersen's litigation
attorney or its outside litigation counsel send Andersen's Enron team a
memo on October 22--the day Enron announced an SEC inquiry--and tell
them to retain all documents? Mr. Berardino, who refused to testify
today, told us Sunday on ``Meet the Press'' that Andersen's policy was
to do so. Yet Ms. Temple did not write such a memo until November 10,
after Andersen received a subpoena.
Why did Arthur Andersen management let it happen? Why did anyone at
Arthur Andersen in their right mind think that document destruction
when an SEC inquiry involving accounting practices was underway was
appropriate? Was that the real Andersen policy, which is what company
officials told our staff in interviews?
Today we start to learn what happened. Today we start the process
of holding people accountable. Today we start to determine what tough
action is required to prevent this kind of affront to our system of
laws from ever happening again. And if these witnesses can't tell us,
Mr. Chairman, I look forward to hearing from those who can.
I also look forward to additional hearings on the accounting
skullduggery that flourished. How should all of these shadowy special
partnerships have been disclosed? How did Arthur Andersen's overlapping
roles as outside and inside auditors, and its conflicting roles as
auditor and consultant, hurt full and fair disclosure? How did the lack
of transparency, accountability, and enforcement for the accounting
industry enable the Enron shell game to go undiscovered? How has the
additional legal protection given the accounting industry by Congress
over President Clinton's veto hurt the ability of victims to seek
redress?
What happened here? Are Arthur Andersen's document destruction, and
accounting shenanigans, a matter of individual conceit--wayward
individuals intent on protecting their careers? Are these a matter of
corporate conceit--a company thinking it was above the law? Are these a
matter of industry conceit--an industry thinking that its powerful
political patrons would protect it once again?
I look forward to a most vigorous hearing, and the continuation and
expansion of a most vigorous investigation.
Mr. Greenwood. The Chair thanks the ranking member, and
would note that the bipartisanship has been exemplary up to
date. I expect it will continue, and we will pursue each and
every one of the issues raised by the gentleman from Michigan.
Mr. Dingell. Mr. Chairman, we do want to note that the
inquiry to date has been conducted in a proper, thorough, fair,
impartial, bipartisan fashion. For that we commend you.
Mr. Greenwood. The Chair thanks the gentleman.
The Chair recognizes the chairman of the full committee,
Mr. Tauzin, for an opening statement.
Chairman Tauzin. Thank you, Mr. Chairman. Let me echo those
sentiments, Mr. Dingell, and express my full appreciation for
the fact that this investigation began with a bipartisan staff,
a team of investigators, and your cooperation and assistance
has been deeply appreciated, will continue to be appreciated as
we go forward. You can be assured again that we will keep you
and all of your staff thoroughly informed as we go forward,
sir, and involved.
Mr. Chairman, let me personally thank you and the staff of
our committee for the extraordinary work already done on this
investigation. Let me first explain where we are, and hopefully
where we are going, with this investigation. Last year when we
announced it, we made it clear that before we held public
hearings, we intended to get the facts. We intended to have our
investigators interview the witnesses, dig up the documents and
to get the evidence before we actually put witnesses before our
committee to explain what happened to the American public and
to learn ourselves how we might, No. 1, understand, and,
second, deal with this incredible tragedy for American
investors, Enron employees and other creditors of this massive
corporation.
When we made that announcement, we indeed put that
investigative team to work, and we have learned a lot. The
Washington Post detailed some of what we have learned,
including instances where Enron Corporation dealing in numerous
partnerships, using the corporate equity to borrow money and to
accumulate debt that was not disclosed to investors and others
on their balance sheet, miraculously and through accounting
tricks and gimmicks converted that debt into a phony income
that never appeared and perhaps never would appear to the
corporation, and, as one of the whistleblowers wrote in a memo,
perhaps not only misled, but fraudulently misled consumers and
investors in this important corporation.
At one point it is clear to our investigators and--through
our reading of their results that this incredible corporation
somehow suspended the rules of corporate ethics and perhaps
even put corporate morality on vacation and accumulated massive
amounts of debts that were not reported on its balance sheet
and were somehow allowed to count as income, again income from
these partnerships that never truly should have been counted as
income, very much like the MicroStrategy case, where had its
arrangements with NCR been reported authentically,
realistically, MicroStrategy would have reported losses rather
than enormous gains, and consumers and investors might have
gotten the truth instead of a lot of phony baloney.
The bottom line is that we are uncovering instances of
corporate behavior that I think almost every corporation in
America would abhor and would condemn, and we are preparing to
lay it all out for the American public at a series of hearings
on the Enron operations. That process was interrupted abruptly
by an amazing admission by Arthur Andersen of a massive
coordinated effort to destroy documents that may be extremely
relevant to our investigation and to the investigation that we
are working hand in glove with the SEC and now with the Justice
Department.
We will hear today of conversations and e-mails and
discussions dating back to early fall about the problems at
Enron and about the need for somebody to explain them properly
to people in this country who are investing in this company,
and at the same time a decision to invoke something known as a
document retention policy.
The chairman has put it correctly. The document retention
policy which we have a copy of, vague in its language, can
properly be described as a document retention and destruction
policy. Why else would corporate employees and attorneys within
Arthur Andersen have instructed its members, including Mr.
Duncan, to expeditiously carry out the policy, even working
overtime if necessary to complete it within a matter of weeks,
the policy of getting rid of documents in the file? If it was
simply a retention policy, a simple 1-hour process of locking
the files would have done the job. Instead a massive overtime
effort involving scores and scores of employees to get rid of
documents, documents which we have sought, the SEC is seeking,
and obviously the Justice Department is now interested in.
I don't know whether crimes were committed, but it is clear
to us that our investigation and other investigations have been
impeded by this policy of destruction. We are going to learn a
lot about it today. And the reason we have scheduled this
hearing in advance of the Enron hearings is because our
investigation depends upon the full cooperation of Arthur
Andersen and Enron, its employees, in obeying the law, in
retaining and providing to this committee and to other
government agencies the documents relevant to this case, and we
will brook no exception to that rule. So let the word go out to
all those who currently work for these two firms that we fully
expect their cooperation and we expect to receive all the
documents that we request.
I am disappointed that this is the first time in my tenure
as chairman that I have had to sign subpoenas to compel the
appearance of witnesses before our committee, not even until
the Ford Firestone case were we obliged to sign a subpoena. I
am disappointed we have reached this point, and I suspect we
will be there again when we conduct our full committee hearings
on Enron. But let me make it clear, this committee will cut no
one any slack as we go forward. We are going to lay the facts
down, and we are going to try to find some answers and
hopefully some solutions that will give American investors and
consumers some confidence in the system again. And where we
have made policy that needs to be changed, we will boldly face
the fact that we need to strengthen those policies and those
standards, and we will do so.
And I want to thank again Mr. Dingell for his cooperation,
and you, Mr. Chairman, for the extraordinary work you are
doing. There are many hours yet to go, but before we finish; I
believe we are going to lay all the facts on the table for the
American people to make their own decisions, but more
importantly, if there has been corporate wrongdoing, we will
unroot it. If there has been personal or corporate attempts to
hide the facts, we will uncover them, and people will answer
for them, and in the end we are going to do our best to make
sure something like this awful tragedy never occurs again.
We are going to learn, for example, why Enron decided to
change pension managers in the middle of this crisis and
therefore invoke a 60-day period when its own employees could
not dump the stock as some of its corporate officers were
dumping. We are going to learn a lot before we are through, but
in the end we are going to try and get some answers, too, and
the questions raised by you, Mr. Chairman and Mr. Dingell, are
deeply appropriate. And before we have finished, we hopefully
will pass some changes in policies and laws that will help
ensure that investors and consumers can have some confidence
again in the audit systems, in the reporting systems, in the
way in which Americans learn whether corporations are really
earning money or just accumulating debt. Thank you, Mr.
Chairman.
[The prepared statement of Hon. W.J. ``Billy'' Tauzin
follows:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Thank you Chairman Greenwood. And let me commend you for putting
together this morning's hearing, which will take us on a path of
inquiry we certainly did not expect to be on when the Committee began
ramping up its Enron investigation in December--the destruction of
potentially critical documents.
Yet this is a path we must--and will--follow not only so we can
eventually piece together as fully as possible the facts surrounding
Enron's financial collapse, but also so we can make very, very clear
that this Committee will not allow its investigations to be hindered in
any way.
Overall, our wide-ranging investigation, which we will address in
more detail at next week's full Committee hearings, involves sorting
out the complex bookkeeping and various parties and policies that had a
role in that collapse. It also involves a dogged pursuit of the various
leads--wherever they take us--that might explain why people did what
they did and how things went so wrong.
Only with such full information will we then be able to consider
how Congress might address the policy issues raised by Enron's actions.
Which brings me back to the disturbing topic of today's hearing: Enron-
related audit documents were destroyed by employees of Andersen--the
company's own accounting firm--when signs of outside investigations
were emerging early this past fall.
So we have a situation where the Committee is trying to conduct a
thorough, in-depth investigation and now it is facing destruction of
documents that may well have provided critical answers to its
questions.
The loss of these documents certainly came as a surprise to our
Committee investigators when they were invited by Andersen to look
through its Enron materials earlier this month. And the loss certainly
is hindering our ability to create a full picture of what Andersen knew
about Enron's bookkeeping.
The document destruction raises several troubling questions about
Andersen's relationship with Enron and role in its collapse.
Our witnesses today should help us sort through some of the issues
raised by these troubling activities.
For example, why did key Andersen employees suddenly decide--in
October, just as it was becoming clear that outside investigation was
imminent--to enforce document destruction policies? And why did
destruction continue for several weeks after investigations commenced,
which was clearly against Andersen policy, according to Mr. Berardino?
The destruction also raises some broader questions about document-
retention policies that we may have to address: For example, how do
corporations implement these policies, particularly when investigations
may be developing? Is this a widespread, though under-appreciated,
problem?
Revelations of document destruction have severely harmed Andersen's
reputation. I hope what we learn today will help us get a more accurate
picture of Andersen's policies, and whether the actions it took
represent broader problems within the company, the industry as a whole,
or the mistaken decisions of a handful of individuals.
In the end, what we gather should help us understand more fully
where we are in our investigation, and where we need to look next as we
proceed into some of the substantive issues involving Enron directly.
There is, however, another message this hearing should impart--one
highlighted by emerging news of document destruction at Enron, now
under investigation by the FBI: This Committee takes document
destruction very seriously. It will not allow efforts to impede its
investigations to go unpunished.
Thank you again, Mr. Chairman.
Mr. Greenwood. The Chair thanks the chairman and recognizes
for an opening statement the ranking member of the
subcommittee, the gentleman from Florida, Mr. Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman. You know, all the
previous speakers have alluded to what the big picture of the
Enron disaster is, and the big picture really is that the
public accounting system and our capital market system failed,
and that failure, in terms of the implication it has to our
macroeconomy, potentially could be very, very significant.
There, you know, was not an Enron prior to Enron. I take
great exception to the Secretary of Treasury's comments right
after Enron filing for bankruptcy that this was business as
usual in America; that companies, you know, succeed, and
companies fail. That is the case, but the seventh largest
company in America effectively imploding in a matter of weeks
has not happened before, should not happen again, and that is
in a sense the big picture of what we are looking at and what
we will end up being able to determine, and whether the issues
were systemic or criminal or, you know, specific, I think we
will determine, and this committee has shown in the past that
we have incredibly competent staff and competent Members to get
to that point.
There are many issues as well that I think are part of
that. I mean, obviously this hearing is a component of that,
but there are many issues as well, and, again, just to put in
perspective my--the chairman of the committee mentioned the
figure of $100 million of bonuses that were given during the
period of--before the implosion of Enron to management. There
was also literally over a billion dollars, $1.3 billion of
stock held by managers of Enron that was sold prior to Enron's
implosion.
We also again are aware of a number of political appointees
in the administration who sold stock prior to the implosion of
Enron. What we are also aware of, though, is that for the
thousands of Enron employees and their 401(k)s, for them
personally, many of whom were restricted from selling at least
part of their stock, in some cases maybe all of their stock,
for the lockout period, they also were very directly affected,
but in an opposite--completely opposite way in that they lost
over $1 billion. Now, that number is huge, but the number is
personal, and, you know, we have seen people, you know, whether
in television stories or congressional hearings, but some of my
colleagues in the Houston area have talked to dozens of
constituents that tell horror stories on a daily basis. I mean,
just again in the scope, the pension fund, the Florida, lost
$300 million.
You know, K-Mart filed for bankruptcy this week. It was not
a surprise. The public accounting system in a sense worked.
Analysts, the public, anyone who was looking at their balance
sheet could, in fact, understand what was going on. The
question today, you know, obviously is are there other Enrons
in our public markets; are there other people who have gamed--
other corporations and individuals who have gamed the system,
whether through systemic problems or corrupt activities, that
will implode tomorrow? And if there is not that transparency
and faith in the capital system, there is a significant
problem.
What I would like to do, I know the chairman has said that
members who are not on the subcommittee cannot take opening
statements, but I haven't used my 5 minutes. I would like to
yield to Mr. Green from Houston for the remainder of my 5
minutes to talk about some of the specific issues.
[The prepared statement of Hon. Peter Deutsch follows:]
Prepared Statement of Hon. Peter Deutsch, a Representative in Congress
from the State of Florida
Thank you, Mr. Chairman, for holding this very important hearing.
What we are dealing with today is the alleged destruction of documents
by Arthur Andersen, the accounting firm for Enron, which unexpectedly
declared bankruptcy on December 2nd. While document destruction is the
scope of today's hearing, securing confidence in our capital markets is
the fundamental issue facing Congress.
It was no surprise to anyone that Kmart Corporation declared
bankruptcy this week. With Kmart, the system worked--but why in the
case of Enron was the entire Wall Street Community shocked to witness
the sudden collapse of America's seventh largest corporation?
Sophisticated analysts were caught completely off guard, but the real
tragedy are the thousands of workers and seniors who have lost billions
in retirement savings, including a $300 million loss in Florida's
pension system. If the analysts couldn't understand Enron's books,
average shareholders and workers didn't stand a chance.
We are going to address in detail why Andersen's Enron team
continued to purge their files of drafts, memos, e-mails and the back-
and-forth discussions about accounting decisions that Enron made and
Arthur Andersen approved--even after (1) Enron announced the initiation
of an inquiry by the Securities and Exchange Commission into the
financial accounting of certain off-the-books special purpose entities
by Enron; (2) Enron established a special committee of its board to
look into related party transactions and their inclusion in Enron's
financial statements; (3) an Enron ``core consultation group''
established at Andersen was discussing litigation; and (4) Andersen
retained litigation counsel.
Not until November 10th, after Andersen itself received a subpoena
was anyone told to stop implementing the company's document retention
policy, thus finally halting the destruction of documents. Mr.
Berardino told Meet the Press on Sunday that the company's policy was
not to shred documents ``if you have a reasonable basis to anticipate
an investigation.'' He stated that basis was not established until
October 22nd, the day that the SEC publicly announced it inquiry. Mr.
Berardino chose not to be here today to explain exactly what Andersen's
policy is. But from our Subcommittee's investigation, it appears that
Mr. Berardino's understanding of the policy was not observed by the
relevant principals--not the lawyers, not the accountants. In fact, the
lawyers kept reminding the Enron team to comply with the retention
policy, which was a highly unusual move in a company in which complying
with the written policy appeared to occur on an irregular basis at
best. Perhaps that is why the three partners that Andersen put on
``administrative leave'' are actually still in the office every day.
Perhaps that explains why no one representing Andersen has--to this
day--questioned these partners or their staff to get their version of
what exactly happened.
Perhaps, more importantly, Mr. Chairman, is the fact that companies
are allowed to release financial reports to shareholders that no one
can understand. Even the professional analysts recommending purchase of
Andersen stock until at least October 24 cannot figure out how Enron
was making money. Unlike Kmart's collapse, the rapid bankruptcy of
Enron was a total shock. Employees, shareholders, public pension plans,
professional investors and banks lost billions of dollars, and there
are many tragic personal stories.Ensuring transparency in our financial
accounting system is essential to securing public confidence in
America's capital markets. Something has to be done to ensure that
publicly held companies and their accountants provide accurate
financial information that the average investor can understand.
Mr. Chairman, I look forward to learning the facts about Andersen's
role in the Enron debacle. I also look forward to additional hearings
when we will focus on Enron's destruction of documents and the role of
company management in the collapse of America's seventh largest
corporation.
Mr. Green. Thank you, Mr. Chairman, and I thank my
colleague from Florida. I want to thank the chairman for
allowing me as a member of the full committee to----
Mr. Greenwood. If the gentleman would desist, it is going
to be a courtesy that is going to have to be accorded to all of
the Members, and the gentleman Mr. Green contacted me earlier
and asked if he could participate in the hearing, and we said
of course he can, but under our rules and under our procedures,
members who are not on the subcommittee are not afforded the
opportunity to make opening statements. I will be very liberal
with the precursors and the introductions to the questions that
Mr. Green wants to make to the witnesses, but I think we are
going to need to draw a line with regard to the opening
statements.
Mr. Green. Thank you, Mr. Chairman. With that, I would just
like permission to submit an opening statement.
Mr. Greenwood. Certainly it will be a part of the record
and----
[The prepared statement of Hon. Gene Green follows:]
Prepared Statement of Hon. Gene Green, a Representative in Congress
from the State of Texas
Mr. Chairman: I want to begin by thanking you for allowing me the
opportunity to participate in today's important hearing.
The Enron meltdown and the associated causes need to be throughly
examined, and that all starts with today's hearing.
Enron's economic collapse brought on by the decision makers at
Enron and it's supposed watchdogs at Arthur Andersen have devastated
investors, employees, creditors large and small, and our Houston
Community as a whole.
For only a 16 year old company, Enron was an integral part of
Houston's art, medical, educational, and business community.
Enron's name is even on our new Major League Baseball stadium.
Enron's demise has taken the American Dream away from thousands of
employees and stockholders, and I am hearing more and more of these
stories every day.
Former employees now have no income, no health insurance for their
children, and no pension for their retirement and the fulfillment of
the American dream.
Our committee's job is not to prosecute, that will come if we can
find someone at the Department of Justice who has not recuse
themselves.
No, our job is to investigate how we can prevent this from
happening again.
Over the last several weeks it appears that, Arthur Andersen has
attempted to hide facts and destroy documents related to their work for
the Enron Corporation.
After being briefed by committee staff, reading all the recent news
accounts, and talking to impacted Enron workers, I am stunned by the
activity of Arthur Andersen a once venerated 88 year old company.
What I find most interesting is that Arthur Anderson's experiences
with both the Waste Management and Sunbeam corporations seemed to be
only practice for their crown jewel of bankruptcies, Enron.
I am hopeful that today's witnesses will be able to shed some light
on Arthur Andersen's ``document destruction policy'' \1\. Not a
document preservation policy.
---------------------------------------------------------------------------
\1\ Arthur Anderson had a policy known as the ``documentation
preservation policy'' that required their auditors to destroy all
documents not specifically related to their final audit report. Ms.
Temple sent an e-mail to Mr. Odom reminding him of this policy on Enron
related documents.
---------------------------------------------------------------------------
As a lawyer, I always understood that if their was even the hint of
some kind of official investigation that it was better to retain
documents rather then destroy them.
This is because if an investigation is started and the
investigators learn that I started a large scale shredding operation,
it makes me look guilty.
Ms. Temple's e-mail to Mr. Odom that was subsequently relayed to
Mr. Duncan reminding everyone of the so-called ``document preservation
policy'' is at least highly suspicious and at most criminal.
Mr. Chairman, Arthur Andersen definitely played a role in the Enron
collapse, but we all know the true problem resides with Ken Lay,
Jeffrey Skilling, and Andrew Fastow.
Arthur Andersen is only a large cog in the wheel that was Enron,
and the Committee needs to stay focus on this fact.
I want to thank you again Mr. Chairman for allowing me to
participate today, and I look forward to hearing the witness testimony.
Mr. Deutsch. If I could yield back my time, then, and just
mention, you know, I don't know how much we will get in this
hearing, but Mr. Green--I know my colleague also from Houston
area as well has unfortunately--I mean, we just came back from
a couple-week break where he was telling me some of the stories
before the hearing started, and literally, I mean, tearing can
come to your eyes, that he is met the people, he has talked to
people on a daily basis. Obviously that information of what the
status of Enron was not provided for them, and clearly the
insiders knew what was going on.
Chairman Tauzin. Would the gentleman yield?
Mr. Deutsch. I am out of time. If he would----
Chairman Tauzin. Just quickly to announce that we are going
to have a full committee hearing on Enron to lead off the rest
of the hearings by the subcommittees, and the gentleman will,
of course, have a chance then to make full opening statements.
Mr. Green. Thank you.
Mr. Greenwood. And if I may say so, the gentleman from
Texas Mr. Green has expressed his profound concern with regard
to the well-being of his constituents, and we appreciate his
participation this morning.
The Chair now recognizes the gentleman from Florida Mr.
Bilirakis for an opening statement.
Mr. Bilirakis. Thank you very much, Mr. Chairman. I don't
have a prepared opening statement, but I would just like to
make a couple of points very briefly. One is that both Mr.
Tauzin and Dingell have emphasized bipartisanship of this
hearing and of the entire investigation, and of the subsequent
hearings that are going to take place. I think we should all
keep that in mind. This particular hearing is limiting itself,
as I understand it, to the destruction of Enron-related
documents by personnel working for the company, and I would
hope that we would limit ourselves to that. As much as we all
would want to go into the other areas, I hope that we would try
and hold off on those.
The second point as has been made by so many others in
other ways is credibility, or I guess I like to say maybe lack
of credibility. We depend on you accountants and you auditors.
We, the American people, depend on you so very much. We depend
on your truth. We depend on your veracity. We depend on you not
hiding and on you not misstating and not miscommunicating to us
the facts as you see them. What is happening here is that we
are losing that sense of credibility in you. I am not sure that
any of the American people are paying attention at all,
although I expect that they practically all are. I am not sure
that they will, in the future place, complete confidence in
information that they might receive from the auditors and the
accountants of any of the companies throughout this country of
ours. And for that, you should be, I think, very, very much
ashamed.
Now, I don't know what happened. I don't know why the
documents were destroyed. We are supposed to go into these
hearings with an open mind, and I like to think that we all
have an open mind. However, I think we all probably have been
back there sort of saying, hey, if they destroyed these
documents the way they did when they probably should not have,
they must have had something to hide. That is certainly there,
and I hope that you will clear that up.
Did the process of destruction of documents mean that you
are hiding the truth, that you did not reflect the truth, that
you did not really do the job that American people expected you
to do, even though you were employed by the company in the
process of reporting their activities? So many people are let
down, not only the stockholders around the country, but
certainly the employees who have lost so much in their
retirement fund. Certainly it is a shame when you see a big
company go under the way it has, and it is a terrible crime
that retirement funds have been lost. However, I think more
than anything else we have lost that sense of credibility that
we have always had in the auditors and in the accountants, and
I think that is just really terrible. And, again, you should be
ashamed of all that.
Having said all that, Mr. Chairman, I will yield back.
Mr. Greenwood. The Chair thanks the gentleman from Florida
and recognizes for his opening statement for 3 minutes the
gentleman from Michigan Mr. Stupak.
Mr. Stupak. Mr. Chairman, I thank you for holding this
important hearing. This is the first of what will likely be
many hearings this committee will hold on the collapse of Enron
and the roles that the executives at Enron and Arthur Andersen
played in that collapse. Today's hearing about shredding
documents by Arthur Andersen employees is one with extremely
serious implications, including possible civil and criminal
penalties. I look forward to learning more about Andersen's
policies on document retention and destruction.
In reviewing the materials provided by the committee, it
appears that there were--was a clear effort on Andersen's part
to cleanse their files after they were made aware that the SEC
had begun an inquiry on October 22 and well after Andersen was
informed by one of their former employees who was working for
Enron that shady accounting practices were going on at Enron.
While I do look forward to hearing about what Andersen's
official policy is on document retention, I also hope that our
panelists will be able to shed some light on what is being done
to recover the documents that were purged from computers and
shredded by staff. Certainly Andersen runs backups of their
computer files, just as my office does, and would have them
available to recover many of the deleted files. Hopefully Mr.
Baskin will be able to provide us with an update as to what is
being done to recover these documents.
The actions taken by Andersen and Enron executives in
recent months give us reason to be concerned about the cavalier
attitude that is all too prevalent in today's corporate world.
I can't help but believe that this cavalier attitude was
encouraged by the passage over a Presidential veto of the
Securities Litigation Reform Act of 1995.
In 1995, only a few other members on this committee and I
opposed the bill, which essentially shredded the rights of
investors to take action against companies for these deplorable
business actions. The Security Litigation Reform Act, or the
securities rip-off act as some of us called it back then,
provides immunity from the private fraud liability for written
or oral corporate forward-looking statements even when those
statements are deliberately false. This so-called reform act
significantly limits victims' recoveries by curtailing joint
and several liability, making it more difficult for Enron
employees to sue corporate officials who cashed in close to a
billion dollars worth of stock while Enron was collapsing.
Finally, the Securities Reform Act failed to restore the
liability of aiders and abetters in private action. Here we
have Andersen aiding Enron or Enron aiding Andersen, and the
whole crooked bunch avoids liability. So once again, the
defrauded shareholders are left holding an empty bag.
Unfortunately, Mr. Chairman, we are seeing firsthand the
results of that terrible law. Thousands of Enron employees who
used to have what they thought would be a secure retirement
will now be forced to work well into what should be their
retirement years and have little ability to take action against
the individuals who shredded their hopes for a secure
retirement.
Chairman Tauzin said this morning, and I compliment him, he
said in a TV interview that our first commitment must be to the
investors. I agree, and we can help these and millions of other
shareholders by immediately repealing the 1995 Securities
Reform Act so we can put teeth back into our security exchange
laws.
Mr. Chairman, it is not just the employees who are taking a
beating on their retirement hopes. There are countless numbers
of people, ranging from teachers in California, police and fire
officials in New York City, who have lost hundreds of millions
of dollars in their pension plans and 401(k)s. That is a
subject of future hearings, which the chairman said we will be
having beginning next week, and I look forward to discussing
this in more detail and more depth at future hearings. And I
thank you, Mr. Chairman, for the time.
[The prepared statement of Hon. Bart Stupak follows:]
Prepared Statement of Hon. Bart Stupak, a Representative in Congress
from the State of Michigan
Mr. Chairman, I thank you for holding this important hearing this
morning. This is the first of what will likely be several hearings that
this committee will hold regarding the collapse of Enron and the roles
of the executives at Enron and Arthur Andersen in that collapse.
Today's hearing about the shredding of documents by Arthur Andersen
employees is one with extremely serious implications including possible
civil and criminal penalties. I look forward to learning more about
Anderson's policy on document retention and destruction. In reviewing
the materials provided by the committee, it appears that there was a
clear effort on Anderson's part to cleanse their files AFTER they were
made aware that the SEC had begun an inquiry on October 22nd and well
after Andersen was informed by one of their former employees who was
working for Enron that shady accounting practices were going on at
Enron.
While I do look forward to hearing about what Andersen's official
policy is on document retention, I also hope that our panelists will be
able to shed some light on what is being done to recover the documents
that were purged from computers and shredded by staff. Certainly
Andersen runs back-ups of their computer files, just as my office does,
and would have them available to recover many of the deleted files.
Hopefully Mr. Baskin will be able to provide us with an update as to
what is being done to recover these documents.
The actions taken by Andersen and Enron executives in recent months
give us reason for concern about the cavalier attitude that is all too
prevalent in today's corporate world. I can't help but believe this
cavalier attitude was encouraged by the passage--over a presidential
veto--of the Securities Litigation Reform Act of 1995. In 1995 only a
few other members on this committee and I opposed the bill which
essentially shredded the rights of investors to take action against
companies for these deplorable business actions. The Securities
Litigation Reform Act, or Securities Rip Off Act as some of us called
it, provides immunity from private fraud liability for written or oral
corporate forward looking statements even when those statements are
deliberately false. This so-called Reform Act ``significantly limits
victims recoveries by curtailing joint and several liability making it
more difficult for Enron shareholders to sue corporate officials who
cashed in close to 1 billion dollars worth of stock while Enron was
collapsing. Finally, the Security Reform Act failed to restore the
liability of aiders and abettors in private action. Here we have
Andersen aiding Enron or Enron aiding Andersen and the whole crooked
bunch avoids liability, so once again the defrauded shareholders are
left holding an empty bag.
Unfortunately Mr. Chairman, we are seeing first hand the results of
that terrible law. Thousands of Enron employees who used to have what
they thought would be a secure retirement will now be forced to work
well into what should be their retirement years and have little ability
to take action against the individuals who shredded their hopes of a
secure retirement. Chairman Tauzin said this morning in a TV interview
that ``our first commitment is to the investors. I agree and we can
help these and millions of other shareholders by immediately repealing
the 1995 Securities Litigation Reform Act--so we can put teeth back
into out security exchange laws.
Mr. Chairman, it is not just the Enron employees who have taken a
beating on their retirement hopes. There are countless numbers of
people ranging from teachers in California to police and fire officials
in New York who have lost hundreds of millions of dollars in their
pension plans and 401K's , but that is a subject for future hearings
and I look forward to discussing this more in depth at those hearings.
Mr. Greenwood. The Chair thanks the gentleman from Michigan
and recognizes for the purposes of an opening statement for 3
minutes the gentleman from Florida Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman, and let me commend
you for having this hearing and, of course, also to commend the
staff on both sides of the aisle for all the work they did, of
course, during the holidays when lots of the Members were back
enjoying the Christmas holidays.
The hearings, of course, today are focusing on destruction
of documents, an allegation that will carry serious
implications should deliberate wrongdoing be discovered. I
think I am not alone. I think all of my colleagues would agree
that a person will fare better in cooperating with this
subcommittee and the full committee's investigation as opposed
to subverting our efforts. We need to have answers for
investors, and we need to develop transparency on this question
of the auditing of large corporations.
Florida State pension fund incurred a loss to the tune of
$300 million. Individual constituents have called me to render
their complaints at losing their retirement savings from their
401(k) accounts. And I promised, as my colleagues on both sides
have, to do everything possible to get to the bottom of this
matter and prevent a reoccurrence. So I look forward to the
testimony of our witnesses.
It is my understanding that a memo from February 2001
detailed Andersen's concern with Enron and whether that
company's dealing would harm Andersen's reputation. I think I
can say that Andersen now has wounded its own reputation. It is
self-inflicted. So if they are here today, it is their own
fault. Mr. David Duncan, the former Andersen partner in charge,
is alleged to have ordered the expedited destruction of Enron-
related documents. One of our witnesses, a counsel for Arthur
Andersen, Ms. Temple, prior to the document destruction e-
mailed a, ``reminder,'' of Andersen's document retention
policy. So is Mr. Duncan being made a scapegoat here this
morning, for it sees maybe an explicit order was given to
destroy a document, yet backsides were covered through the,
``reminder'' e-mail on document retention.
This is kind of like the code word--the code red
instruction that Colonel Jessup used in A Few Good Men, that
movie, as you will remember. When he issued the code red, it
was a term that did not appear in any manual or standard
operating procedure, yet carried specific actions once it was
given.
So, Mr. Chairman, I think this hearing should give us an
opportunity to get to the bottom of this destruction of
documents, and I might say, the chairman of our full committee
has also talked about transparency in auditing procedures. I
would like to note that I chair the committee that has
jurisdiction over the Financial Accounting Standards Board, and
I would like to know personally if our accounting standards are
responsive to today's challenge posed by the increasingly
complex business and financial transactions of companies like
Enron. Are there other companies doing this same procedure with
these limited partnerships, sheltering of the debt? So we need
to look at these standards and to assure our constituents and
the American public that there is transparency and honesty
dealing with these accounting procedures.
So, again, I commend you and the full chairman of the staff
for the work you are doing.
Mr. Greenwood. The Chair thanks the gentleman from Florida
and recognizes for the purposes of an opening statement for 3
minutes the gentleman from Ohio Mr. Strickland.
Mr. Strickland. Thank you, Mr. Chairman, and I would like
to submit a longer opening statement, and I will be short.
Mr. Greenwood. Without objection, the gentleman's statement
will be a part of the record.
Mr. Strickland. It isn't clear exactly when the collapse of
Enron began, but on October 16, 2001, Enron announced its
third-quarter results, which included a loss of more than $600
million, and disclosures of a $1.2 billion reduction in
shareholder equity. The next day, October 17, the SEC opened an
informal inquiry into Enron's business practices, and on
October 22, Enron publicly acknowledged the SEC's inquiry was
under way. Only 1 day later, the Andersen/Enron audit managers
met, and the team was instructed to ensure that they are in
compliance with the firm's, ``documentation retention and
destruction policies.''
Subsequently and alarmingly, an estimated thousands of
Enron-related documents were destroyed. This destruction of
documents takes place after the SEC began its inquiry.
Furthermore, the destruction of documents continues not for a
few hours or for a few days, but I understand it wasn't until
November 9, 2001, that an e-mail was sent to the Enron audit
team calling for, ``no more shredding.''
This behavior by Enron's accounting firm is brazen,
outrageous, and completely unacceptable. In fact, the document
shredding may render it impossible for this committee, the
other House and Senate committees, the SEC and the Department
of Justice to know exactly who and what led to Enron's
collapse.
Andersen was responsible for auditing Enron's books and
recognizing the company's problems. Not only did the accounting
firm neglect to do its job, but it may have made it impossible
for the SEC to do its job because it continued to destroy
documents relevant to the agency's investigation.
When Enron declared bankruptcy last month, thousands of
workers found themselves unemployed, and investors, including
many of those same unemployed workers, lost billions of dollars
when Enron's stock fell. As workers and investors suffered the
consequences of Enron's apparently fraudulent behavior, and the
company's executives, embarrassed perhaps, but rich, walk away
with millions of dollars, the employees walk away with little
or nothing.
It is imperative that we uncover what happened and that we
take steps to see that those who are responsible are punished,
and having worked in a maximum security prison before I came to
this institution, I am tired of white collar crime being
treated differently than other kinds of crime in this country,
and if crimes have been committed, it is my fervent hope that
those responsible will see the inside of a jail cell. I yield
back my time.
Mr. Greenwood. The Chair thanks the gentleman from Ohio and
recognizes the gentleman from North Carolina Mr. Burr for 3
minutes for the purposes of an opening statement.
Mr. Burr. Thank you, Mr. Chairman.
I don't think anyone at this hearing is happy with the
reasons for why we are here today, but today in this exercise
we must faithfully discharge our duties to uncover that which
has been covered up. We must begin to publicly uncover and
inquire of the actions taken by Arthur Andersen in its work on
behalf of the Enron Corporation. Why did Andersen engage in
what is alleged to be a large-scale destruction of documents
related to Enron's financial well-being?
We know from testimony given to our committees as early as
August that Andersen had already convened a working group to
review Enron's third-quarter charges, charges in its October 16
press release that revealed a loss of $618 million and a
reduction in shareholder equity of approximately $1.2 billion
due to charges associated with various partnerships. We know
that Ms. Temple was concerned enough about misstatements in the
third-quarter press release, that she suggested to Mr. Duncan
that portions of his memo for company files be deleted so that
it does not suggest that Andersen concluded the release was
misleading.
Why is this important? Because it appears that some at
Andersen were seeking to avoid a similar outcome to what had
happened with their client Sunbeam in the middle of the last
year. As it was reported by The Wall Street Journal in
November, according to the SEC's May settlement order with
Sunbeam, Andersen auditors had routinely dismissed so many
violations of general accepted accounting procedures as
immaterial, that they eventually piled up to produce
significant distortions in Sunbeam's financial statements,
making the barely solvent consumer products maker look
handsomely profitable. Sunbeam filed for Chapter 11 bankruptcy
protection this past February 2001.
This article went on to say that under generally accepted
accounting procedures, misstatements aren't immaterial simply
because they fall beneath the numerical threshold. According to
an SEC accounting bulletin, under certain circumstances, the
SEC says intentional immaterial misstatements are unlawful. One
reason is that when immaterial statements are combined with
other misstatements, they can, according to the SEC bulletin,
render the financial statement taken as a whole to be
materially misleading.
What I hope to come away from this hearing and this phase--
and I emphasize ``this phase''--of our investigation is were
documents destroyed by Andersen that would have proven that
an--that they had made intentionally immaterial statements as
related to Enron? When did Andersen hire outside counsel to
represent them, and did the document destruction start,
continue, or accelerate once they received that outside legal
advice? Were Andersen officials aware of an SEC investigation,
but did little to stop the destruction of documents?
Mr. Chairman, the chore before us today will require some
hard work and heavy lifting. Before I go any further, I want to
commend the staffs on both sides of the aisle who gave up
nights, weekends and holidays to make sure that we were ready
to start this investigation today. It has been said that hard
work will reveal character of those involved in the task at
hand. Some will turn up their sleeves, some will turn up their
nose, and some just won't turn up at all. I look forward to
working with those who choose to turn up their sleeves in this
endeavor to uncover that which has been covered up, and I yield
back.
Mr. Greenwood. The Chair thanks the gentleman from North
Carolina and recognizes for 3 minutes the gentlelady from
Colorado for the purpose of making an opening statement.
Ms. DeGette. Thank you, Mr. Chairman. Before I make my
statement, I would like to ask unanimous consent that all the
full committee members who are here but not being allowed to
make opening statements be allowed to submit their statements
for the record.
Mr. Greenwood. Without objection, the opening statements
from the full committees members present who are not members of
the subcommittee will be incorporated into the record.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Chairman, by now we are all painfully familiar with the
events that led to the collapse of Enron. When Enron reported a
significant financial loss more than a year ago, we soon
learned that it had inflated its earnings by straying from
generally accepted accounting principles. Subsequently, the SEC
opened investigations into Enron and later Arthur Andersen.
This whole debacle has shown Congress and the SEC that we will
need to, among other things, strengthen the laws which protect
investors and build stronger protections to prevent the
inevitable conflict between companies that audit and provide
other services to their clients.
Today, though, the issue is focused specifically on the
destruction of Enron-related documents by Arthur Andersen
employees. This panel will need to help us understand exactly
what Andersen's document destruction protocol is, which
documents should be destroyed under it and the conditions that
govern its use.
Specific actions were taken--that were taken by Andersen
employees are also in need of scrutiny. Through press accounts
and through staff, we have learned that an internal memo was
sent to David Duncan, who is here today but apparently not
going to testify, the head of Andersen's Houston branch, from
Nancy Temple, a lawyer in the company's Chicago headquarters.
The memo reportedly detailed Andersen's standard document
destruction and retention protocol. Five days later Enron
received a letter of inquiry from the SEC, initiated after
Enron reported significant changes to its financial standing.
According to press accounts, despite the SEC inquiry into one
of its clients, Andersen had begun to and continued to shred
documents related to its business dealings with Enron and did
not make any change to that policy, even after it was--it
received a letter of inquiry from the SEC.
I frankly don't want to leave this room today until I learn
two things. First, what exactly was the document preservation
protocol at Andersen in this instance, and what has been done
in past similar instances as some of my colleagues have alluded
to? Second, the exact time line of who knew what when and the
implications of this employee knowledge on the destruction of
documents.
The committee's investigation has thus far discovered that
implementation of Andersen's document destruction protocol may
have been ambiguous. It was generally understood by Andersen
employees that the policy was not applied uniformly, and no
particular manager on any level oversaw compliance with the
policy. We need to find out the implication of that matter.
We also need to find out whether senior members of Andersen
were aware of Enron's potential accounting problems possibly in
August of 2001.
I will be asking the panelists a number of questions around
these issues. Mr. Chairman, I congratulate you in calling this
hearing today and look forward to learning the answers to these
questions.
Mr. Greenwood. The Chair thanks the gentlelady from
Colorado and recognizes for 3 minutes for the purpose of an
opening statement the gentleman from Kentucky Mr. Whitfield.
Mr. Whitfield. Mr. Chairman, thank you very much.
This is really a sad day for our country, and I know that
there isn't anyone on this committee that is particularly
excited about this endeavor. This is the first of many hearings
that will be held on this subject, and our goal, of course, is
to find out the truth. We know for a fact that 4,000 some-odd
people have lost jobs. We know for a fact that stockholders
from around the country have lost most of their equity in this
company. We know for a fact that employees--loyal employees of
the company have had their pension plans eliminated, the value
of their 401(k)s eliminated. And we know for a fact that
Sherron Watkins in her letter to Mr. Lay back in August pointed
out--this is quite sad, I think--that--it said, employees
question our accounting proprietary consistently and
constantly.
I have even heard one manager-level employee from the
principal investments group say, I know it would be devastating
to all of us, but I wish we would get caught. We are such a
crooked company. And then one of the real advocates for Enron,
Mr. David Fleischer, an analyst at Goldman Sachs, had told Mr.
Lay at a financial analyst meeting, there is an appearance that
you are hiding something. And he went on to say, they have
engaged in a number of transactions that one wonders about and
that are hard to understand. They have not been as forthcoming
in explaining them, but, he said, I am still recommending the
stock, because I don't think accountants and auditors would
have allowed total shenanigans. And in the absence of total
shenanigans going on at this company, there is tremendous value
here.
So we want to get to the facts. We want to discover the
truth. And as we go forward, Congress is going to have to come
up and come forward with some solutions to prevent this type of
activity in the future, look at conflicts between one entity
serving as a consultant and as an auditor, and try to determine
how the Director of the Division of Investment at the SEC in
1997 provided an exemption from the Foreign Investment Act of
1940 for Enron alone.
Do we need pension reform? Why did the board of directors
of Enron waive their ethical standards for corporate executives
to enter into partnerships with Enron for the purpose--or at
least what happened was hiding debt? All of these questions
must be answered, and as I said, it is a sad day, and many of
us do have constituents impacted by this. And when you think of
the employees of this company and their loyalty to this company
being totally wiped out while executives walked off with
millions and millions and millions of dollars, it really is a
sad day, and I want to thank the chairman for having this
hearing.
Mr. Greenwood. The Chair thanks the gentleman from Kentucky
and recognizes the gentleman from Louisiana, Mr. John.
Mr. John. Mr. Chairman, thank you very much for holding
this hearing. This is a very important topic, and what I
envision is going to be a series of very in-depth, very lengthy
and very serious hearings over the next few months, several
months, engaging the full committee also, on what went wrong
with the energy giant Enron. The hearing today focuses on what
I believe is a first appropriate step, and that, of course, is
document shredding. I believe it is really important for us to
start here to understand and uncover what exactly went wrong.
I think the work of this committee is very clear. First, it
is to get the testimony from individuals so that we can
understand and uncover the facts; second, determine if there
were criminal activities that were engaged in; and third, to
seek out the appropriate--appropriate, if necessary,
legislative solutions affecting accounting, managerial and
corporate relationships so this tragedy will never happen again
in America.
I will have a more in-depth and comprehensive opening
statement at the full committee hearing next week, which will
be more global in its reach, and I look forward to the
testimony today from the witnesses. I thank the chairman for
his----
Chairman Tauzin. Would the gentleman yield?
Mr. John. Sure. Yes, I will yield to the chairman.
Chairman Tauzin. The Chair feels compelled to clarify that
with the new announcements, disclosures of potential record
destruction at Enron Corporation itself, that the full
committee hearing is scheduled for February 6. If you will all
put that on your calendar. The investigators will use the time
in between to examine thoroughly those new allegations of Enron
destruction. I thank the gentleman for yielding.
Mr. John. Thank you, and I yield back to the chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from New Hampshire, Mr. Bass, for an
opening statement.
Mr. Bass. Thank you very much, Mr. Chairman. And has been
stated before, the purpose of the hearing is to deal with the
very specific issue of shredding of documents. Hopefully the--
this hearing will lead to broader issues that will be addressed
by Mr. Stearn's subcommittee, perhaps the full committee,
dealing with issues of accounting practices and changes in the
regulatory structure that govern the proper disclosure and
honest, trustworthy disclosure of financial information in the
corporate world.
As my friend from Kentucky said, this is going to be a--to
a great extent--a very sad process that we go through here for
the 4,000 or so people whose lives have been shredded by the
actions of a few who may have acted in a certainly unethical,
if not illegal, manner in covering up what may be one of the
biggest corporate scandals in recent American history.
I hope as a result of this hearing, and hearings that will
follow, that we can to some measure restore a feeling of
confidence in the integrity of not only accounting practices,
but in business reporting practices which will have a salutary
impact on the capital markets in this country, because this is
not a good time in this country to have this kind of an issue
arise.
We are economically fragile right now. The last thing we
need to have is to have investors lose confidence in the--in
the nature and structure of corporations and business and to
have allegations, such as the ones that will be discussed and
investigated over the next few weeks, prove to be true.
So I want to thank my colleagues for helping bring this
matter out and bring a resolution, because if we don't, the
implications are going to be not only significant to the
business world but to the economy and this Nation and the
world. I yield back.
Mr. Greenwood. The Chair thanks the gentleman from New
Hampshire and recognizes the gentleman from Illinois, Mr. Rush,
for an opening statement.
Mr. Rush. Thank you, Mr. Chairman, for holding today's
hearing on the destruction of Enron-related documents. Today,
many thousands of Americans have awaked not knowing how they
will survive today or tomorrow.
At the same time, several high-level executives are waking
up with their economic futures in top-notch shape. For them,
the collapse of Enron may be little more than a financial speed
bump.
Today's hearing will be an important part in answering the
questions asked by many Americans. That question is simply: Why
was corporate misconduct and malfeasance allowed to happen? Why
was Enron's arrogance and avarice allowed to trample the future
of Enron's employees?
Enron, which was once the seventh largest company in
America, has wreaked havoc on the lives of thousands of former
employees and stockholders. Furthermore, given the major role
that Enron played in the energy industry, the ripple effects
will be felt throughout our economy for some time to come.
Other Americans will pay for Enron's corporate greed.
Simply put, this is indeed a financial catastrophe. One
economist stated it perfectly when he said the following, and I
quote: You can look at the system of concentric circles from
management to directors and the audit committee to regulators
and analysts and so forth and so forth. This was like a nuclear
meltdown where the core was melted through all layers.
Today, as we begin to look at the first of many layers of
that meltdown, I am hopeful that we will be able to conduct a
straightforward discussion. That discussion should allow us to
move on that core issue that asks: What deliberate, negligent,
or reckless actions taken by Enron itself led to the financial
and personal ruin of thousands of unsuspecting shareholders?
That said, I will remind the witnesses of the importance of
today's hearing, which is not about excuses, nor is it about
fingerpointing done in the hopes of getting off the hook.
Instead, this hearing is about those thousands of workers who
were left to perish in this financial meltdown while those at
the controls ran for safe cover. And ultimately this hearing is
an important step in making sure that the American public is
shielded from this sort of travesty in the future.
And, Mr. Chairman, last I want to say that I hope that my
gut suspicions are not accurate this morning, and I hope that
although the hearing is aimed at the actions, possible criminal
actions of Arthur Andersen, I hope that this hearing is not
about letting Enron off the hook and distracting and diverting
the attention of the actions of the Enron executives and using
others an scapegoats for their actions.
Thank you, and I yield back the balance of my time.
[The prepared statement of Hon. Bobby L. Rush follows:]
Prepared Statement of Hon. Bobby L. Rush, a Representative in Congress
from the State of Illinois
Today, thousands of Enron employees awoke not knowing how they will
survive today or tomorrow. At the same time, several high level
executives awoke with their economic futures in good condition. For
them, the collapse of Enron may be little more than a financial speed
bump.
Today's hearing will be an important part in beginning to answer
the questions asked by millions of Americans. Those questions are
simply: Why was this corporate misconduct and negligence allowed to
occur? Why were Enron's top-level managers allowed to arrogantly and
greedily trample on the future of their employees?
Enron, once the seventh largest company in America, has wreaked
havoc on the lives of thousands of their employees and stockholders.
Furthermore, given the major role that Enron played in the energy
industry, the ripple effects of their collapse are will be felt
throughout our economy for some time to come. Americans will pay for
Enron's corporate greed. This is a financial catastrophe.
One economist stated it perfectly when he said the following: ``You
can look at the Enron collapse as a system of concentric circles from
management to directors, and the audit committee to regulators. This
was like a nuclear meltdown where the core was melted through all
layers.''
As we begin to look at the first of many layers of that meltdown, I
am hopeful that we will be able to conduct a straight-forward
discussion. I would remind the witnesses of the importance of today's
hearing. It is not about excuses and finger pointing done in the hopes
of getting off the hook. It is about those thousands of workers who
were left to perish in this financial meltdown, while those at the
controls ran for safe cover. The hearing is a critical first step in
making sure that the American public is forever shielded from this sort
of travesty.
Mr. Greenwood. I thank the gentleman. Mr. Rush, if you want
to see us investigate the Enron Corporation, I suggest you
fasten your seatbelt.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Richard Burr, a Representative in Congress
from the State of North Carolina
Mr. Chairman, I don't think anyone at this hearing is happy with
the reasons for which we must be here today. But today, in this
exercise--we must faithfully discharge our duties to uncover that which
has been covered up.
We must begin to publicly uncover and inquire of the actions taken
by Arthur Andersen in its work on behalf of the Enron Corporation.
Why did Andersen engage in what is alleged to be a large scale
destruction of documents related to Enron's financial well-being? We
know from testimony given to our Committee's as early as August, that
Andersen had already convened a working group to review Enron's Third
Quarter charges, charges that in its Oct 16 press release revealed a
loss of $618 MILLION and a reduction in shareholder equity of
approximately $1.2 BILLION due to charges associated with various
partnerships. We know that Ms. Temple was concerned enough about
misstatements in the Third Quarter press release that she suggested to
Mr. Duncan that portions of his memo for company files be deleted so
that it does not suggest that ``[Andersen has] concluded the release is
misleading.'' Why is this important?
Because it appears that some at Andersen were seeking to avoid a
similar outcome to what happened with their client Sunbeam in the
middle of last year.
As it was reported by the Wall Street Journal in November,
``according to the SEC's May settlement order with Sunbeam, Andersen
auditors had routinely dismissed so many violations of Generally
Accepted Accounting Procedures (GAAP) as immaterial that they
eventually piled up to produce significant distortions in Sunbeam's
financial statements, making the barely solvent consumer-products maker
look handsomely profitable. Sunbeam filed for Chapter 11 bankruptcy-
court protection this past February (2001).''
The article went on to say, ``Under GAAP, misstatements aren't
immaterial simply because they fall beneath a numerical threshold,
according to an SEC accounting bulletin. Under certain circumstances,
the SEC says intentional immaterial misstatements are unlawful. One
reason is that when immaterial misstatements are combined with other
misstatements, they can (according to the SEC bulletin): `render the
financial statements taken as a whole to be materially misleading.' ''
What I hope to come away with from this hearing and this phase of
our investigation is:
Were documents destroyed by Andersen that would have proved
they had intentionally made immaterial statements as they
related to Enron?
When did Andersen hire outside counsel to represent them as it
pertained to their client Enron?
Were Andersen officials aware of an SEC investigation yet did
nothing to stop the destruction of documents?
Mr. Chairman, the chore before will require some hard work and
heavy lifting. Before I go any further, I want to commend the staffs on
both sides of the aisle who sacrificed nights, weekends and holidays to
get this investigation to where we are today. It has been said that
hard work will reveal the character of those involved in the task at
hand. Some will turn up their sleeves, some will turn up their noses,
and some just won't turn up at all. I look forward to working with
those who chose to turn up their sleeves in this endeavor to uncover
that which has been covered up.
______
Prepared Statement of Hon. Robert Ehrlich, a Representative in Congress
from the State of Maryland
Thank you, Mr. Chairman. Mr. Chairman, the failure of any business
is deeply disappointing as investors are stripped of wealth and
worker's incomes, security, and future dreams are altered. Employees
and their families bear the brunt of this failure with many
experiencing a profound sense of loss, anger, and shame. As the failure
ripples through related enterprises, rocking businesses and
communities--disillusionment and loss is left in its wake.
Unfortunately, the tempest of a failed enterprise is in direct
proportion to its size, and I applaud your conducting this inquiry of
Enron, once our nation's 7th largest company.
On December 2, 2001, energy-giant Enron shocked the energy and
financial communities by filing for Chapter 11 bankruptcy. Enron is the
largest corporation in American history to file for bankruptcy. In
addition to investor losses, the sudden and dramatic fall in Enron's
stock price has stripped the retirement accounts of many current and
retired Enron employees, whose savings were largely based on Enron
stock.
Mr. Chairman, my colleagues and I support the committee's efforts
to discover whether or not Enron engaged in illegal business practices.
We want to understand why executives received large bonuses and
compensation during Enron's financial decline while other employees
were prevented from selling their stock and lost their entire life
savings. We want to understand how such a large corporation was able to
hide its debt and collapse without any warning from responsible
regulatory agencies and auditors. There are many questions to be
answered: Did Enron's use of a large number of partnerships contribute
to its collapse? Was there a failure on the performance of federal
regulators? Did federal regulators have authority to adequately oversee
the complex commodity trading and financial transactions--the
foundation of Enron's rapid growth? Through your guidance, these and
many other questions will be answered.
Further, I am troubled by the performance of one of our country's
most preeminent accounting firms and auditors. Strong, diligent, and
effective accounting and auditing practices are the foundation of
capitalism and fundamental to maintaining investor and lender
confidence in our capital markets. The Enron collapse has brought a
crisis of confidence in the accounting profession and changes are
required to regain the public's trust. Deceptive accounting and
auditing practices must not go unchecked.
Mr. Chairman, I applaud your efforts to review accounting
standards, practices, and services and their effects in the Enron
collapse. If there are flaws in the regulatory system, then the laws
must be changed to guarantee that a debacle of this magnitude will
never happen again. I agree with President Bush's State of the Union
statement that through stricter accounting standards and tougher
disclosure requirements, corporate America must be made more
accountable to employees and shareholders and held to the highest
standards of conduct. This must be an era of corporate responsibility.
The American people know that deliberate destruction of evidence by
an employee in an ongoing investigation brings its own State and
Federal criminal and civil penalties as does failure to comply with SEC
regulations and directives. Americans know that our court system will
resolve the many lawsuits seeking justice and compensation. Illegal and
duplicitous actions should not and cannot be tolerated. Americans know
that some may attempt to use this failure and business scandal that has
hurt so many as a tool for petty politics and opinion manipulation. We
owe those who have worked hard, played by the rules, and have lost so
much a strong, bipartisan investigation, or risk victimizing them a
second time.
Mr. Chairman, your efforts to promote dependable, affordable, and
environmentally-sound production and distribution of energy are well
known. Opponents may try to confuse deregulation with illegal and
duplicitous actions. I continue to believe that the competitive market
place, protected from potential abuse of power through proper oversight
and legal protections, is the foundation for a strong economy, the
basis for national security, and provides the best products and
services to our citizens. I agree with President Bush that it is
critical, particular in the energy market, to provide Americans the
right of choice with regard to products and services.
Finally, this committee's investigation into Enron's business
practices will prevent future business collapses of this nature,
determine the effectiveness of Federal oversight and regulatory
agencies, and make clear whether changes to Federal law are necessary
to protect employees and shareholders. We must and will get to the
bottom of Enron's failure and work to ensure it never happens again.
Thank you Mr. Chairman.
______
Prepared Statement of Hon. Paul E. Gillmor, a Representative in
Congress from the State of Ohio
Thank you Mr. Chairman, for giving us the opportunity to explore
the recent events with regard to the destruction of Enron-related
documents by Andersen personnel. I am also glad to see the witnesses
from Andersen and look forward to hearing their testimony.
Over the past few years, like many of the members here, I have
distributed a questionnaire to my constituents in an effort seek
further input regarding the issues of day. Of note, one of my questions
inquires whether members of a household invested in stocks or mutual
funds. Here lies my motivation and concern. Of those that responded to
this year's survey, 83% answered ``yes.'' With the number of private
shareholders on the rise, it is important that as we listen to
Andersen's document retention and destruction policies carefully,
keeping in mind the actions of those in corporate management. More
importantly, their actions should never come at the expense of the
shareholder. I look forward to further congressional oversight
regarding this issue.
______
Prepared Statement of Hon. Edward J. Markey, a Representative in
Congress from the State of Massachusetts
Thank you, Mr. Chairman, for extending to me the courtesy of
participating in today's hearing.
I think it is outrageous that the same executives who may be
responsible for the destruction of workers' pensions--and the
destruction of documents that might prove their guilt--are currently
protected by Congress when defrauded worker's actually try to recover
their life savings. But, sadly, it is true. Why? Because in 1995,
Arthur Anderson and the other big accounting firms succeeded in
lobbying Congress to strictly limit their future liability for
securities fraud. That bill passed over the President's veto as part of
the Republican Contract with America. And today, we are seeing the grim
results--Arthur Anderson can no longer be held jointly and severally
liable when a court has found them guilty of securities fraud. I
believe that this ill-advised law has directly contributed to a rising
tide of accounting failures, culminating in the Enron-Arthur Anderson
fiasco. The types of internal checks and balances that a healthy
concern about litigation risk used to create within each accounting
firm has been undermined. The many honest and decent people who want to
do the right thing get overruled, and the increasing revenues coming
from consulting and non-audit businesses put growing pressure to sign
off on the ``cooked books'' of major clients.
Yesterday, I introduced legislation aimed helping to address this
problem. This bill would, among other things, require auditors to
retain copies of all documents generated during the course of an audit
for a period of four years and establish criminal penalties of up to
ten years imprisonment for auditors that knowingly and willfully
destroy such documents. The bill also would reform the liability
standards applicable to accountants in securities fraud cases and
provide an exemption from the ``Catch 22'' discovery stay that allows
accounting firms to escape accountability for their actions. I look
forward to working with Members on this and other reforms. Clearly, we
have a system that is very broken, and we need to work together to fix
it.
Today's hearing is focused on the disturbing reports that employees
of Arthur Anderson have destroyed documents in connection with the
Enron debacle. I think it's appalling that Anderson CEO Joseph
Berardino has declined the Subcommittee's invitation to testify on this
matter, when he was somehow able to make an appearance on Meet the
Press last Sunday. I have also read that Mr. Berardino has agreed to
appear before the House Financial Services Committee on February 4th.
If Mr. Berardino can appear to answer questions on national television
and before other Committees, it seems to me that he should be able to
appear before this Subcommittee so that we can get to the bottom of why
his firm destroyed documents being sought by the SEC, by the Justice
Department, and by defrauded workers and investors.
Now, I have many questions about the underlying transactions and
investments whose accounting treatment helped to bring Enron to
bankruptcy, but I understand that this is not the subject of today's
hearing. I would merely hope, Mr. Chairman, that we will have a chance
to thoroughly examine Enron's investments in broadband, its energy
trading operations, and its derivatives and other structured financings
in the detail needed to understand just what happened here and what
lessons we can learn from this massive fraud and misbehavior. That will
require more than a single hearing of all of the principals to do
properly.
Thanks again, Mr. Chairman, for allowing me to participate in
today's hearing. I look forward to the testimony.
Mr. Greenwood. The Chair will now call the first panel. Mr.
Duncan, will you please come forward.
Please be seated right there. Thank you, sir.
Good morning, Mr. Duncan.
Mr. Duncan. Good morning.
Mr. Greenwood. Mr. Duncan is here with us today under
subpoena. To date, Mr. Duncan has cooperated with this
committee in our search for the facts by submitting to an
interview last week with our committee investigator that lasted
more than 4 hours. Yet we received a letter from his counsel
yesterday stating that Mr. Duncan authorized his counsel to
advise the committee that he will, quote, rely on his
constitutional right not to testify, close quote.
I believe that this privilege should be personally
exercised before the Members, and that is why we have requested
Mr. Duncan's appearance here today, and request that he
reconsider.
Mr. Duncan, you are aware that the committee is holding an
investigative hearing, and, in doing so, we have the practice
of taking testimony under oath. Do you have objection to
testifying under oath?
Mr. Duncan. No, sir.
Mr. Greenwood. Thank you. The Chair also advises you that
under the rules of the House and the rules of the committee,
you are entitled to be advised by counsel. Do you desire to be
advised by counsel during your testimony today?
Mr. Duncan. Yes, sir.
Mr. Greenwood. Okay. In that case, would you please rise
and raise your right hand and I will swear you in.
[Witness sworn.]
Mr. Greenwood. Thank you, Mr. Duncan. You are now under
oath and you may give a 5-minute summary of your written
testimony if you choose to.
TESTIMONY OF DAVID DUNCAN, FORMER ANDERSEN PARTNER-IN-CHARGE OF
ENRON ENGAGEMENT
Mr. Duncan. I have no summary, sir.
Mr. Greenwood. Okay.
The Chair will recognize himself for questioning. Mr.
Duncan, Enron robbed the bank. Arthur Andersen provided the
getaway car, and they say that you were at the wheel.
I have a specific question for you, Mr. Duncan. You were
fired by Anderson last week for orchestrating an expedited
effort among the Andersen-Enron engagement team to destroy
thousands of paper documents and electronic files relating to
the Enron matter after learning of an inquiry by the Securities
and Exchange Commission into Enron's complex financial
transactions.
Did you give an order to destroy documents in an attempt to
subvert governmental investigations into Enron's financial
collapse, and, if so, did you do so at the direction or
suggestion of anyone at Anderson or at Enron?
Mr. Duncan. Mr. Chairman, I would like to answer the
committee's questions, but on the advice of my counsel I
respectfully decline to answer the question based on the
protection afforded me under the Constitution of the United
States.
Mr. Greenwood. Well, let me be clear, Mr. Duncan. Are you
refusing to answer the question on the basis of the protections
afforded to you under the fifth amendment to the United States
Constitution?
Mr. Duncan. Again, on the advice of my counsel, I
respectfully decline to answer the question based on the
protection afforded me under the United States Constitution.
Mr. Greenwood. Will you invoke your fifth amendment rights
in response to all of our questions here today?
Mr. Duncan. Respectfully, that will be my response to all
of your questions.
Mr. Greenwood. I am disappointed to hear that, but it is
therefore the Chair's intention to dismiss the witness.
Mr. Duncan, we thank you for your attendance today and your
respect for this committee's process. You are dismissed and
perhaps we will see you on another occasion.
Mr. Duncan. Yes, sir.
Mr. Greenwood. I continue on my time.
Mr. Dingell. Mr. Chairman, may I raise a point of inquiry
at this time?
Mr. Greenwood. The gentleman is recognized.
Mr. Dingell. I assume the witness is being excused but may
be recalled at a later time; is that correct?
Mr. Greenwood. That is correct.
Mr. Dingell. And that the witness remains subject to the
process of the committee, and that if the committee's need is
such, that we will be recalling him; is that correct?
Mr. Greenwood. That is correct.
Mr. Dingell. Very well. I thank you, Mr. Chairman.
Mr. Greenwood. Does the ranking member of the subcommittee
wish to be recognized?
Mr. Deutsch. Mr. Chair, I think also, just in terms of
clarification, that we have the ability to grant immunity, but
at this time we have chosen not to, based upon our working with
the Justice Department as well as the SEC.
Mr. Greenwood. Mr. Duncan's attorney has repeatedly made it
clear that Mr. Duncan would have testified this morning had the
committee been willing to grant immunity to him. We have chosen
not to do that. I think that would be improper, certainly at
this time, in view of the Justice Department's investigation.
Mr. Deutsch. I want to make it clear that that is a
bipartisan agreement in that respect that the investigation is
continuing.
Chairman Tauzin. Would the gentleman yield? I also wanted
to say clearly on the record that our joint bipartisan team of
investigators is working on a daily basis in consultation with
Justice Department officials. The decisions we make regarding
granting any right of immunity to testify will be made in terms
of that consultative proceeding with the Justice Department.
I thank the chairman.
Mr. Greenwood. The Chair thanks the gentleman.
Continuing on my time, I think it is very important to lay
out for the subcommittee, our panel, and our audience our
apparent understanding of Mr. Duncan's recollection of relevant
events based on the committee counsel's interview of Mr. Duncan
last week.
It is my understanding that Mr. Duncan said that during the
September and October time period, he participated in frequent
meetings and teleconferences with a group of senior-level
Andersen partners in Houston and Chicago to discuss matters
relating to the Enron account. That group included Ms. Nancy
Temple from the legal group and Mr. Michael Odom, the audit and
practice director, both of whom are testifying today.
The consultation group which was created in late August or
early September was fluid in membership and was formed in
response to growing concerns over the accounting for Enron
special purpose entities.
Specifically, Mr. Duncan said that the group was formed at
the suggestion of Mr. Odom and himself in response to, one,
Sherron Watkins' allegations of accounting improprieties on the
Enron Raptor and LJM transactions; two, the $1 billion
accounting error discovered in August by Enron and Andersen
with respect to the accounting for the Raptor entities; and,
three, the rapidly declining stock price of the Enron merchant
assets transferred to the Raptor partnerships which made it
look like there would be a significant write-down by Enron.
During these conference calls, prior to October 12, 2001,
Mr. Duncan recalls receiving advice from Ms. Temple with
respect to the proper documentation of Andersen's evolving
position with respect to the correct accounting for the Raptor
transactions.
Also prior to receiving Ms. Temple's October 12 e-mail
regarding compliance with Andersen's documentation retention
policy, Mr. Duncan recalls Ms. Temple on one or two of these
three group conference calls asking him, quote, ``How are you
on compliance with the document retention policy on Enron?'' he
said that his response to her was, ``At best, irregular.''
Mr. Duncan then received Ms. Temple's October 12 e-mail
forwarded from Mr. Odom with the note ``more help.'' He did not
know what Mr. Odom meant by that phrase, but he viewed Ms.
Temple's e-mail as a follow-up to the question she had posed to
him orally about compliance with the retention policy, and as
advice from his attorney to ensure that the entire Enron audit
engagement team was in compliance with that policy.
He added that he had never before during his lengthy tenure
at Andersen been asked about compliance with the retention
policy, nor had he ever received such an e-mail about ensuring
compliance with that policy from anyone in Andersen's legal
group.
Mr. Duncan does not recall the precise date, but sometime
after October 12, 2001, Mr. Duncan met with his top Enron audit
partners, Mr. Tom Bauer, Ms. Deborah Cash, and Mr. Roger
Willard, to discuss the advice that he had received from Ms.
Temple. According to Mr. Duncan, the meeting participants
concluded that they should call a meeting of all of the Enron
audit managers to discuss timely compliance with the retention
policy.
Mr. Duncan does not recall when this meeting occurred, but
does not dispute that his secretary sent out an e-mail on
October 23, 2001, calling an urgent meeting of the Enron
managers for later that same day.
Just days earlier, on either Friday, October 19, or
Saturday, October 20, Mr. Duncan had first learned of the SEC
informal inquiry of Enron. He recalled that he had discussions
with the Andersen Consultation Group about the SEC development
over the weekend, including Ms. Temple. He also recalled that
on October 22, he and other Andersen engagement team members
met with Enron chief accounting officer, Rick Causey, to
discuss the SEC inquiry.
Duncan said that Causey requested Andersen's assistance in
creating documents to explain the related party transactions to
the SEC. Mr. Duncan said that at the meeting he called with all
of the Andersen audit managers on the Enron account, whenever
it may have occurred, he advised them of the importance of
compliance with the document retention policy, and handed out
copies of the policy to the participants.
Mr. Duncan said that he observed individuals on the
engagement team actively complying with the firm's document
policies by shredding documents, and that the activity
continued up until November 9 when he received a voice-mail
from Ms. Temple ordering the preservation of all Enron-related
documents.
Mr. Duncan also said that he destroyed some of his own
Enron-related documents in an effort to comply with Andersen's
document retention and destruction policies.
Again, that is my understanding of Mr. Duncan's interview
with committee staff. Mr. Deutsch, would you agree that I have
characterized our current understanding of Mr. Duncan's
recollection of relevant events accurately?
Mr. Deutsch. I would.
Mr. Greenwood. Thank you. With that, I would call the
second panel of witnesses to the table.
Mr. Dingell. Mr. Chairman, while the witnesses are coming
forward, I would like to request to proceed out of order for
about 1 minute.
Mr. Greenwood. Without objection, the gentleman, Mr.
Dingell, will be recognized to speak out of order for 1 minute.
Mr. Dingell. I assure you with thanks, Mr. Chairman, you
have nothing to fear from this request.
I have the pleasure to introduce an old friend to this
committee who is known and loved by us all, Mr. Jack Valenti
who is in the room.
And I have also the pleasure to introduce a new friend of
the committee, somebody that you have been watching, I think
with great enjoyment, in one of the most popular of the shows,
The Sopranos. That is Ms. Lorraine Bracco, who is here present
with us this morning as a part of an effort we are making to
bring forth information with regard to the inadequate treatment
of women managers in the marketplace and discrimination against
them.
So we thank her for that, and I am pleased to welcome her.
And I have, Mr. Chairman, stayed under my 1 minute.
Chairman Tauzin. Will the gentleman yield quickly? Just to
point out, we may need your character's services before this
hearing is over.
Ms. Bracco. I am available.
Mr. Greenwood. Welcome. The Chair calls the second panel,
Mr. Dorsey L. Baskin, Jr., managing director, Professional
Standards Group, Andersen; Mr. Andrews, the global managing
partner; Ms. Nancy Temple, attorney, Andersen; and Mr. Michael
C. Odom, audit partner at Andersen.
Good morning. The Chair welcomes our next panel of
witnesses. You are aware that the committee is holding an
investigative hearing and that when doing so, we have the
practice of taking testimony under oath.
Do you have any objections to testifying under oath? Seeing
no such objection, the Chair then also advises you that under
the rules of the House and the rules of the committee, you are
entitled to be advised by counsel.
Do any of you desire to be advised by counsel during your
testimony today? Mr. Baskin you--state your counsel's name for
the record, Mr. Baskin.
Mr. Baskin. Mark Gitenstein.
Mr. Greenwood. Mr. Andrews?
Mr. Andrews. Mark Gitenstein and Stan Brand.
Mr. Greenwood. Ms. Temple?
Ms. Temple. Yes. Mark Hansen, Reid Figel, and Silvija
Strikis.
Mr. Greenwood. You know the name of your attorney. Very
good. Mr. Odom.
Mr. Odom. Peter Flemming.
Mr. Greenwood. Okay. In that case, would you please rise
and raise your right hands so I can swear you in?
[Witnesses sworn.]
Mr. Greenwood. Thank you. The Chair advises you that you
are now under oath, and would recognize Mr. Andrews for 5
minutes to make an opening statement, Mr. Andrews?
Mr. Andrews. Actually, Mr. Baskin is making the opening
statement.
Mr. Greenwood. Mr. Baskin, then you are recognized for 5
minutes for your opening statement.
TESTIMONY OF C.E. ANDREWS, SENIOR EXECUTIVE, ANDERSEN LLP;
MICHAEL C. ODOM, AUDIT PARTNER, ANDERSEN LLP; DORSEY L. BASKIN,
JR., MANAGING DIRECTOR, PROFESSIONAL STANDARDS GROUP, ANDERSEN
LLP; AND NANCY TEMPLE, ATTORNEY, ANDERSEN LLP
Mr. Baskin. Thank you. Chairman Tauzin, Congressman
Dingell, Chairman Greenwood, Congressman Deutsch, members of
the committee, my name is Dorsey Lee Baskin, Jr. Since 1999 I
have been managing director of Andersen's Assurance
Professional Standards Group, which has firm-wide
responsibility for providing guidance on auditing standards,
including professional standards relating to the preservation
of audit work papers and client files.
I have been at Andersen for almost 25 years since receiving
my MBA from Texas A&M University in 1977. I am here with my
partner, C. E. Andrews, who is managing partner for Andersen's
global audit practice. He and I will both answer the
committee's questions.
I would like to make three essential points at the outset
of our testimony. First, as our CEO has said, this is indeed a
tragedy on many levels. Second, the committee and the broader
public should know that Andersen came forward voluntarily and
disclosed the destruction of documents by Andersen personnel.
However improper that destruction was, Andersen did not hide
from its obligations to do what it could to take corrective
action. We promptly alerted all investigative authorities,
including this committee.
Although the firm was well aware of the potentially
devastating impact this disclosure could have on our
reputation, we did the right thing. We certainly are not proud
of the document destruction, but we are proud of our decision
to step forward and accept responsibility.
Third, it bears emphasis that Andersen has cooperated fully
and unreservedly with all of the ongoing investigations into
the destruction of Enron-related documents. We are determined
to get to the bottom of what happened. We have publicly
acknowledged and will continue to acknowledge mistakes that we
have made. We have tried and will continue to try to answer
every question that is put to us. And we will take whatever
decisive action is necessary to restore public confidence in
the firm.
I have to tell you in all candor that we are limited in
what we can say today about the destruction of documents by
Andersen personnel working on the Enron engagement. Our
investigation into that destruction is far from complete. We
have not yet had the opportunity to review all of the many
relevant documents or to hear from all of the people who have
relevant information.
But, having said that, this is what I can tell you about
Andersen's retention and destruction of documents. To begin
with, it is the usual routine and wholly legitimate practice of
auditors to preserve their final working papers while disposing
of drafts, personal notes, and other materials that are not
necessary to support the audit report.
So far as I am aware, this is the policy of all of the
large accounting firms. This policy toward document disposal
reflects longstanding and sound audit practice. It is designed
to assure that the audit work papers, which are the principal
materials reflecting and documenting the conclusions of the
audit, unambiguously reflect the judgments that actually were
reached.
This understanding of proper audit practice was reflected
in the Andersen document retention policy in effect last fall,
which provided that documents other than work papers ordinarily
should be disposed of when no longer needed, but that such
documents should be retained when litigation has commenced or
is threatened.
Of course, precisely when that occurs often will require
the application of informed judgment to the particular
circumstances of a given case, and that may well be a point at
which reasonable people can differ. As for the destruction of
Enron-related documents, we know that on October 23, just 6
days after the SEC requested information from Enron, David
Duncan, Andersen's lead partner on the Enron engagement, called
an urgent meeting of the Enron engagement team, in which he
organized an expedited effort to shred, or otherwise dispose
of, Enron-related documents.
This effort was undertaken without any consultation with
others in the firm, or, so far as we are aware, with legal
counsel. Over the course of the next several days, a very
substantial volume of documents and e-mails were disposed of by
the Enron engagement team. This activity appears to have
stopped shortly after Mr. Duncan's assistant sent an e-mail to
other secretaries on November 9, the day after Andersen
received a subpoena from the SEC telling them no more
shredding.
Once this activity came to light, Andersen's response was
immediate. Andersen notified the Department of Justice, the
SEC, and all relevant congressional committees. At the same
time, the firm suspended its records management policy and
asked former Senator Danforth to conduct an immediate and
comprehensive review.
On January 15, approximately 2 weeks after our CEO learned
about the document destruction, Andersen dismissed Mr. Duncan.
The firm also placed three of our partners from the Enron
engagement on administrative leave, pending completion of the
investigation into their responsibility for these events.
The firm relieved four partners in its Houston office of
their management responsibilities, and the firm indicated that
it will take disciplinary action against any Andersen personnel
who are found to have acted improperly.
I should address the question why Andersen took the
forceful action it did regarding Mr. Duncan. In our view, Mr.
Duncan's actions reflected a failure of judgment that is simply
unacceptable in a person who has major responsibilities at our
firm. He was the lead engagement partner for a significant
client, exercising very substantial responsibility within the
firm, yet our investigation indicated that he directed the
purposeful destruction of a very substantial volume of
documents, just as the government investigation was beginning.
This is the kind of conduct that Andersen cannot tolerate.
When Andersen CEO Joe Berardino testified before Congress
almost 6 weeks ago, he observed that all of us here today, and
many others who are not here, have a responsibility to seek out
and evaluate the facts and take needed action. We have tried to
fulfill that responsibility.
We uncovered the document destruction. Our firm's
management brought it to the attention of the governmental
authorities. We already have started to implement decisive
disciplinary and remedial action. We are continuing our
investigation, resolved to take all steps that are necessary to
restore public confidence in the integrity of our firm. Thank
you.
[The prepared statement of C.E. Andrews and Dorsey L.
Baskin, Jr. follows:]
Prepared Statement of C.E. Andrews, Global Managing Partner--Assurance
and Business Advisory, Andersen, and Dorsey L. Baskin, Jr., Managing
Director, Assurance Professional Standards Group, Andersen
Chairman Tauzin, Congressman Dingell, Chairman Greenwood,
Congressman Deutsch, Members of the Committee.
C.E. Andrews is managing partner for Andersen's global audit
practice. Dorsey L. Baskin, Jr. is Managing Director of Andersen's
Assurance Professional Standards Group, which has firm-wide
responsibility for providing guidance on auditing standards, including
professional standards relating to the preservation of audit work
papers and client files.
We would like to make two essential points at the outset of our
testimony. First, this Committee and the broader public should know
that Andersen came forward voluntarily and disclosed the destruction of
documents by Andersen personnel. However improper that destruction was,
Andersen did not hide from its obligation to do what it could to take
corrective action; we promptly alerted all investigative authorities,
including this Committee. Although the firm was well aware of the
potentially devastating impact this disclosure could have on our
reputation, we did the right thing. We certainly are not proud of the
document destruction--but we are proud of our decision to step forward
and accept responsibility.
Second, it bears emphasis that Andersen has cooperated fully and
unreservedly with all of the ongoing investigations into the
destruction of Enron-related documents. We are determined to get to the
bottom of what happened. And we will take whatever decisive action is
necessary to restore public confidence in the firm.
The Committee is holding this hearing at an extraordinary time. The
circumstances surrounding the collapse of Enron are now being
investigated by myriad committees and subcommittees of Congress,
including this Committee; the House Financial Services Subcommittee;
the Senate Commerce Committee; the Senate Governmental Affairs
Committee; and the Senate Permanent Subcommittee on Investigations.
In addition, of course, investigations are being conducted by the
Securities and Exchange Commission; the U.S. Department of Justice; and
the U.S. Department of Labor.
And not least, Andersen is conducting its own inquiry into all of
the circumstances of the Enron audit, including the destruction of
documents by Andersen personnel. This is not a face-saving exercise on
our part. It is absolutely essential to Andersen's continued success
that there be a thorough, entirely credible determination of what
happened and what went wrong. We know that our reputation is our single
most important asset--and the one on which our firm's existence is
premised. We therefore are determined to get to the bottom of what
happened, to publicly acknowledge and correct any errors that we made,
and to take all actions that are necessary to ensure that such mistakes
do not recur in the future.
The proof of our commitment to a thorough and transparent response
to the events at Enron is visible in the steps that we already have
taken. Andersen's CEO, Joe Berardino, testified before the a House
committee in December and acknowledged that Andersen auditors made an
error in judgment regarding the Enron audit. As we'll explain in more
detail later, we likewise have acknowledged that the destruction of
documents by the Enron engagement team was wrong, and we have taken
forceful steps in response.
Our commitment also is manifest in the full cooperation that we
have given to all of the official inquiries into Enron's collapse.
While others whose assistance has been sought by investigators have not
cooperated and were nowhere to be seen at previous congressional
hearings, we have answered every question put to us and appeared
whenever requested. Although this is a very painful time for our firm
and the questions are sometimes difficult to answer, Joe Berardino and
C.E. Andrews, each testified before congressional committees last
month. Mr. Berardino has addressed issues raised by the press, and he
and Andersen's other top executives have tried to respond fully and
honestly to the concerns both of our clients and of the tens of
thousands of Andersen partners and employees who had no connection at
all to the Enron audit.
We have, moreover, gone the extra mile in cooperating with the
governmental investigations:
We have made diligent efforts to provide all relevant
materials to investigative bodies; to accommodate this
Committee, for example, we produced a substantial volume of
material on a significantly expedited basis.
We gave the Committee the names of Andersen personnel who have
knowledge about events relating to Enron, including document
destruction, and, to the extent possible, encouraged these
individuals to cooperate with the Committee's requests for
interviews. We did not object to the testimony of any Andersen
personnel with direct knowledge relevant to the inquiry,
including Ms. Nancy Temple.
We have provided briefings to congressional staff on Enron
accounting issues and, to the extent we are able, on matters
relating to the destruction of documents.
We have invested incalculable man hours responding to
governmental requests for documents and information.
Finally, to assure that we resolve all issues relating to the
destruction of documents in a manner that is beyond reproach, we
retained former Sen. John Danforth and his law firm to review
Andersen's document retention policies and, ultimately, to ensure that
Andersen takes all appropriate disciplinary action against personnel
involved in improper document destruction.
Our investigation into the destruction of documents by Andersen
personnel is far from complete. We nevertheless will endeavor to be as
helpful and forthcoming as possible--although we must add the caveat
that there may well be questions that neither we, nor anyone else at
Andersen, will be able to answer at this time to the Committee's
satisfaction.
This is what we can tell you about Andersen's retention and
destruction of documents.
To begin with, it is the usual, routine, and wholly legitimate
practice of auditors to preserve their final work papers while
disposing of drafts, personal notes, and other materials that are not
necessary to support the audit report. So far as we are aware, this is
the policy of all large audit firms.
This policy towards document disposal reflects sound audit
practice. It is designed to assure that the audit work papers--which
are the principal materials reflecting and documenting the conclusions
of the audit--unambiguously reflect the judgments that actually were
reached. To this end, auditors routinely dispose of preliminary or
draft documents that might create confusion about the auditor's
analysis or conclusions. It is the audit work papers, rather than
preliminary materials, that are the real evidence of how the audit
proceeded.
Generally Accepted Auditing Standards, commonly referred to by
their initials as GAAS, provide guidance on the purpose and nature of
documentation retained by auditors. The applicable general standard,
Section 339 of the codification of audit standards, provides that
auditors should keep for a period of time their working papers that
support their reports.
The standard provides that the purpose of working papers is to: (a)
provide the principal support for the audit report, including the
reference in the report to compliance with GAAS; and (b) aid the
auditor in the conduct and supervision of the audit. Work papers
consist of many different types of documents, including schedules and
details of account balances; memoranda relating to business and
financial reporting risks and management controls; work programs that
direct the staff in the procedures and tests to be performed, and that
may document the results thereof; documentation of procedures and tests
such as confirmations of accounts receivable; records of counts of
inventory; results of tests of the operation of controls as the audit
progresses; conclusions reached as the result of tests; a copy of the
entity's financial statements signed by management to evidence its
responsibility for the final presentation; memoranda related to any
accounting and audit issues that arose during the audit, including
conclusions reached; representation letters from management; and a copy
of the final audit report.
In addition to these period-specific documents, auditors generally
keep continuing or ``evergreen'' files that contain documents of use to
audits for more than one year. Examples of these documents would be
copies of loan agreements, charters, organization charts, and so on.
Auditors also keep client-relationship files that contain records of
billing for fees and other administrative matters. The client-
relationship files are not considered to be part of the work papers
because they do not contain audit evidence relating to the audit
report.
According to the section 339 of GAAS, many factors affect the
auditors judgment about the quantity, type, and content of the work
papers for a particular engagement, including: (a) the nature of the
engagement (b) the nature of the auditors report; (c) the nature of the
financial statements, schedules, or other information on which the
auditor is reporting; (d) the nature and condition of the client's
records; (e) the assessed level of control risk; and (f) the needs in
the particular circumstances for supervision and review of the work.
The January 2002 revision of section 339 of GAAS adds to the
standard that audit documentation should be sufficient to: (a) enable
members of the engagement team with supervision and review
responsibilities to understand the nature, timing, extent and results
of auditing procedures performed and the evidence obtained; (b)
indicate the engagement team member(s) who performed and reviewed the
work; and (c) show that the accounting records agree or reconcile with
the financial statements or other information being reported on.
Section 339 of GAAS provides that the auditor should adopt
reasonable procedures for safeguarding work papers and should retain
them for a period sufficient to meet the needs of the auditor's
practice and to satisfy any pertinent legal requirements of records
retention.
Typically the work papers for the previous year's audit are checked
out at the beginning of the next audit by the engagement team and used
as a source of information during the next audit. Hereafter, the work
papers tend to sit in storage for many years.
This understanding of proper audit practice was reflected in the
Andersen document retention policy in effect last fall, which provided
that documents other than work papers ordinarily should be disposed of
when no longer needed--but that such documents should be retained when
litigation has commenced or is threatened. Precisely when that occurs
often will require the application of informed judgment to the
particular circumstances of a given case, and that may well be a point
on which reasonable people can differ. It also may be a point that
looks quite different in hindsight than it did to people making
decisions at the time.
Looking at this policy now, in light of recent events and with the
benefit of hindsight, we have to say that it is not a model of
clarity--although our guess is that, if the document retention policies
of other large businesses were subjected to the same close scrutiny,
they likely also would reveal ambiguities and questions about their
application to particular cases.
As we mentioned, we are still investigating the destruction of
Enron-related documents by Andersen personnel, and there is much still
to learn. But we can say this much about what we know about the
destruction of Enron-related documents. On October 17 the SEC requested
information from Enron about its financial accounting and reporting.
Several days later, on October 23, David Duncan, Andersen's lead
partner on the Enron engagement, called an urgent meeting of the Enron
engagement team at which he organized an expedited effort to shred or
otherwise dispose of Enron-related documents. This effort was
undertaken without any consultation with others in the firm or, so far
as we are aware, with legal counsel.
Over the course of the next several days, a very substantial volume
of documents and emails--involving many of the Enron-related materials
that ultimately were destroyed were disposed of by the Enron engagement
team, including Mr. Duncan. So far as we have been able to determine to
date, however, no audit work papers were destroyed.
This activity appears to have stopped shortly after Mr. Duncan's
assistant sent an e-mail to other secretaries on November 9--the day
after Andersen received a subpoena from the SEC--telling them ``no more
shredding.''
Enron-related documents also were destroyed by others at the firm,
although the volume and circumstances of their activities appear to
have been quite different from those of Mr. Duncan. We are continuing
our investigation into that aspect of these events.
On Friday, January 4--shortly after the firm's internal inquiry
informed Andersen's CEO about the document destruction--Andersen
voluntarily notified the Department of Justice and the SEC. On January
7, Andersen met with Justice Department and SEC attorneys and briefed
them on what we knew. On January 10, Andersen also disclosed the
destruction to all relevant congressional committees and to the public.
At the same time, the firm suspended its records management policy,
asking Sen. Danforth to conduct an immediate and comprehensive review
of that policy and to recommend improvements.
On January 15, approximately two weeks after our CEO learned about
the document destruction, Andersen dismissed Mr. Duncan, the lead
engagement partner. The firm also placed three other partners from the
Enron engagement on administrative leave pending completion of the
investigation into their responsibility for these events. The firm
relieved four partners in its Houston office of their management
responsibilities. And the firm indicated that it will take disciplinary
action against any Andersen personnel who are found to have acted
improperly. Anyone at Andersen who purposely destroyed work papers, or
who destroyed Enron-related documents after having been informed of the
Nov. 8 subpoena to Andersen, will be dismissed; discipline for other
improper conduct will depend on the nature and severity of the acts
involved.
Finally, as we have mentioned, Andersen retained Sen. Danforth and
his firm to ensure that all appropriate steps are taken to deal
internally with misconduct by Andersen personnel.
We should address the question why Andersen took the forceful
action it did regarding Mr. Duncan. In our view, Mr. Duncan's actions
reflected a failure of judgment that is simply unacceptable in a person
who has major responsibilities at our firm. He was the lead engagement
partner for a significant client, exercising very substantial
responsibility within the firm. Yet our investigation indicated that he
directed the purposeful destruction of a very substantial volume of
documents--and in doing so, he gave every appearance of destroying
these materials in anticipation of a government request for documents.
This is the kind of conduct that Andersen cannot tolerate.
The case of Mr. Duncan was clear enough to allow us to draw
conclusions about his responsibility at an early stage of the inquiry.
That is not true of other Andersen personnel who were involved with the
destruction of documents. Our investigation continues; persons who are
found to have acted inappropriately, whatever their position in the
firm, will be dealt with accordingly.
Let me conclude by noting that when Joe Berardino testified almost
six weeks ago, he ended his remarks by stating that ``[a] day does not
go by without new information being made available and I would observe
that all of us here today--and many others who are not here--have a
responsibility to seek out and evaluate the facts and take needed
action.'' We have tried to fulfill that responsibility. We uncovered
the document destruction; our firm's management brought it to the
attention of the governmental authorities; we already have started to
implement decisive disciplinary and remedial action; and we are
continuing our investigation, resolved to take all steps that are
necessary to restore public confidence in the integrity of our firm.
This is, of course, a very painful and difficult period for
Andersen. But Andersen's great strength is its 85,000 employees in 84
countries around the world; its 28,000 Andersen Personnel in the United
States contribute to the economic life of virtually State in the Union.
We are determined to respond to this test openly and with complete
candor, and to face up honestly to our responsibilities to our clients
and to the public.
Thank you.
Mr. Greenwood. The Chair thanks the gentleman.
Ms. Temple, do you have an opening statement?
Ms. Temple. I do not, Mr. Chairman.
Mr. Greenwood. Mr. Odom, do you have an opening statement?
Mr. Odom. No, sir.
Mr. Greenwood. Mr. Odom, I understand from your attorney
that you have a letter addressed to me that you would like to
have incorporated into the record?
Mr. Odom. Yes, sir.
Mr. Greenwood. Okay. Without objection, that letter will be
incorporated into the record.
The Chair would note for the witnesses and for the members
that each of you should have a binder that has--two binders
that have in it the documents to which we will refer during the
course of the hearing, and we will refer to the documents by
tab number so that you can refer to them to assist you in
responding to the questions.
And I would suggest at this point you might want to turn to
Tab 28.
Mr. Burr. Mr. Chairman, do we also have a copy of Mr.
Odom's letter?
Mr. Greenwood. Yes. The staff will copy and circulate Mr.
Odom's letter.
[The material referred to follows:]
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Mr. Greenwood. The Chair recognizes himself for 5 minutes
for inquiry. And let me address my first question to Mr. Baskin
and/or Mr. Andrews for response.
I would like to read for you a quote from a Georgetown law
professor who is an expert on corporate legal ethics. Mr.
Milton Regan from the Washington Post last Sunday says this.
And if you look at Tab 28 in your binder, it says that as soon
as an accounting firm knows that a company it audits is under
government investigation, the firm's general counsel or
compliance officer would typically send a notice reminding
employees of the need to preserve documents related to the
inquiry and that, ``requirement of preserving documents would
override any internal document retention policy.''
Mr. Lynn Turner, the former top accountant for the SEC and
a longtime member of the Profession in Accounting Firms sent me
a letter to the same effect, saying that an SEC inquiry into a
client would normally prompt a letter from the auditor's
counsel to its employees, directing them to preserve related
records. I would like to make this letter part of the record.
[The letter follows:]
January 24, 2002
The Honorable James C. Greenwood
Chairman, Subcommittee on Oversight and Investigations
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
Dear Chairman Greenwood: For almost twenty years, I was associated
with the international accounting firm, Coopers & Lybrand, (now
PricewaterhouseCoopers). I served in various capacities in the firm
including a partner, member of the national accounting and auditing
office and as the partner responsible for the National High Technology
audit practice. More recently I served as Chief Accountant of the
Securities and Exchange Commission. I am currently an accounting
professor on the faculty of the College of Business of Colorado State
University.
It has been my experience in practice, when an accounting firm
becomes aware an investigation or litigation will occur with respect to
the performance of an audit, the communication to the audit team is
both in writing and verbal and clear and concise with respect to
document retention. The audit team is informed that any documents in
possession of the firm, its partners or employees are to be maintained
and no documents should be destroyed, altered or otherwise affected.
I would be pleased to provide testimony to this Committee at some
future date to assist the Committee in its work related to the Enron
matter and respond to any further questions you might have.
Sincerely,
Lynn E. Turner
Mr. Greenwood. Finally, last Sunday on Meet the Press, your
CEO and managing partner, Mr. Berardino said essentially the
same thing. Let me show you his quotes which should be in Tab
23 of your binder.
He says that your policy states, ``exactly that,'' meaning
that upon the SEC inquiry all shredding should have stopped. He
even went further, saying that if there is a, ``reasonable
anticipation of an investigation,'' all destruction should
stop.
So I guess the simple question is: Why didn't anyone at
Andersen notify its employees that an SEC inquiry into Enron
financial and accounting issues had begun and that normal
document destruction policies were suspended? Why did
Andersen's counsel wait nearly 3 weeks to do so?
Mr. Andrews. Well, Mr. Chairman, in terms of the timing of
that particular period of time and what is going on, and as to
why our legal counsel did not do that, I can't address
specifically the legal counsel response. But let me at least
explain the situation as we see it, as we understand it.
First, we clearly recognize that audit work papers should
never be destroyed. That is completely unacceptable. We
recognize that nothing can be destroyed once a subpoena is
received. That is completely unacceptable. And we also
recognize that judgment therefore needs to be applied in a
situation, to apply when any kind of documents cannot be
destroyed.
When we were in this period that you are referring to, in
this late October period, there was a lot going on as it
related to the company. At that point, as you indicate, the
company had just released its third quarter. It had been
notified that it was the recipient of an SEC investigation, a
lot of activity was taking place.
Our responsibility and our policy requires the engagement
partner, who in this case was Mr. Duncan, to assume and accept
responsibility for managing our policies. As you know, as the
record states, on October 23, Mr. Duncan called a meeting to
review our policies as it pertains to work papers and documents
and other related materials. At the conclusion of that meeting,
it appears that it led to a vast destruction of documents as a
result of that.
Mr. Greenwood. Mr. Andrews, let me interrupt you for a
second. My understanding of your company's position is that on
the 23rd, Mr. Duncan then set off this process, this initiation
to destroy documents. But what we can't understand, what I
would like to know is why in God's name, on October 23, didn't
the chief counsel for your company, the top brass at Andersen,
immediately send out word to everyone in the company,
particularly those involved in the Enron case, to not touch
documents, not shred a document? Why didn't that come down from
the top immediately?
Mr. Andrews. With regard to that question, Mr. Chairman, as
it is stated in our policy, the responsibility for that rests
with the engagement partner, a very seasoned, experienced
individual. And we rely on the engagement partner to make that
judgment, to make the judgment of what to do, as well as when
to seek counsel. Without the knowledge, without our knowledge,
without the knowledge of the legal counsel, that meeting was
called, that meeting was held, and they proceeded to destroy
documents, without consultation, without inquiry as to whether
it was proper or improper. And we find that situation
appalling. We did not----
Mr. Greenwood. And all of Mr. Duncan's superiors in the
company, including Mr. Berardino, and knowing this meltdown was
happening at Enron, knowing that this SEC investigation was on,
sat silently, just assuming that Mr. Duncan would do the right
thing? They gave him no direction whatsoever?
Mr. Andrews. Mr. Chairman, again, Mr. Duncan had been
advised of our policies in the memo on October 12. We expect
our engagement partners to understand our policies and apply
them, and we were not aware of the meeting that took place on
October 23, to the best of my knowledge.
So he directed the action. We find that action totally
unacceptable. That is why when we began our investigation,
which is in process, and we learned of it, we took the action
that we have taken to date. But the investigation is in process
and not completed. We took the action aggressively, because it
is a situation we will not tolerate. It is not the way Andersen
personnel are trained to perform, and it is completely
unacceptable. So it is totally out of bounds with good judgment
in that situation. And we took action as a result of that.
Mr. Greenwood. Let me turn to Ms. Temple.
Since I don't have any other members here right now, I will
continue with the questioning. We have a memo from you, Ms.
Temple, that is dated, I believe, November 10. Tab 20 in your
notebook. And that memo is very explicit. It is very clear that
you took action on that date, in the form of that memo, to make
it crystal clear that no one was to destroy documents.
Can you explain to us why it took you until November 10 to
issue a statement with that clarity, when a month earlier you
knew that the question of retention and destruction of
documents was going to be critical to investigations and to
litigation?
Ms. Temple. Yes, Mr. Chairman. I will tell you the
circumstances concerning the November 10 memo and the facts as
I understood them in the previous time period. On November 10,
the memo was sent--it was drafted by our outside counsel, a law
firm--Davis, Polk & Wardwell.
Mr. Greenwood. When was that firm retained?
Ms. Temple. I did not personally retain that law firm. I
know I spoke to a partner at that law firm on October 16.
Mr. Greenwood. Is your testimony that you do not know when
they were retained?
Ms. Temple. I don't recall the exact date of the retention.
I know I spoke to a partner at that law firm on October 16.
Mr. Greenwood. You may proceed.
Ms. Temple. It is the legal group's practice and protocol,
when Arthur Andersen receives a subpoena or a request for
documents, to send a written notification reminder to the
members of the engagement team, and we asked our outside
counsel to assist us in that process.
To the best of my recollection, the firm received a
subpoena from the Securities and Exchange Commission the end of
the business day on November 8, and a voice-mail was
distributed to the audit engagement team notifying them of that
the following business day. And once this e-mail was drafted,
it was circulated to the engagement team.
Now, moving back in timeframe to the previous period that
you talked about, the firm does have a written policy that
provides guidance. It is self-enforcing, and we trust our
partners to exercise their good judgment and to consult with
either the legal group or the practice directors, as
appropriate.
Mr. Greenwood. Let me interrupt you for a second. I asked
Ms. Temple when Davis, Polk was retained for this purpose. And
her response is that she didn't know. Mr. Baskin, Mr. Andrews,
do you know when this firm was retained?
I want to remind you that I asked you last night to be
prepared to answer that question this morning.
Mr. Andrews. Mr. Chairman, the firm was retained on October
9 and commenced work with us on October 16.
Mr. Greenwood. Okay. And what was the purpose for retaining
that firm on October 9?
Mr. Andrews. Well as--if we just--for a moment, what was
going on during--at that particular period of time, around that
October 9 time----
Mr. Greenwood. Are they handling the potential litigation
for the firm now?
Mr. Andrews. Are they handling it now? Yes, they are. What
was going on at that particular time was that we were
involved--the company was closing its third quarter. They were
about to reach conclusions on the third quarter. There were a
lot of financial reporting issues occurring during that period
that were obviously unusual and were concerning. So we engaged
them to help us with the financial reporting issues and with
possible litigation.
Mr. Greenwood. On October 9, when you retained this firm,
you did so because Andersen considered it likely that you were
going to confront litigation?
Mr. Andrews. No, Mr. Chairman, that is not what I said. We
engaged them to help us with that third quarter closing as it
related to financial reporting issues and possible litigation
and within the accounting literature, if you will, the term
``possible'' is used frequently but does not mean probable. We
had no reason at that particular point in time to expect
litigation, no.
Mr. Greenwood. Even given the Sherron Watkins memo that you
were aware of at that time, you didn't think that it was likely
that you were going to face litigation? You hired the firm that
is now handling your litigation, but on October 9, you didn't
hire them for that purpose?
Mr. Andrews. On October 9 we made the decision, the
principal reason that we were hiring the firm was to help with
the complex issues that were going on in the third quarter.
There were a number of accounting issues. There were disclosure
issues. And there were issues, as you referred to, the Ms.
Watkins memo. There were a number of items going on in that
third quarter that it would be normal in a situation like that,
I believe in my experience, to have--we engaged legal counsel
to advise us on things in many other situations.
Mr. Greenwood. Let me ask you, Ms. Temple, when did you
decide that it was likely that Andersen was going to face
litigation over this matter?
Ms. Temple. I don't recall making a particular
determination that Andersen was likely to face litigation or
being asked to make that determination. At this time, looking
back in retrospect, I can see all of the events that eventually
did occur that we did not anticipate at the time. And, as Mr.
Andrews stated, litigation is a possibility in this profession.
Mr. Greenwood. I believe you told our investigators that it
wasn't until sometime in November that you thought that it was
likely that there would be litigation?
Ms. Temple. Once it came to my attention that the company
intended to restate prior financial statement reporting
periods, I definitely considered that the firm would likely be
sued at that point.
Mr. Greenwood. When is the first time that Davis, Polk gave
the company any advice whatsoever, or counsel whatsoever, with
regard to document retention and destruction?
Ms. Temple. I believe in my conversations on October 16, I
discussed the documentation and retention issues that had
arisen as of that date with Davis, Polk.
Mr. Greenwood. Mr. Baskin or Mr. Andrews, or Ms. Temple,
you may want to answer this question. The document in Tab 29 in
your binder is a copy of an Enron announcement to its employees
and others on the Enron worldwide e-mail list, which I believe
includes Andersen, on October 25, 2001, telling them to
preserve records relating to the related party transactions,
including the accounting of those transactions.
Did Andersen learn about this action by Enron, which, by
the way, also seems rather late given that it is 8 days after
Enron learned of the SEC inquiry, and, if so, why didn't
Andersen act right then to order its employees to do the same?
Mr. Andrews. This is the first time that I have read this
memo. But as it pertains to our actions, again we believe that
it was the engagement partner's responsibility in this
situation, given what was occurring in that late October
period--which is when the date of this memo--that there was
enough information available that, in that partner's judgment,
the instructions and oversight of that partner would in fact
cause us not to destroy documents, and certainly you would not
convene a meeting and give instructions, if you will, if that
apparently is what happened, to destroy documents.
So we would agree that during this period, it would be
appropriate to, at a minimum, seek counsel before doing such an
exercise. And destruction of documents in that period is wrong.
We have admitted that. It is wrong. And once we learned of
that, once we learned of that in our investigation, we took
firm action. That is not Andersen. That is not what we
encourage our employees to do. It is inappropriate.
Chairman Tauzin. The chairman of the subcommittee has had
to go to the floor to make a vote and will return shortly. His
time has expired, but we will explore this question further in
detail as we go forward.
The Chair is pleased to recognize the ranking member of the
subcommittee, Mr. Deutsch, for a round of questions.
Mr. Deutsch. I had a chance to read your testimony, but not
to listen, because we are trying to save time in terms of
people's comments.
Mr. Andrews, if you can give me a sense of has anything
like this, in your knowledge, ever occurred before in a ``Big
5'' accounting firm, with the destruction of documents with the
time line that we are here.
Mr. Andrews. I want to make sure I understand.
Mr. Deutsch. Basically the time line. You are aware of an
investigation and documents were destroyed? I mean, I accept
the fact that documents should be destroyed after an audit. But
I guess the disturbing issue is just the time line, that
apparently people did know that there was an SEC investigation
and then the documents were still destroyed, even though they
knew that there was an investigation.
I mean, that seems to me the heart of the issue. And then
the question becomes, you know--I mean, why were they
destroyed, then? Because that really seems like where there is
a conflict. Whether it is illegal or not, we are not going to
determine today. But factually, that does seem, if this
occurred--would you question whether that occurred?
Mr. Andrews. Whether do you----
Mr. Deutsch. From the timing, that it occurred after--at
least employees of Andersen were aware of an SEC investigation?
Mr. Andrews. Congressman, if I may, let me talk about the
time line, what occurred, and what our conclusions are related
to that in this stage of our investigation, and recognize--my
qualification is that we are only partially through our own
investigation. We took action at a date in that investigation
when we felt we had conclusive information to take some action.
But we are not completed with the investigation, as is the SEC,
as is the committee investigating this, as is the Department of
Justice. So it is in process.
Now, what happened during that period and what was going
on, I believe I am agreeing with your statement in the sense
that once the company had been notified of the SEC
investigation, once the company had was a recipient of a
lawsuit, once the company was clearly on high alert--and we
were aware of that; I agree we were all on high notice at that
point. That needs to be a very careful period of time.
And what in fact happened apparently is the next day, after
receipt of the SEC letter, October 23, Mr. Duncan had a meeting
of the engagement team, which then led to a massive
destruction, a rush, an expedited destruction of documents. I
agree. That is totally inappropriate. We do not condone that.
That is not what the firm's policy would encourage to do.
Mr. Deutsch. Can I just inject the fact--so the time line
that you are saying is even after Andersen itself received
notice, not public notice, not Enron receiving notice of the
SEC, but you are testifying that Andersen actually received
notice and then the destruction continued?
Mr. Andrews. Let me clarify that. We were aware of the
notice that the company had received.
Mr. Deutsch. Not Andersen?
Mr. Andrews. Correct.
Mr. Deutsch. There is some issue, because your regulations
apparently talk about notice to Enron. That again seems to be
gaming the system. A notice to Andersen itself that, you know,
you are not in--my understanding is your internal regulations
or procedures state that you are not obligated to--that you are
not obligated not to destroy documents until you are, as
Andersen, aware of an investigation.
Again, let me tell you that that perspective that I have is
just, you know, looking for loopholes that are not just
appropriate, the same way that Enron was looking for loopholes.
If that--that distinction, I think is worth noting. If you can
respond to that.
Mr. Andrews. Yes, Congressman, let me respond. Let me cover
a couple of points. First of all, if the policy is unclear,
that obviously is a problem. What we have done with the policy,
once we learned of this, we have suspended that policy, put in
place an interim policy, and we have engaged and hired former
Senator Danforth to construct a policy that is as clear as
possible.
But let me back up and cover the point of the policy that
existed at that time and why this action would or would not be
appropriate.
Mr. Deutsch. Let me also tell you, 5 minutes goes very
fast, and so I just want to follow up on two specific
questions. I am told specifically by our counsel that Ms.
Temple--that the position? In Enron did not have a subpoena
yet, and, based upon outside counsel, you were not required to
put out a memo on document retention. So that was apparently
your internal policy.
First of all, why was it? But then--you know, I mean, it
is--is Mr. Duncan telling you, or are you able to tell us that
he was following company policy? That is, that he didn't do
anything wrong is his position; that he didn't do anything
wrong at this point.
Mr. Andrews. Congressman, I cannot say more strongly, Mr.
Duncan was not following company policy. Mr. Duncan broke
company policy.
Mr. Deutsch. Is he saying that he is following company
policy? Is his position that he was following company policy?
Mr. Andrews. Congressman, I can't respond for Mr. Duncan.
Chairman Tauzin. The gentleman's time has expired. The
Chair recognizes himself for a round of questions. First of
all, I want to turn to the week of October 9. You have
testified October 9 was the date that Arthur Andersen hired
counsel, outside counsel, right? And the outside counsel firm
was Davis, Polk & Wardwell of New York, right? Is that correct,
sir?
Mr. Andrews. Yes, that is correct.
Chairman Tauzin. My understanding is that is a litigation
team, right?
Mr. Andrews. Davis, Polk is a reputable firm. I am sure
they do litigation and other things. But we hired them for
purposes to help us with the financial reporting and possible
litigation.
Chairman Tauzin. And possible litigation, right? October 9.
I want to turn to you, Ms. Temple, real quickly. Sometime
before the week of October 12, in your interviews with us you
informed us that there was a conference call about the Enron
engagement team's compliance with the document retention
policy.
Mr. Duncan says that it was you who raised the question
about the retention policy. You had some other recollections of
that conversation. Give us your recollections of what happened
in that conference call. And what date was that?
Ms. Temple. Sure. Let me give you the context of my role in
this matter. I was asked, beginning on September 28, 2001, to
participate in a conference call. I understood that the firm
was addressing one accounting issue that had risen at that
point in time. In between that time and October 12, I provided
legal advice, including, after consultation with my supervisor
and others, about specific documentation and retention issues.
Chairman Tauzin. Ms. Temple, in that conversation that
occurred right about the time that the firm was hiring other
litigation counsel--you are the litigation attorney for the
firm, is that not correct?
Ms. Temple. My background is in litigation, correct.
Chairman Tauzin. But they just hired an outside litigation
firm to advise them on possible litigation about the same time
there is a conference call and there is a discussion about the
retention policy. And obviously the memo is sent out, following
it, regarding that policy that includes the information about
destruction of documents as well.
You said something to our investigators about conversations
in that conference call referencing changing memos and deleting
information from past memos; substituting a memo to the file
for an old memo with a new memo. Is that accurate? Was that
discussion held in that conference call?
Ms. Temple. The advice I gave was different from that, Mr.
Chairman. The advice I gave was----
Chairman Tauzin. What were the questions being asked that
you had to give advice?
Ms. Temple. The team was discussing a draft of a memo about
a particular accounting issue on asset impairment. The advice
that my supervisor and I gave initially was that memo, which
was being currently drafted, needed to be dated----
Chairman Tauzin. What did they want to do that you told
them they couldn't do? What did they ask you to do?
Ms. Temple. I don't recall, with respect to that particular
legal advice, that there was a question raised. But we pointed
out to the team----
Chairman Tauzin. Was there not a request or discussion of
substituting a new memo for an old memo, backdating a memo to
the file?
Ms. Temple. No, there was a not a question about backdating
that particular memo. But the date----
Chairman Tauzin. Was there a question about substituting it
and deleting information from the memo?
Ms. Temple. There was a question in that current memo that
was raised: Can we delete a sentence acknowledging that the
firm had given incorrect accounting advice in the first quarter
of 2001? And I said absolutely not.
Chairman Tauzin. That is what I want to know. Essentially
you said don't do that?
Ms. Temple. Right.
Chairman Tauzin. Is it customary that in those kind of
discussions, when the firm finds itself in error, that anyone
would suggest substituting memos or deleting information that
was in memos already in the file? Was that unusual
conversation?
Ms. Temple. I expect the engagement partners to raise
questions about documentation and seek advice, which they were
doing, though other legal advice that I gave on documentation
was the--the memos for any prior periods, first quarter 2001,
year end 2000, could not be changed.
Chairman Tauzin. You are telling them to make no changes. I
understand that. I am asking you, was it customary? Was this
unusual for members of the firm to be talking to you about
changing documents, altering documents, substituting documents
that were on file already with regards to Enron operation?
Ms. Temple. At the time, based on my recollection, I
understood that there were good faith questions that were being
asked about how to properly document the firm's----
Chairman Tauzin. Was it a good faith question to change a
memo that is already in the file with a new memo?
Ms. Temple. I received the question and consulted with my
supervisor----
Chairman Tauzin. You said, don't do it.
Ms. Temple. I gave the advice. To the best of my knowledge,
the advice was followed.
Chairman Tauzin. Were you shocked that they would raise
such a question? Were you alarmed? Were you disturbed? Did it
bother you, as litigation counsel for the firm, that any member
would even suggest altering the record, altering documents,
substituting memos to the file?
Ms. Temple. I don't recall everything going on in my mind.
I recall making sure and giving advice to make sure that the
written record was complete and accurate and truthful. And I do
recall seeing that my advice was followed.
Chairman Tauzin. And my time is up, but you do recall also
that October 16 memo, that you did discuss with them changing
that memo so that your name is not included because you might
be a potential witness? Is that correct?
Ms. Temple. I do recall giving legal advice, after
consultation with others, including outside legal counsel
Davis, Polk, that the audit partner should document the
recommendations and communications he had with the client about
the client--Enron's draft press release. And I did, after
consulting with outside legal counsel--it is our standard
practice in the legal group to advise the engagement team not
to write down and discuss in their memos legal advice that the
legal group might give, because it may be a waiver down the
road of attorney-client privilege.
Chairman Tauzin. Thank you. The Chair recognizes the
gentlelady, Ms. DeGette, for a round of questions.
Ms. DeGette. Thank you, Mr. Chairman.
Ms. Temple, I think that it would be helpful if you would
take the notebook in front of you and turn to document No. 27
before we get started. Now, Ms. Temple you have been at Arthur
Andersen a couple of years; is that right?
Ms. Temple. I started at Arthur Andersen in July of 2000.
Ms. DeGette. Before that you were a litigation partner at a
law firm, I believe?
Ms. Temple. Yes.
Ms. DeGette. Okay. And I assume you are familiar with
Arthur Andersen's policy on document retention and destruction?
Ms. Temple. Yes.
Ms. DeGette. That is the document that I showed you,
document No. 27, right?
Ms. Temple. Yes.
Ms. DeGette. If you can tell me, very briefly, under what
circumstances you believe documents should be retained? What--
when is it? What is the trigger under which documents need to
be retained?
Ms. Temple. There are several provisions in the policy that
address retention.
Ms. DeGette. In fact, there is an exhibit to document No.
27 here, Exhibit 1, that says examples of situations to be
reported. And that is a list of examples of situations where if
you see that coming, then you treat that as threatened legal
action under section 2.5 of the litigation procedures, and you
retain them; is that right?
Ms. Temple. Yes. There is a list of examples to be reported
to the legal group, that calls for notification. I don't
believe----
Ms. DeGette. That would trigger, then, a notification such
as the one that you made, I think, on October 12 in your e-
mail, right? It is not just threatened litigation, is it? There
are other things that would trigger Arthur Andersen to
recommend retention of documents?
Ms. Temple. The policy does require retention of all
related materials if there is threatened litigation or----
Ms. DeGette. Or other situation, right? And one of those
situations would be oral indications from management or owners
that the firm was somehow responsible for the failure of
operations or the failure to detect fraud, right? That is the--
that is the third one on the list of examples of situations to
be reported, right?
Ms. Temple. Right. This list of examples is from the policy
statement No. 780, which requires notification to the legal
group of those examples.
Ms. DeGette. Right. So now there was a memo that was
written on August 15, 2001, from Sherron Watkins, an Enron
vice-president, alleging improper accounting and all kinds of
other problems. Was the legal department aware of that?
Ms. Temple. I don't recall if I was aware of that
particular document. I was aware of circumstances, about
allegations by an employee of Enron, and the fact that Vincent
& Elkins had conducted an investigation and concluded and
reported positively to the board the week of October 8.
Ms. DeGette. So you are aware in August an employee had
made these allegations, and then Vincent & Elkins had done an
investigation also in August; is that right?
Ms. Temple. Not exactly. Before October 12, I was aware
that Vincent & Elkins had been engaged and completed and
reported orally to the board that the results of their
investigation were positive. And the engagement team also
assured the practice directors who were being consulted at that
time and myself that they had reviewed the information about
the allegations, and that the allegations were, to the extent
that they had any information in them in reference to
transactions, involved transactions that the audit team had
carefully reviewed in its prior work.
Ms. DeGette. So you thought that because Vincent & Elkins
had said there was no problem, that that did not trigger any
kind of requirement; is that correct? Yes or no, please.
Ms. Temple. No, that is not what I would think at the time.
Ms. DeGette. Now, what caused you to send that memo on
October 12? Did you do that on a regular basis?
Ms. Temple. There were several factors that caused me to
send the memo on October 12.
Ms. DeGette. Let me back up for a minute. How many times in
your 2 years, roughly, at Andersen did you send memos like this
to remind people of the document retention and destruction
policy?
Ms. Temple. I don't recall the number of times.
Ms. DeGette. Had you done it before?
Ms. Temple. I believe I had referred people to the firm's
policies on document retention and destruction.
Ms. DeGette. How many times before?
Ms. Temple. I don't recall the number of times.
Ms. DeGette. One time? Five times? Ten times?
Ms. Temple. To the best of my recollection, at least one
other occasion.
Ms. DeGette. Was that in relation to Enron, or was that in
relation to another client?
Ms. Temple. No, that was not in relation to Enron.
Chairman Tauzin. The gentlelady's time has expired. I would
ask that the gentlelady have 1 additional minute and would ask
her to yield, if she will.
Ms. DeGette. Before I do that, Mr. Chairman, I have many,
many more questions. I would hope you would have a second round
of questioning today. The chairman of the subcommittee is
nodding, and I thank him.
And with that, I'd be happy to yield.
Chairman Tauzin. I thank the gentlelady.
I just want to clarify your testimony to the gentlelady's
questions. You indicated that Vinson & Elkins issued a positive
report. I want to quote from that report: ``there is a serious
risk of adverse publicity and litigation. It also appears
because of the inquiries and issues raised by Ms. Watkins,
Arthur Andersen will want additional assurances that if anyone
had no agreement with LJM, that LJM would not lose money,'' et
cetera. Is that a positive report?
Ms. Temple. As I recall the outcome of the report as
reported to me----
Chairman Tauzin. You have a copy of this--I believe we've
submitted it. You have a copy of this letter, don't you, from
Vinson & Elkins? You saw it yourself, didn't you?
Ms. Temple. After the week of October 12, I did receive a
copy.
Chairman Tauzin. Here's the point, Ms. Temple. We're trying
to get the facts here, but if you will characterize a report
that indicates a decline in the value of Enron stock and a
serious risk of adverse publicity and litigation as a positive
report from the attorneys, we're going to have trouble with
your testimony today.
Ms. Temple. Later on, when I did receive a copy of the
report and sent a copy to outside counsel, I did note the
comments that you're referencing, but I also noted that the law
firm reported that there was nothing further to follow up on at
that point in time; and the law firm was representing Enron
Corporation, not Arthur Andersen. And I understood and recall
at the time thinking that there might be a challenge to the
business judgment decisions of Enron to enter into certain
trade----
Chairman Tauzin. Did you know at the time that Vinson &
Elkins had signed off on these agreements as a counsel for the
firm that may have been a conflict of interest in them
commenting on them now?
Ms. Temple. I don't recall the circumstances.
Chairman Tauzin. You are not aware of that?
Ms. Temple. I don't recall at this time.
Chairman Tauzin. I thank the gentlelady.
The Chair recognizes the gentleman, Mr. Stearns, for a
round of questions, and the chairman of the subcommittee will
be in the chair. Mr. Bilirakis is recognized for----
Mr. Stearns. That's okay. Let Mr. Bilirakis go.
Mr. Bilirakis. Well, we're both from Florida.
Either Mr. Baskin or Mr. Andrews, in your January 15 of
this year press release, Tab 22, your firm stated that it did
not believe that any work papers had been destroyed; and I ask
you the question, how were you able to come to that conclusion,
and are you still confident with that?
That was just a few days ago, I might add. I guess we
realize that.
Mr. Andrews. Let me respond to that and why the press
release says that, Congressman.
Our investigation is extensive, and this is very complex
and will take an extended period of time. We are not finished
with our investigation, what we are doing, Davis, Polk, our
counsel, is conducting the investigation, and we actually have
gone a second level and hired former Senator Danforth to come
in and review the results of our best investigation. So we are
in process, and it is far from finished, as is your
investigation, as well as the SEC's.
So what we did and what happened on January 15, at that
point in time, that investigation being conducted by Davis,
Polk had determined enough information that we believe
warranted the action we took. The point that I want to make is,
that is just an interim step, the interim step, because our
investigation is far from complete and we intend to complete
the investigation and take the appropriate action----
Mr. Bilirakis. Mr. Andrews, with all due respect, you're
talking about the action you took warranted the action you
took. The question is, you had come to the conclusion that none
of the work papers had been destroyed at that point in time, as
of January 15. Is that still your conclusion?
Mr. Andrews. Congressman, at this point in time, there
were--let me define for a moment ``work paper.'' Audit work
papers are the permanent record of the audit. At the point in
time that we took the action on January 15, we were not aware,
and I am not aware today, of the destruction of any audit work
papers. But my caution, my only caution, is that our
investigation is in process, and until we complete the
investigation, obviously I cannot say that that is the
conclusion until the investigation is done.
Mr. Bilirakis. So even today you're not acknowledging that
any work papers were destroyed? So we're going through this
trying to determine why they were destroyed and whether they
were destroyed legally and that sort of thing, but you're not
acknowledging that they have even been destroyed?
Mr. Andrews. Let me clarify. There are different types of
documents that exist in an audit process. One is--one example
would be the permanent audit work papers, when you complete the
audit. So, for instance, for fiscal 2000, we completed the
fiscal 2000 audit, and there's a permanent set of work papers
that is developed and retained as a result of that.
Mr. Bilirakis. And those are permanent and they are never
destroyed. Mr. Baskin stated that earlier.
Mr. Andrews. They are destroyed after a statute period,
which is 6 years in the United States, but they would not be
destroyed. So when we took the action on the 15th, it was not
because audit work papers had been destroyed. What it was a
result of is the extensive destruction of other documents, e-
mails and other papers that were not part of a permanent set of
audit work papers, that we became aware of as a result of Mr.
Duncan's meeting and actions subsequent to October 23. We think
regardless of the policy, at best that was an extreme error in
judgment that we as an organization don't support, don't
condone and don't encourage and will not stand for.
Mr. Bilirakis. Mr. Andrews, you said that earlier. Now, all
right, so you do acknowledge, apparently from what I
understand, the destruction of e-mails, those sorts of
documents, but not the permanent or the final audit documents.
So can those be reproduced? Those that you have----
Mr. Andrews. The items that have been destroyed?
Mr. Bilirakis. Yes.
Mr. Andrews. Let me explain what we're doing and this is
one of the reasons I think that the investigation takes an
extensive period of time.
When we became aware of this, again we asked our legal
counsel to begin the process to intensively investigate this,
which means to interview any and everybody associated with it,
to get an understanding of what took place in terms of the
destruction and, most importantly perhaps to do everything
possible to reconstruct those records. And, for example,
electronic communications, we have been able to recover a
significant number of those, not all of those, and we're
continuing to work to do that. So we embarked on the process to
try to recover everything that is destroyed.
Now, obviously documents, hard-copy documents that are not
in an electronic form, that have been shredded, we cannot
recover those. Electronic documents, we're taking every effort
to recover those, and that process continues. Now, we have
recovered many of them, but I don't think we'll be able to
recover them all.
Mr. Bilirakis. Mr. Andrews, what I'm trying to get at is,
you heard my opening statement about lack of credibility and
that sort of thing. The documents that were used by your firm
to determine that--to basically--I'm going to use the word
``hide'' and not; I don't mean that necessarily as bad as its
sounds--to hide the truth regarding Enron, et cetera, the
misstatements, the voodoo accounting, if you will, that I
consider voodoo and the chairman referred to; those documents
were a part of your audit, your work papers, right?
Mr. Andrews. Congressman, documents that were part of a
completed audit process that were determined to be the
necessary documents that support the conclusions would be part
of the permanent audit work papers.
Mr. Bilirakis. And those have not been destroyed?
Mr. Andrews. Again, to the best of any knowledge at this
point, we have not determined that any audit work papers, i.e.,
the permanent audit documentation, we have not determined that
they have been destroyed; but the investigation is in process
and continuing.
Mr. Bilirakis. Well, my entire 5 minutes has been used up
here, and I'm not sure that I've gotten an answer.
All right, thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman from Florida
and recognizes the gentleman from Louisiana, Mr. John, for his
questions.
Mr. John. Thank you, Mr. Chairman. My comments revolve
around where the chairman of the committee was going with his
opening comments about the time lines and maybe even the
company policy of Andersen and how they structure their team.
Your comment to the chairman's question about when Mr. Duncan
had this meeting on October 23, that neither you or legal
counsel knew about this meeting or that he was ordering the
destruction of all these documents. Is that correct?
Mr. Baskin. Yes, sir. I think that is what I said in my
opening statement.
Mr. John. And obviously Arthur Andersen being a very large
corporation has lots of clients worldwide. Is the model where
Mr. Duncan is the team leader, the engagement team leader, and
whereby you put all your faith in an individual to handle a
client, is that consistent with other clients in the way that
you do business?
Mr. Baskin. Congressman, yes, I think that is. We place a
great deal of responsibility in the hands of our audit
partners, and it takes a long time to become an audit partner,
and then that is why we have the high level of responsibility
left in their hands.
Mr. John. Okay. So you have other members of your team and
partners as you call them, that head other of your clients. Do
they meet on a weekly or daily basis to talk about the way--not
particularly about their clients, but the way that they have to
go about following Arthur Andersen's policies such as the
retention and destruction policy?
Mr. Baskin. Well, first of all, we have to understand that
our engagements range in size from very small audits that need
only perhaps a couple of hundred hours to complete to very,
very large audits that involve hundreds of people and thousands
and thousands of hours. So the extent of time the partner
spends with the staff and what they do varies a great deal,
depending upon how extensive the engagement is. On a large
engagement like Enron, there are many partners who are involved
with one as the engagement leadership responsibility.
As far as communicating policies, we have many ways of
doing that, and we rely a great deal on training. We have an
internal Web site which provides access to our policies. We
distribute our policies through CDs and DVD ROMs that people
can put in their computers.
Mr. John. Well, I guess I'm not satisfied, and I don't
think the chairman was satisfied or any members have been
satisfied with your answer to--from the 18 days, from October
23 of when this meeting occurred and documents started to be
destroyed, till--what is it?--November 9 when Ms. Temple sends
Mr. Duncan a voice mail and told him to preserve all those
documents. It is perplexing to me that no one in the highest
management of Arthur Andersen had any indication of this
meeting or what was going on and didn't step up to the plate
and say, we on October 20--I'm sorry, October 22, the SEC has
had an informal inquiry. This is not good. This is not
consistent with any professional accounting practices, and I
would like for you to comment on that, because I think there is
an 18-day problem that I'm not satisfied with, and we need to
get down to who knew and why and why wasn't it stopped until
that point in time.
Mr. Andrews. Congressman, in terms of that period of time
and what transpired in that period of time, as I tried to
indicate earlier, I agree that the action that took place on
October 23 and the subsequent elimination of e-mails and
destruction of documents is an action that is totally
inappropriate, and I believe the responsibility, as our policy
states, lies with the engagement partner to have the judgment
to know how to exercise within that time period, given the
things that were occurring. And that judgment may be the
judgment to not destroy documents. It may be the judgment to
seek consultation to determine what should be done. What took
place was a conclusion to eliminate e-mails, to destroy
significant amounts of documents without consultation, to the
best of my knowledge, with others, and that activity is totally
inappropriate, and we do not condone that, and we do not
believe our personnel would do those sorts of things. That's
what we find was inappropriate, and that's why we've taken what
action we've taken to date and we'll continue to review the
situation and take appropriate action against anyone else.
Mr. John. I'm out of time, but I need to end on this
comment. And I respect and I understand--and that is the
position you should take--but why 18 days? That is a long
period of time. If there was a meeting about the destruction of
documents taking place, it just seems to me that someone else
knew that this meeting took place and someone higher up in
management should have invoked that policy before November 9,
2001. That's just me, and I'm out of time.
Mr. Greenwood. The Chair thanks the gentleman, and
recognizes for inquiry the gentleman from Florida, Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman. Ms. Temple, the
questions I'm going to ask you, I'd just like a yes or no
answer. If you'd be so kind. On August 15 Sharon Watkins wrote
a--she was vice president of Enron, a former employee of Arthur
Andersen. She wrote a memo to the President Kenneth Lay of
Enron, in which she said she was incredibly nervous that we
will implode in a wave of accounting scandals. Did you know of
this memo before October 23? Just yes or no.
Ms. Temple. To the best of my recollection, I don't----
Mr. Stearns. Just yes or no.
Ms. Temple. [continuing] recall seeing a letter from Ms.
Watkins.
Mr. Stearns. So you're saying no you did not know about
Sharon Watkins' letter on October 23? You knew nothing about
it? Is that your answer, that, no----
Ms. Temple. I was aware that she had made allegations. I
don't recall if I saw a document.
Mr. Stearns. So you're saying yes you knew of her
allegations. Is that correct?
Ms. Temple. I was informed that she had made allegations,
yes. I don't recall if I saw a document.
Mr. Stearns. So the answer to my question is, yes, you knew
about it. Is that correct? Yes, you knew about----
Ms. Temple. I was aware that she had made allegations. I
don't recall if I saw the document.
Mr. Stearns. Okay. Now, on October 15, Vinson & Elkins was
hired to look at this memo, and they indicated that there are
serious risks of adverse publicity and litigation. Did you know
about the Vinson & Elkins final conclusions before October 23?
Yes or no. Did you know about this study before October 23?
Ms. Temple. Yes. I believe I received a copy of that report
before October 23.
Mr. Stearns. So you knew about Sharon Watkins. You knew
about this one. Okay the questions I have I'd like you to
answer just yes or no relative to October 23. Did you know that
Enron had taken $1 billion charge due to an accounting error on
the Raptor transaction? Yes or no. October 23. By October 23
did you know that Enron had taken a billion dollar charge due
to an accounting error on the Raptor transaction?
Ms. Temple. To the best of my recollection, no--I knew that
they had taken charges, but I did not----
Mr. Stearns. That is a yes.
Ms. Temple. [continuing] know about a billion dollar charge
at that time.
Mr. Stearns. You knew that--okay. Second, that the SEC had
begun an informal inquiry into Enron related to a party
transaction. Did you know that the SEC had begun an informal
inquiry before October 23?
Ms. Temple. By October 23, I knew that, yes.
Mr. Stearns. Yes. Okay. That your own Houston and Chicago
offices were disagreeing about the proper accounting and what
in fact Andersen had signed off on with respect to one series
of Enron transactions? Yes or no.
Ms. Temple. Yes.
Mr. Stearns. That a class action lawsuit had been filed
against Enron with respect to these transactions, as well as
other shareholder suits? Yes or no.
Ms. Temple. To the best of my recollection, I recall an
announcement on the 23 of a class action shareholder lawsuit--
--
Mr. Stearns. So that is a yes?
Ms. Temple. [continuing] against Enron. Yes.
Mr. Stearns. That Andersen was assisting Enron in its
response to the SEC, did you know that?
Ms. Temple. Yes. On October 23, I have notes of a call with
the engagement partner and senior management where the
engagement partner reported to us that----
Mr. Stearns. So that is a yes?
Ms. Temple. [continuing] the team was assisting. Yes.
Mr. Stearns. Okay. In light of your comments and your
retention policy statements earlier, why did you wait until the
November 9 to tell the Enron audit team to stop destroying
documents, in light of all these yeses you said earlier?
Ms. Temple. On October 23, according to my notes, Mr.
Duncan reported to us the AA was trying to gather all documents
regarding----
Mr. Stearns. Can I interrupt you, Ms. Temple? The question
is based upon all this prior information, Sherron Watkins, the
Vinson & Elkins study, all of the previous things: You knew
about the Raptor write-offs, you said, oh, I didn't know a
billion dollars, but I knew about the Raptor transaction. You
knew that the SEC had started an inquiry. Based upon all of
that, why did you wait till November 9 to tell the Enron audit
team?
Ms. Temple. According to my notes on October 23 Mr. Duncan
assured us that the team was trying to gather all documents----
Mr. Stearns. I don't think you've answered the question, in
all due--what--let me ask you this. What did you believe that
Mr. Duncan's representation--no. Why did you believe that Mr.
Duncan's representation that he was gathering the relevant
documentation on these transactions, which clearly for purposes
of internal review as to the substance and completeness of the
audit trail meant that he was also gathering up everyone else's
notes, e-mails, voice mails, drafts and other nonwork paper
documents for purposes of preservation for litigation? Was that
your job, was that his job, or was that your job?
Ms. Temple. The engagement partner's primary responsibility
for document retention--and he assured us, according to my
notes, that they were gathering all documents regarding
transactions from around the world. That was the assurance that
the documents were being gathered and preserved.
Mr. Stearns. Don't you think Mr. Duncan was gathering work
papers?
Ms. Temple. According to my notes, he said all documents.
Ms. DeGette. Would the gentleman yield?
Mr. Stearns. I'd be glad to yield.
Ms. DeGette. Do your notes indicate that the documents were
gathered and preserved or simply gathered?
Ms. Temple. The notes state, AA trying to gather all docs,
re transactions, from around the world. I understood that to be
gathering the relevant documentation about all of the
transactions from all around the world to have it in one place
to have it available.
Ms. DeGette. Now, do you recall discussing----
Mr. Greenwood. The time of the gentleman from Florida has
expired.
Ms. DeGette. I'd ask unanimous consent to grant the
gentleman 1 additional minute so I can ask a follow-up
question. Thank you.
Mr. Greenwood. We will be doing a second round. The
gentlelady will be granted an additional minute.
Mr. Stearns. Mr. Chairman, I ask unanimous consent to ask
for an additional 1 minute, and it's not just for me, but I
think we are on to a line of reasoning, that at this point if
we leave it, we lose an opportunity for this committee--this
subcommittee. So----
Mr. Greenwood. Fair enough. Without objection, the
gentleman from Florida will be granted an additional 2 minutes,
some of which he may yield to the gentlelady from Colorado if
he so chooses.
Mr. Stearns. I'll yield to the gentlelady from Colorado,
and also I understand the chairman here also has a question. So
I yield part of my time to you.
Ms. DeGette. Thank you so much for your comity.
Do you recall a conversation with Mr. Duncan in which he
assured you he was gathering the documents to preserve them? Do
you recall specifically having that conversation, according to
your notes?
Ms. Temple. I don't recall the specific words, but I do
recall that we had a group conference call on October 23, and I
have these notes from that call.
Ms. DeGette. And the notes don't say anything about
preservation, do they?
Ms. DeGette. The notes----
Ms. DeGette. Yes or no?
Ms. Temple. The notes do not have the word ``preservation''
in them.
Ms. DeGette. And on October 12 you had just sent a memo to
Mr. Duncan and his group, advising them of the Arthur Andersen
document retention and destruction policy which involved
destroying all of the notes and backup documents and so on,
correct?
Ms. Temple. No. Actually, I sent a reference to the policy
to the practice director in Houston.
Ms. DeGette. So you never sent that to Mr. Duncan?
Ms. Temple. I did not send it personally to Mr. Duncan.
Ms. DeGette. Mr. Odom had that, correct? Mr. Odom, did you
have that?
Ms. Temple. The Houston practice director, based on several
factors----
Ms. DeGette. Just----
Ms. Temple. [continuing] at that time----
Ms. DeGette. In this October 23 phone call, you don't
recall specifically and your notes do not reflect you telling
Mr. Duncan to retain records, do they? Yes or no.
Ms. Temple. I don't see that----
Ms. DeGette. Yes or no, ma'am.
Ms. Temple. [continuing] in my notes, no.
Ms. DeGette. Thank you.
I yield back.
Chairman Tauzin. Would the gentleman yield?
Mr. Stearns. I'll be glad to yield to the chairman.
Chairman Tauzin. I'll be real quick.
Ms. Temple, if you received this e-mail from Mr. Duncan,
indicating he was collecting all of these documents, and
assumed that he was preserving them, why did you feel it
necessary on November 9 to leave a voice mail with Mr. Duncan,
directing him to preserve those documents because of the
receipt of the SEC subpoena? If he was preserving them already,
why on Earth did you feel it necessary to advise him to
preserve them on November 9?
Ms. Temple. It is our firm practice to notify the
engagement team when the legal group receives a subpoena. I
believe it had been received in the general counsel's office,
and I promptly notified the engagement partner and reminded
about the need to--at this point in time, we'll have to collect
the documents for production.
Chairman Tauzin. Well, but you understand why common sense
gets a little lost here. If you're in a position where you know
that the retention policy also means destruction, you knew
that, didn't you?
Ms. Temple. There are aspects of the destruction guidelines
in that policy, yes.
Chairman Tauzin. So you know that the retention policy, as
long as it's operating, permits Mr. Duncan and however many
people he has working for him to destroy documents? You get a
memo from him saying, I'm gathering them all up; and you tell
us today that you assumed that meant that he was gathering them
up to preserve them for litigation, not to destroy them.
Why would you even bother to say, by the way, on November
9, quit destroying documents? If you just got an SEC subpoena,
why would you do that?
Ms. Temple. The legal group notifies the engagement partner
and engagement team when subpoenas are served. It was received
by the legal group, and I felt it was appropriate to follow the
firm protocol to notify the engagement partner.
Chairman Tauzin. Now, but you see we also have the memo on
November 10, and I'm going to read to you from it. It says, the
first thing we must do in preparing to respond to these
subpoenas and lawsuits is to take all necessary steps to
preserve all of the documents and other materials that we may
have relating to claims that are being filed.
Now, if that was already being done, if you had received a
notice from Mr. Duncan that he's gathering them all up to
preserve them, that was your conclusion, why would you say that
the first thing we have to do now, now that the subpoena has
arrived, is start preserving these things?
Do you see, common sense, Ms. Temple--common sense tells me
that destruction was going on up until this time when the
subpoena arrived and that until you said ``preserve them,''
they may well have been gathered up for destruction, and that
somebody should have known that. And was that somebody you?
Ms. Temple. I never counseled any destruction or shredding
of documents. And I only wish that someone had raised the
question so that we could have consulted and addressed the
situation.
Chairman Tauzin. I thank the gentleman.
Mr. Stearns. Mr. Chairman, I know my time is out. The
question I had is for Mr. Baskin and Mr. Andrews.
Did you ever call Mr. Duncan in and say, Mr. Duncan, we're
thinking about letting you go; we're thinking about getting
your version of the story first before we let you go? Did you
give him that courtesy to say, Mr. Duncan, tell us your version
before we make our version? And why didn't you bring him in and
just ask him questions like that, so that we could better
understand your actions?
Mr. Andrews. Congressman, as we have our legal counsel
Davis, Polk doing the investigation for us, it's my
understanding that they have had multiple interviews with Mr.
Duncan on this subject, both prior to his being dismissed. So
we did in fact do what you're suggesting, and it was a very
appropriate step in the process of investigating it.
Mr. Stearns. And did he tell you he was ordered to destroy
these documents?
Mr. Andrews. My understanding--repeat the question, please.
Mr. Stearns. Did he tell you, he was told he was to destroy
these documents?
Mr. Andrews. My understanding of his interview and
responses he gave is that he acknowledged--or discussed,
presented, if you will--what took place on October 23, the
meeting and the subsequent activity of destroying documents;
and also indicated that he did not seek advice or counsel and
was not instructed by someone to do so.
Mr. Stearns. Did he admit to you that he told other people
to destroy documents?
Mr. Andrews. I did not do the interview, so I can't respond
specifically. My understanding of what took place was, they
held a team meeting. He was the senior partner in that----
Mr. Stearns. Mr. Andrews, is a copy of that interview or
any notes on that available?
Mr. Andrews. No, sir. I do not have copies of notes, and I
don't know if there was documentation from the meeting.
Mr. Greenwood. The time of the gentleman from Florida has
expired.
Let me clarify your response, Mr. Andrews. You just
testified that you are not aware as to the existence of any
documentation of the interviews of this law firm with Mr.
Duncan?
Mr. Andrews. What I'm saying is that our law firm is
conducting the investigation, and the information I have is as
a result of what they have, what they have told me from that
investigation.
To clarify, I do not have a written report on an
investigation. The information is in process, and will be
completed appropriately; and the appropriate results----
Mr. Greenwood. In the course of that information, did
anyone from Andersen come forward and say, while these
interviews are going on, or subsequently, that they directed
Mr. Duncan to destroy documents? Or that Duncan directed them?
Excuse me.
Did anyone indicate that Duncan directed them to destroy
documents?
Mr. Andrews. Congressman, I'm not sure exactly what
instructions Mr. Duncan gave. What I have been told, and it's
my understanding that a team--Mr. Duncan led a team meeting in
which instructions were given to apply policy No. 760, which is
the one in question; and that subsequent activity resulting
from that meeting led to the destruction of documents, the
documents we're talking about, not work papers, to the best of
my knowledge at this time in the investigation, but e-mail and
other forms of documentation that existed.
Mr. Greenwood. All right, Mr. Andrews, I'm going to ask you
to make available to this committee today all of the
documentation that may exist that documents the interviews with
Mr. Duncan prior to leading up to his firing.
Would you make those documents available for us?
Mr. Andrews. Congressman, I'd have to consult with our
counsel on that. It's our intention to complete the
investigation and completely share the conclusions of that
investigation.
Mr. Greenwood. Well, this committee will need these
documents and will subpoena them if necessary.
The time of the gentleman from Florida expired a long time
ago, and the gentleman from Illinois, Mr. Rush, is recognized.
Mr. Rush. Thank you, Mr. Chairman.
Ms. Temple, according to the notes that we have, you--and
according to the Martindale-Hubbell Legal Directory, you
graduated from Harvard Law School with honors. Is that right?
Ms. Temple. Yes, sir.
Mr. Rush. And you were a partner at the law firm of Sidley
& Austin before joining Arthur Andersen's legal department; is
that right?
Ms. Temple. Yes, sir.
Mr. Rush. Can you explain to us, give us some kind of an
idea what you were--what type of work you were doing at Sidley
& Austin? I know you were--your specialty is civil litigation,
professional malpractice and securities litigation, but can you
give us a further indication of the type of work that you were
performing at Sidley & Austin?
Ms. Temple. Yes. I worked primarily on litigation,
commercial litigation, did some accountants liability
litigation, represented a law firm in another professional
circumstance, and did other general commercial litigation for
both plaintiffs and defendants.
Mr. Rush. So it would be correct for us to assume that you
were well versed on ethical considerations as it relates to
document retention?
Ms. Temple. I was aware of document retention issues in a
litigation context, yes.
Mr. Rush. Okay. And when did you start at Arthur Andersen?
Ms. Temple. In July of 2000.
Mr. Rush. July of 2000. And what was your work at Arthur
Andersen? Prior to being assigned to the Enron clientele and
cases, what was your work?
Ms. Temple. My work was on a variety of matters and in
addition to the Enron matter, continues to follow up a variety
of matters. Members in the legal group, we work on managing
with outside counsel litigation against the firm. We counsel
business people from time to time on various contracts, other
legal issues, practice issues. And we also help the firm comply
with subpoenas.
Mr. Rush. So you consider yourself a top-notch lawyer; is
that correct?
Ms. Temple. I don't know. I probably like others to think
so.
Mr. Rush. Okay. All right.
Let me ask you, you were assigned on September 28, 2001, to
Enron on the Enron-related matters. Is that correct?
Ms. Temple. I was asked to participate in a conference call
with some of the business people, including the engagement
team, shortly before the call occurred on September 28.
Mr. Rush. Okay. So were you actually assigned to--from your
superiors at Arthur Andersen to Enron-related matters?
Ms. Temple. At the time that's not how it was described to
me. I was just asked to participate on this conference call
with my supervisor, and as time progressed, I continued to
consult with the business people on this matter relating to
Enron.
Mr. Rush. Okay.
So did you transition into being the No. 1 person as it
relates to the document retention matters and the policies and
that type thing? Did Arthur Andersen rely on you as a part of
its legal department to inform others about retention matters
as it related to Enron and other--any other kind of
corporation?
Ms. Temple. The way I perceived my role, advising as a
legal adviser relating to Enron, was to be able to participate
in conference calls as the engagement team and other business
people discussed the accounting issue, and to answer questions
that arose. I consulted--my supervisor participated at times in
some of those conference calls, and I consulted with him and,
later on, with outside counsel.
Mr. Rush. On October 12, you informed Mr. Duncan of--in a
way that was--that raised some eyebrows and some questions. You
sent an e-mail--no--to Mr. Odom, stating that it might be
useful for him to remind the Enron engagement team about--about
Andersen's document retention and destruction policy to ensure
compliance with the policy.
Now, what drove you? What motivated you to inform Mr.--or
send this e-mail to Mr. Odom?
Ms. Temple. There were several factors. Leading up to
October 12, a few questions had been raised in the conference
calls I participated in about how to appropriately document
several different matters: one, a current draft of a memo
describing the firm's conclusion about the right accounting
method, how to date that document; two, whether we should
acknowledge in writing in the current document the fact that
the firm had now concluded that the prior accounting advice in
the first quarter was correct; three, it also came to our
attention that the memos, until the first quarter 2001, it did
not fully reflect and accurately reflect the nature of the
consultation that the engagement team had had at that time with
some of the national accounting experts, and so gave advice to
document the current memos dated currently, make sure they are
complete and accurate and include all facts and conclusions,
and also make sure that no prior papers or any prior reporting
period is changed or deleted and that the national experts
should create a document dated today that made very clear the
nature of the facts that they recalled about their consultation
for the prior period so there would be a clear written record
of their version of the facts.
Given these questions that had arisen--and I had consulted
with my supervisor about providing advice, and others. In part
of that consultation we referred to the documentation,
retention and destruction policy for guidance in giving our
advice; and I thought it was useful----
Mr. Rush. Ms. Temple----
Ms. Temple. [continuing] given the confusion, to make sure
that we were compliant.
Mr. Rush. What I'm trying to home in on, focus on, is your
stating that--your words stating that it might be useful for
him on October 12, it might be useful for him to remind.
Why weren't you more direct? Why weren't you more forceful
on October 12?
Ms. Temple. The way our system works in our firm is that
the engagement partner has primary responsibility for the
engagement and documentation, retention and compliance with
policies; they can consult with the practice directors. And I
did not have the detailed information about potential other
issues that were being addressed by the engagement team. I
thought perhaps the local practice director who's available for
consultation with the audit team might have a better idea as to
whether it would be useful.
Mr. Rush. What changed as of November 9?
Ms. Temple. I'm sorry, sir?
Mr. Rush. Where you were more forceful, what changed?
Ms. Temple. November 9--if you're referring to the November
10 e-mail and that timeframe, the firm had received the
subpoena from the Securities and Exchange Commission asking to
produce all documents, so we sent that----
Mr. Greenwood. The time of the gentleman from Illinois has
expired.
The Chair recognizes the gentleman from North Carolina, Mr.
Burr.
Mr. Burr. Thank you, Mr. Chairman.
Mr. Odom, I feel like you've been neglected, and I'll try
to----
Mr. Odom. My feelings are not hurt.
Mr. Burr. I didn't think they would be.
Mr. Odom, you play a crucial role in this, if for no other
reason than there are many meetings that individuals have
speculated on what the content was that you were involved in;
and you were aware of Sherron Watkins' September--or excuse me,
August concerns that she raised not only to Andersen, but also
to Ken Lay directly, weren't you?
Mr. Odom. Yes, sir.
Mr. Burr. And those were conveyed to you, if not directly,
through a memo from Mr. Hecker, James Hecker from Andersen,
through a memo to you and to the file?
Mr. Odom. I was copied on Mr. Hecker's memo, yes, sir.
Mr. Burr. Is it usual that concerns like that might not be
shared within the legal team in Andersen?
Mr. Odom. Concerns like?
Mr. Burr. The concerns that Ms. Watkins raised, should they
or were they shared with anybody within the legal team at
Andersen?
Mr. Odom. Once Mr. Hecker got the call, the next morning we
contacted firm-wide legal to inform them of the nature of the
call Mr. Hecker had gotten the night before.
Mr. Burr. Now, Ms. Temple, are you in firm-wide legal?
Ms. Temple. Yes, I am.
Mr. Burr. And for some reason you're not aware of the
accusations at that time when you got involved in the Enron--I
think you said on September 28?
Ms. Temple. I believe another lawyer was consulted at that
time, but it did come to my attention, general allegations,
before October 12.
Mr. Burr. But on September 28 when you became a part of the
Enron team for Andersen, you didn't know any of these
accusations as part of the firm-wide legal team that Ms.
Watkins had raised?
Ms. Temple. I did not know about those allegations on
September 28. About 5 minutes before the conference call
occurred, I was asked to participate by my supervisor, who also
participated, and the topic of discussion was a specific
accounting issue that did not----
Mr. Burr. When did you become aware of the investigation
that Vinson & Elkins was currently engaged in by Enron to look
at these questions?
Ms. Temple. To the best of my recollection, I believe it
was during the week of October 8.
Mr. Burr. Mr. Odom, is there anything that you've read that
has been credited to Mr. Duncan, either in his formal
statements that he's made or in his answers to questions by
this committee that you find to be false?
Mr. Odom. I have no knowledge of any false statements.
Mr. Burr. Is there any point that you thought David Duncan
had diverted from, anything other than what he was instructed
by individuals within Andersen, as it related to document
retention?
Mr. Odom. I don't know what Mr. Duncan did with respect to
document retention. So I really can't answer that question.
Mr. Burr. Was there any point where Mr. Duncan asked you,
or anybody that you might have been knowledgeable of, to
destroy documents that were pertinent and should have been
protected?
Mr. Odom. No, sir.
Mr. Burr. Ms. Temple, what was your understanding of why
Andersen hired Davis, Polk?
Ms. Temple. To the best of my recollection, I understood
that Davis, Polk was hired as an additional resource for the
legal group to consult with on ongoing issues.
Mr. Burr. Was the legal group consulted on the hiring of
Davis, Polk?
Ms. Temple. I did not participate in that decision. I was
informed by my supervisor----
Mr. Burr. How many other representatives from the legal
team were involved intricately in the Enron team at that time,
and which ones were consulted about the hiring of Davis, Polk?
Ms. Temple. I don't know who was consulted about the
hiring. I do know that my supervisor told me that the decision
had been made to retain Davis, Polk.
Mr. Burr. And when was your first contact with individuals
at Davis, Polk?
Ms. Temple. To the best of my recollection, October 16.
Mr. Burr. Did Davis, Polk have any input into your October
12 memo as it related to document retention?
Ms. Temple. As far as I recall, no.
Mr. Burr. Were there any individuals other than you that
had input into your October 12 e-mail on document retention?
Ms. Temple. I don't recall reviewing a draft of the e-mail,
but I do recall discussing the document retention issues.
Mr. Burr. Was there an initiative that you started on your
own or was it suggested to you to put out this e-mail?
Ms. Temple. No one suggested to me to put out the e-mail.
Mr. Burr. Did you ever have a conversation relative to that
e-mail, prior to its distribution, with your direct supervisor?
Ms. Temple. I don't recall discussing the particular e-
mail. I recall discussing the document retention policy and the
legal advice we should give on documentation and retention.
Mr. Burr. On 10/12 when you distributed that e-mail on
document retention, were you aware at that time of the
preliminary findings that would be reported on 10/15 from
Vinson & Elkins as it related to their investigation on a--
stimulated by Enron?
Ms. Temple. The facts that had been reported to me by the
engagement team were that Vinson & Elkins had given an oral
report to the board that there was nothing further that Enron
needed to do as a result of their investigation.
Mr. Burr. So you were aware of what the conclusion of their
investigation was?
Ms. Temple. That was what was reported to me, yes.
Mr. Burr. Did that in any way, shape or form shape your
decision about the fact to send an e-mail about document
retention on October 12?
Ms. Temple. I don't recall all the things going on in my
mind at that particular time. I do recall that I was motivated
by the fact that questions had been raised about appropriate
documentation and retention of prior period papers----
Mr. Burr. Were there any meetings within the legal team
that talked about the Vinson & Elkins findings that would be
reported publicly, prior to their report publicly?
Ms. Temple. I recall generally keeping my supervisor up to
date on events as they occurred. I don't recall any specific
discussion of the Vinson & Elkins report.
Mr. Burr. On October 16 you made a request for--from Mr.
Odom, Gorgal & Golsby, to delete your name from a press
statement. What was the reason for that?
Ms. Temple. Actually, it was a request to delete a
reference to my name and legal advice that had been provided in
an internal Arthur Andersen memo that was to go into the audit
work paper file; and the reasons for that were to avoid
potential argument later on that the attorney-client privilege
had been waived, and I made that recommendation after
consulting with our outside counsel on that point.
Mr. Greenwood. The time of the gentleman from North
Carolina has expired.
Mr. Burr. If the chairman would indulge me for one
additional question.
Mr. Greenwood. Without objection, the gentleman from North
Carolina will be granted an additional minute.
Mr. Burr. Can you share with us the exchange with your
outside counsel and specifically the date that that took place?
Ms. Temple. I believe I had a discussion on October 16
about appropriate documentation and how it would be good
practice not to disclose in writing legal advice obtained from
the legal group so that one cannot argue later that there was a
waiver of the attorney-client privilege.
Mr. Burr. Did you counsel with him because you suspected
that there would be litigation in this case?
Ms. Temple. No. I sought counsel about appropriate
documentation. The firm receives hundreds of subpoenas a year,
and if there's documentation that's going in the work paper
file, we, as a standard practice, don't like to have the
auditors document and describe the legal advice, because it
might be waived.
Mr. Burr. I would take for granted that the decision to
hire outside counsel is not something that happens weekly at
Andersen or many other companies. Clearly, somebody believed
that a litigation team was needed. That decision was made on
October 9, which makes at least this committee very interested
in the meetings that took place, the decisions that one arrived
at.
Clearly, after that October 9 date, decisions were made by
you and you alone as you have stated, to remind individuals of
the--of the document retention policy. Decisions were made to
delete the legal staff's names from documents for fear that
attorney-client privilege would be breached. It leads one to
believe that there was a great understanding that some type of
litigation was, if not imminent, certainly in the future.
You're a lawyer. You're a seasoned person. At what point
did you feel that litigation was in fact a reality?
Ms. Temple. To the best of my memory, I don't recall making
a definite decision that, yes, we're definitely going to be
sued here----
Mr. Burr. You got a pretty good sign when they hired
outside counsel, didn't you?
Mr. Greenwood. The time of the gentleman has long expired.
Ms. Temple. I knew there was a possibility, yes.
Mr. Greenwood. The Chair recognizes the gentleman from
Kentucky for 5 minutes.
Mr. Whitfield. Ms. Temple, you indicated to a number of
people that your memo of October 12 regarding the retention
policy was precipitated by the fact that there had been some
incorrect accounting advice given regarding the first quarter
of Enron's financial statements; and in fact, that they were
not adequately reflected and so forth. Is that correct?
Ms. Temple. There had not been a conclusion that the first
quarter financial statements were accurate. It was incorrect
accounting advice, and to my understanding, the firm was
working diligently to determine what the appropriate accounting
advice should be.
Mr. Whitfield. But there was incorrect accounting advice
given, correct?
Ms. Temple. That was my understanding.
Mr. Whitfield. Okay. Now, prior to October 12, did you have
any conference calls relating to that issue with Mr. Odom or
Mr. Duncan prior to issuing that October 12 memo?
Ms. Temple. As I recall, I believe there were a couple
group conference calls where the engagement team was consulting
with other practice directors within their organization about
this accounting issue, and I believe--I don't recall all of the
participants, but I believe Mr. Duncan and Mr. Odom
participated.
Mr. Whitfield. Is that right, Mr. Odom? Did you participate
in some conference calls with her prior to October 12 about
that issue?
Mr. Odom. Yes, sir.
Mr. Whitfield. And is it true that you recall someone in
those calls asking the engagement team how they were with
respect to compliance with the retention policy?
Mr. Odom. I believe I recall the question of--I don't think
we called it necessarily the ``retention policy.'' We called it
our ``document policy,'' whatever the----
Mr. Whitfield. Our document--yeah. So that was mentioned.
And did you take any action as a result of that?
Mr. Odom. I may in fact have gone through and seen if I had
old drafts in my office that were not part of the current work,
and I may have also looked at some old e-mails that I'd been
delinquent in deleting. I do not maintain Enron files.
Mr. Whitfield. So you may have, or you did?
Mr. Odom. I believe I did, but I couldn't swear to it.
Mr. Whitfield. Okay. So even prior to that, you at least
went through some of your files and deleted some of them?
Mr. Odom. I believe I did, yes, sir.
Mr. Whitfield. So her e-mail on the 12th, how did you
interpret that e-mail? Did you interpret that she was
suggesting that documents be destroyed or removed?
Mr. Odom. I took it that she was reminding--we needed to
remind the engagement team as to what our policies were.
Mr. Whitfield. Okay. Now, on October 15, Mr. Duncan wrote
in his file that he was quite concerned that a press release
from Enron talking about their financial statement was going to
include nonrecurring charges; and he was quite concerned about
nonrecurring, using that terminology, because he said he felt
like that was misleading--that that would be misleading to the
public.
And he also said that he was going to talk to Mr. Rick
Causey. Who is Rick Causey?
Mr. Odom. You're asking me?
Mr. Whitfield. Yeah.
Mr. Odom. Mr. Causey is the chief accounting officer at
Enron.
Mr. Whitfield. So, trying to read Mr. Duncan's mind here,
it seems to me that since you all were having conference calls
about inadequate advice given on the Enron account in the first
quarter, and now in a press release they're saying we have
these losses because of nonrecurring charges, and he thinks
that that is not accurate.
And then he goes on to say that Mr. Causey basically came
back and said, well, don't be concerned about it or don't worry
about it or something to that effect. Are you aware of that?
Mr. Odom. What tab are you in, sir, so I can read it?
Mr. Whitfield. Tab--I think it's 7. He says that--the
release was issued early Tuesday, October 16, which essentially
was the original--anyway, Rick said, I've raised the issue
internally and that the press release had been thoroughly
reviewed by our legal team, and so despite Mr. Duncan's concern
that it was misleading, the internal legal team review decided
evidently to let it go. Is that your----
Mr. Odom. I believe that's correct.
Mr. Whitfield. Then Nancy Temple wrote a memo to Mr. Duncan
on the 16th, which is 1 day after his memo in which he's
concerned about this misleading recurring charges statement,
and she says, Dave, ``Here are a few suggested comments.'' I
recommend deleting reference to consultation with the legal
group and deleting my name on the memo. I also suggest deleting
language that might suggest we have concluded the release is
misleading.
Why did you write that memo, Ms. Temple?
Ms. Temple. I wrote that after reviewing the draft and
consulting with our outside legal counsel. First----
Mr. Whitfield. Outside. Which outside?
Ms. Temple. Davis, Polk, the comment regarding referencing
legal advice. Again, it's standard practice and consistent with
the advice from outside counsel that the auditors should not
describe the nature of the legal advice in their audit
documentation, because it might be arguably a waiver of
attorney-client privilege later on; and Davis, Polk agreed with
that, and----
Mr. Whitfield. If Mr. Duncan was concerned about misleading
the public with this nonrecurring charge, why did you suggest
deleting that? Because it might suggest we have concluded the
release is a mistake?
Ms. Temple. There's only one sentence they suggested
deleting for two reasons, because it was inaccurate factually
and----
Mr. Whitfield. It was inaccurate factually? How was it
inaccurate?
Ms. Temple. The sentence refers to enforcement actions
undertaken against companies by the SEC in a case where they
believe the presentation was materially misleading. I have been
aware of only one enforcement action, and the circumstances
were different than the case involving Enron. I had not
reviewed an entire draft press release of Enron, but I knew
that Mr. Duncan and others within Andersen had, and provided
comments, but under the professional standards, the press
release is the responsibility of the company, not of the
auditor. The auditor was trying to be helpful, and it was my
understanding, based on the discussions with people within
Andersen, that Andersen had not concluded that the press
release was misleading.
Mr. Whitfield. But the person in charge of the Enron
account was quite concerned about it. And yet subsequently, as
it turns out, he probably was correct. It was misleading.
Mr. Greenwood. The time of the gentleman has expired.
Mr. Whitfield. Very last question.
In this memo you went further to say, ``I would consult
further within the legal group as to whether we should do
anything more to protect ourselves from potential Section 10A
issues.'' What are 10A issues?
Ms. Temple. That is a reference to a provision in the
Federal securities laws that imposes certain obligations on
auditors in certain circumstances. And as an extra precaution,
I sent these documents to Davis, Polk and asked them to review
them to see if they had any suggested advice for additional
steps that Arthur Andersen should take in these circumstances.
And the advice was, no, we were doing the right thing.
Mr. Greenwood. The time of the gentleman from Kentucky has
expired.
The Chair recognizes the gentleman from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman. And I appreciate the
courtesy of the Chair in allowing me--obviously this is not the
first time I have asked to be waited on with the oversight and
investigation on other issues. I appreciate the courtesies in
the past and particularly today.
Representing a district in Houston, you can imagine the
nationwide publicity when you see this current week's Newsweek
about burned and greedy execs, and clueless accountants left
Enron bankrupt and little guys in the lurch, how it affected
investors around the country.
But when you are from Houston and you have a district that
not only had employees but also people who placed their trust
in Enron for 16 years, and also in Arthur Andersen who is an
88-year-old company or partnership, in that trust.
Enron was such an integral part of our community, obviously
employing, you know, thousands of people and individuals
investing in it, but our arts community, our medical community,
even our baseball stadium has their name currently. And you can
see the frustration.
And that is why I guess there are 11 committees in Congress
looking at it. And the Justice Department.
Of course, I am mildly disappointed. It seemed like this
week not only Arthur Andersen's shredding of documents, but
Enron doing it up until the civil lawyers found out, and
hopefully the Justice Department would be more aggressive as
the criminal prosecution I think it would be--much more than
the civil lawyers who are filing the lawsuits. But maybe that
has gotten their attention.
Let me ask some questions, though, and follow up on all of
my colleagues who have done really good in trying to bring out
some of the facts of what happened leading up to Ms. Temple's
memo.
October 9 was when the firm decided to retain outside
counsel. Mr. Baskin, would that----
Mr. Andrews. That is correct.
Mr. Green. How long did it take? Did you interview other
firms, or were there--was the decision made to retain outside
counsel prior to October 9?
Mr. Andrews. Congressman, I wasn't directly involved in
hiring outside counsel. My understanding is we--we engaged them
on October 9, and that they commenced work around October 1.
Mr. Green. But, the decision was made to retain outside
counsel prior to October 9. Do you have any idea of the
timeframe on the decision looking at Arthur Andersen for that?
Mr. Andrews. My understanding is we made the decision and
engaged them on October 9.
Mr. Green. So it was a decision and so you hired them. So
there weren't any other firms that were considered?
Mr. Andrews. I don't know.
Mr. Green. Okay. And you have no idea when the search began
for another outside counsel? I assume that Arthur Andersen has
a lot of outside counsel that they have the opportunities to
retain.
Mr. Andrews. Congressman, that is right. We do have any
number of other firms engaged on various other matters.
Mr. Green. And I guess, to sum up all of the questions,
people are wondering, and I am glad that the testimony brought
out today that Ms. Watkins, who is a former Arthur Andersen--
was she a partner in Arthur Andersen before she moved to Enron?
Mr. Odom. No, sir, she was not.
Mr. Green. But she was an employee of Arthur Andersen and
then moved to Enron?
Mr. Odom. I believe that is correct. Well, actually she
left Arthur Andersen some years ago and went somewhere else
before she went to Enron, is my understanding.
Mr. Green. And she sent--not only in her current job, but
she talked to Mr. Hecker. On testimony you just said that you
were aware of Mr. Hecker's memo to file around the time that he
did it in August 21?
Mr. Odom. Yes, sir.
Mr. Green. Did that make it up just past the Gulf Coast
Region of Arthur Andersen?
Mr. Odom. Yes, sir.
Mr. Green. So I guess, as a lawyer, then Arthur Andersen
had somewhat constructive notice, even though the subpoena
didn't get there until November, that there was possible
litigation and maybe even criminal activity?
Mr. Odom. I am not a lawyer, Mr. Green.
Mr. Green. That is why you have legal counsel from--with
Arthur Andersen, but also the ability to hire outside counsel.
But on August 21, the memo to the--to the Arthur Andersen-
Enron audit team, to the file and to you, and so the
partnership was aware of the concerns of Ms. Watkins in late
August--August 21, 22?
Mr. Odom. Yes, sir.
Mr. Green. And so the decision then from August 21 to
October 9, was--you know, 7 weeks to do that--to decide on
hiring outside counsel, but the constructive notice on that was
there was potential litigation; and I also--as a lawyer, I
understand that there is always potential litigation,
particularly when are you dealing with a company like this.
And why would there be the necessity for sending a memo on
October 12, reiterating Arthur Andersen's policies, when
constructive notice may have been given in August, but actually
you didn't respond until the subpoena, on not destroying
possible evidence?
Ms. Temple, was there some other reason for the October
12--because, granted, you may not have had knowledge, but
Arthur Andersen as a partnership had knowledge in late August,
and yet in October, after the stock continued to go down, and
the company was imploding, there was notice to the local
office.
Ms. Temple. I can tell you, sir, the facts, as best I
recall them, leading up to October 12.
I did learn that this employee had made allegations. I also
learned that the legal group within Arthur Andersen had been
consulted. I consulted and conferred with that lawyer. I
learned that Arthur Andersen encouraged this employee to raise
the allegations within the highest levels of the Enron
organization, and that the Arthur Andersen engagement team had
assured the legal group and others that they had followed up on
the allegations by addressing them with the general counsel of
Enron and learned that Enron had engaged an outside law firm to
conduct an independent investigation.
I learned that the auditors had obtained information about
the nature of the allegations, reviewed that information, and
reported to senior people within the firm and the legal group
that they had reviewed carefully during their audit work the
accounting for transactions referenced in the allegations, and
that they followed up and learned that the law firm had
reported that the company did not need to take any further
action.
So those were the circumstances.
Mr. Green. That was the middle of October?
Ms. Temple. That I knew of by October 12.
Mr. Green. Okay. So before October 12 you were aware of Ms.
Watkin's memo?
Ms. Temple. I don't recall if I saw the memo that Ms.
Watkin's wrote. I do recall knowing that she had made
allegations.
Mr. Green. And you don't have a timeframe before you sent
the memorandum on the--reiterating Arthur Andersen's policy on
the destruction of documents?
Ms. Temple. To the best of my recollection, I learned about
all of the facts that I just described during the week of
October 8.
Mr. Greenwood. The time of the gentleman from Texas has
expired.
The Chair recognizes the gentleman from California, Mr.
Waxman for 5 minutes.
Mr. Waxman. Thank you very much, Mr. Chairman.
One of the great mysteries surrounding the collapse of
Enron is the identity of the secret partners with whom Enron
engaged in various complicated and undisclosed financial
transactions. These partnerships allowed Enron to move debt off
its balance sheet. No one knows for sure how many partnerships
there were, but some press reports have said there could have
been hundreds or even thousands of them. These secret
partnerships appeared to be extraordinarily lucrative for the
partners.
As the Washington Post recently reported, the secret
partnerships were set up in a way that guaranteed that the
secret partners would not be at risk if the ventures failed.
Andrew Fastow, the former Enron official who participated in
some of the partnerships, reportedly made $30 million from his
role in these partnerships.
I am concerned that the document destruction that went on
at Arthur Andersen and at Enron may affect our ability to learn
who these secret partners were. In fact, it is possible that
the document destruction may be intended to cover up the
details of these partnerships, including the identity of these
secret partners.
We know from the press accounts that some of the documents
shredded by Enron have the names of the secret partnerships
such as Jedi clearly visible on them. I would like to ask
whether any one of you at the table knew that Arthur Andersen
knew of the identity of the secret partners.
Mr. Andrews? Mr. Odom?
Mr. Odom. I will try. On the LJM 2 transactions, which are
the large funds that Mr. Fastow raised, there exists a private
placement memorandum, I think it is 144A--is that--am I saying
that right?
144A. It is a private placement memorandum, which I think
exists, that I believe has the names of the people who
subscribed to that partnership.
Mr. Waxman. Is that document intact or has it been
shredded?
Mr. Odom. That is an Enron document.
Mr. Waxman. Do you know if any of the documents destroyed
at Andersen related to these secret partnerships?
Mr. Odom. I have no knowledge.
Mr. Waxman. Do you know whether any of the documents
destroyed at Enron related to those secret partnerships at
Enron?
Mr. Odom. I have no knowledge.
Mr. Waxman. I am assuming that if anybody else at the
table----
Mr. Andrews. No, I have no knowledge of the Enron
activities.
Mr. Waxman. How about of the Arthur Andersen activities?
Mr. Andrews. As the documents that I have discussed,
Congressman, that we believe were destroyed were not permanent
audit work papers, but memos and documents, paper documents and
e-mails, in this--that were destroyed in that late October
period, the ones that we can recover, which were some of the
electronic documents, we will obviously, when the investigation
is done, know the content of those and be able to obviously
answer that question.
Documents that were shredded or destroyed, we cannot
address what was in those items or in those papers, as they
were shredded. But we are making every effort to recover every
document that was destroyed in our organization. As we said, we
certainly do not condone that and will make every attempt to
recover it so that the record is there to investigate for us,
for you, for the SEC, and for the Department of Justice.
Mr. Waxman. Well, there are many Members of Congress who
would like to know about who those secret partners were. Can
any of you give us information or direction about how to get
this information, aside from what you have already indicated?
Whom should we call before the committee? What documents should
we subpoena to learn the identity?
Mr. Andrews. Well, Congressman, I think the investigations
are pursuing, whether it be the SEC, the Department of Justice,
or Congress or ourselves, looking at all information that is
available.
Now, most of the documentation, the original documentation
around partnerships or any other source documentation like that
would first and foremost be the documentation of the company.
We, as auditors, do not create the documentation. We review
those records. So the best source of the information that you
are referring to, of course, would be at the company itself.
Now, when we do our audit, we do review items within that
audit. To the extent we need documentation to support the
audit, we do retain those in our audit work papers. We are and
will continue to make our documentation that we have, including
everything we recover, available to all appropriate
investigating bodies. So anything that we have will be
available appropriately for the investigation, including
anything we can recover from the e-mails that were destroyed in
that--or eliminated in that late October period.
Mr. Greenwood. The time of the gentleman from California
has expired.
Mr. Waxman. If I can ask this one point: Will you be
submitting to this committee that information when you have it?
Mr. Andrews. Congressman, we will cooperate fully with this
committee, as I think we have to date. When we complete our
investigation, we will certainly share with you the conclusions
of our investigation, including the subsequent oversight of
that by former Senator Danforth.
Mr. Greenwood. The Chair recognizes the gentleman from
Massachusetts, Mr. Markey.
Chairman Tauzin. Before the Chair does that, can I clarify
something? Just 30 seconds.
I want to inform the gentleman and all members that our
original request for documents from Enron covers the requests
for knowledge about the partnerships. And that document request
is in the process of being complied with. So we don't have it
all yet, but we obviously are going to share it with all
members and staff when we have it.
Mr. Greenwood. The Chair yields 5 minutes to the gentleman
from Massachusetts, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman, very much.
Ms. Temple, when you sent the October 12 memo, you were
really sending it because you were concerned that Andersen
might be sued, either by the SEC or by Enron investors, weren't
you?
Ms. Temple. No, I don't recall that being in my mind at the
time. I was concerned about making sure that we had accurate
and complete documentation.
Mr. Markey. Mr. Joseph Berardino on Meet the Press on
Sunday said the policy of Andersen is not to shred documents,
not to eliminate documents, if you have a reasonable basis to
anticipate an investigation. By October 12 you already know
there is a reasonable expectation that there will be
litigation.
Now, Mr. Odom, I see that on October 12 you forwarded Ms.
Temple's e-mail on to David Duncan, the Andersen partner in
charge of the Enron account, with the notation, ``more help.''
Now, can you tell us just what did you mean when you
referred to this memorandum as ``more help''? How is an order
to start shredding helpful to you, especially on October 12?
Mr. Odom. I was actually being facetious, Congressman
Markey. What I was referring to is the fact that all of us knew
where our document retention policy was, yet we had gotten a
note attached to it, with a doc link attached to it. So it was
really just a reminder. But it was not something that was----
Mr. Markey. On October 12, ``more help'' is just being
facetious?
Mr. Odom. Yes.
Mr. Markey. Now, Ms. Temple, now just 4 days after you sent
the ``12, 2001, start shredding the documents'' memorandum to
Mr. Odom, I see that you sent an October 16 e-mail to David
Duncan commenting on a draft memo he had prepared, expressing
concerns about a press release that Enron had put out regarding
third quarter 2001 results. In this e-mail you recommended
deleting any reference to consultation with the legal group and
deleting your name from the memo.
You have acknowledged that you were concerned that being
mentioned in this memo could result in your being named as a
witness in future litigation. If so, following Mr. Berardino's
statement, why didn't you direct Mr. Duncan to stop the
shredding?
Ms. Temple. Congressman Markey, I did not instruct Mr.
Duncan to shred documents. In my October 16 e-mail, I did not
anticipate being a witness in any particular proceeding with
respect to Enron.
This is standard advice provided by the legal group.
Mr. Markey. You said there is no ``particular,'' but Mr.
Berardino is saying if there is a ``reasonable'' basis to
anticipate an investigation. At this point, don't you have a
reasonable expectation?
Ms. Temple. As I recall, it was a possibility. But I don't
recall any discussion of any reasonable anticipation of
litigation or making that conclusion.
Mr. Markey. So you were also concerned that Mr. Duncan's
draft would be read as a suggestion that Andersen viewed the
Enron press release as being misleading to investors, weren't
you? And if so, why didn't you order the shredding to stop if
that was your concern?
Ms. Temple. Congressman, I was not aware of any shredding
activities. Based on my discussions with Mr. Duncan and others
and our outside counsel----
Mr. Markey. Your memo was interpreted, as you know, as a
shredding order. That is what began immediately at Andersen in
Houston.
Ms. Temple. I don't know what actually happened, what the
facts are.
Mr. Markey. So you were also worried that Andersen would be
required to comply with the financial fraud reporting
requirements of Section 10A of the Securities Exchange Act, the
Wyden-Dingell-Markey amendment that requires accountants to
immediately report evidence of financial fraud to senior
management, the board; and if they take no action within 5
days, to report the fraud to the SEC. You make that clear.
If so, why didn't you order the shredding to stop?
Ms. Temple. Congressman, there was no conclusion that there
was any financial fraud. In fact, there was a conclusion that
there was no misleading statement. After consultation with
others in the firm and Davis, Polk, I was being careful in
asking Davis, Polk to look at all angles and all issues and
advise us. And the conclusion was there were no further steps
to take.
Mr. Markey. Well, let's move to October 17. On October 17,
the SEC opens an informal inquiry into Enron's dealings, and
over the next several days numerous lawsuits are filed against
Enron. The document shredding continues all through this period
to November 9.
Why didn't you order the shredding to stop then?
Ms. Temple. I was not aware of any shredding activity.
Mr. Markey. You had sent a memo on October 12. You knew
that that was something that could reasonably be interpreted as
a shredding order.
Ms. Temple. I intended by October 12 reference to the
firm's documentation retention policy to focus on the
documentation issues that had arisen in the retention
counseling advice I had provided leading up to the 12. I
specifically told the engagement team to retain the relevant
documents.
Mr. Greenwood. The time of the gentleman from Massachusetts
has expired. Without objection, the gentleman will be granted
an additional minute.
Mr. Markey. Is it your legal opinion that Andersen is free
to shred documents relating to its work with Enron until such
time as it actually receives a subpoena from the SEC or is
formally named as a defendant in a class action lawsuit by
Enron's employees or other investors?
Ms. Temple. I have not reached that legal opinion.
Mr. Markey. Was that your view at that time? That is the
important thing.
Ms. Temple. I was not asked to reach a legal opinion at any
particular time. And I was unaware of any shredding activity.
Mr. Greenwood. The time of the gentleman from Massachusetts
has expired.
The Chair recognizes the gentleman from New York, Mr.
Engel, for 5 minutes.
Mr. Engel. Thank you very much, Mr. Chairman.
I am very concerned about the conflicts of interest that
have to exist when an auditor also serves as a consultant. To
be blunt, a lucrative consulting contract depends on a
company's financial health. And in this case I am forced to
wonder if Andersen was willing to turn a blind eye to
questionable accounting practices and partnerships so as to
maintain its other contracts with Enron.
Some of the financial transactions that Andersen blessed in
its role as auditor are, at face value, reckless and
unwarranted. Obviously, Andersen failed in its role as auditor
to provide investors with proper information. This all brings
to mind the question of ethics.
According to the American Institute of Certified Public
Accountant's Code of Professional Conduct, ``Integrity requires
a member to be, among other things, honest and candid within
the constraints of client confidentiality. Service and the
public trust should not be subordinated to personal gain and
advantage. Integrity can accommodate the inadvertent error and
the honest difference of opinion; it cannot accommodate deceit
or subordination of principle.''
What we now find before us indicates to me that many, many
people at Enron and Andersen failed to uphold basic principles
of honesty and integrity, and with so many unprincipled
choices, far many more people were hurt as a result.
It is evident to everyone now that Enron's become one of
the greatest business scandals in our Nation's history, and
obviously, if the scandal is as dark, portions--billions of
dollars of investment retirement have been lost due to the
dirty dealings of a few greedy people. And as a Congressman, I
look forward to changing our Nation's laws so as to prevent
this type of abuse from ever happening again.
A lot of my colleagues have asked specific questions. I
wanted to ask some general ones. I would like--let me start
with Mr. Baskin and say, does providing consulting and auditing
services set one on a path that will cause professional ethics
to be challenged? Is it not a conflict of interest to provide
consulting and auditing services at the same time?
Mr. Baskin. Congressman, I do not believe that that is
inherently an ethical problem for auditors.
Mr. Engel. Well, let me ask you, as managing director of
the professional standards group of Andersen--you can be
considered the conscience of the company--what is the Andersen
code of professional standards, and has it lived up to these
standards based on everything we now know?
Mr. Baskin. Our code of professional standards in the
United States is the AICPA standards that you read from.
Mr. Engel. Does Andersen require its members to be--its
accountants to be members of the American Institute of
Certified Public Accountants?
Mr. Baskin. I believe we require our audit partners and
others who need to be members to be members, yes.
Mr. Engel. Okay. So you are obviously aware that the AICPA
has an extensive code of professional ethics?
Mr. Baskin. Yes, sir.
Mr. Engel. Then obviously it had to have been obvious to
you that that code was being violated; was it not?
Mr. Baskin. I was not directly involved in the Enron
engagement, and so it was not obvious to me, no. I was not
aware of it.
Mr. Engel. Are you aware that violating these standards and
subsequent expulsion is cause for a company to fire an
employee?
Mr. Baskin. I am sorry. Could you repeat the question?
Mr. Engel. Well, violating these American Institute of
Certified Public Accountant Standards would be reason to fire
an employee?
Mr. Baskin. I think that certainly would be something that
we would have to consider, yes.
Mr. Engel. Would you not logically say that the destruction
of financial documents after a Federal investigation has been
launched would be a violation of that code?
That is not even grey; it is certainly, to me, black and
white.
Mr. Baskin. Congressman, I would want to know the facts
about who was investigating, what part of the SEC was doing the
investigating, what were they looking into. Was it financial
statements or was it some other aspect of their reporting? But
before I would conclude that we had crossed some threshold--I
don't think that simply because someone in the SEC is
investigating is sufficient.
They communicate with our clients quite often, and on a
continuous basis.
Mr. Andrews. Congressman, could I address your question?
First, with regard to your reference to the AICPA
Professional Code of Conduct, we as an organization fully
subscribe to that, as well as to any of the other SEC-related
independence guidelines that we as an organization have to
comply with. We totally concur with that. We believe in this
engagement we have complied with those rules.
The issue related to document destruction, we didn't look
at that from an AICPA Code of Conduct standpoint, we looked at
it as an incredible, gross error in judgment at a minimum, and
certainly probably a violation of our policy; and that is why
we would take that action.
But we fully subscribe to the requirements of the AICPA
Code of Conduct, as well as the SEC rules and regulations
around those subjects, as well.
Mr. Engel. Well, let me ask you----
Mr. Greenwood. The time of the gentleman from New York has
expired. The Chair will do his usual granting of 1 additional
minute.
Mr. Engel. Can an accountant be personally sued for
malpractice as doctors and lawyers can be? And should not
accountants be held legally responsible for negligence?
Mr. Andrews. Congressman, accountants can be and are sued,
as the firm is. So both individually and as a firm we are
accountable.
Mr. Greenwood. The time of the gentleman from New York has
expired.
Chairman Tauzin. Would the gentleman--he had a little time.
I want to clarify something for the record if the gentleman
will allow me. Will the gentleman yield?
Mr. Engel. Certainly.
Chairman Tauzin. Let me make something clear on the record
for all of those attending these sessions, either in person or
by television.
Someone made a statement earlier that we had passed a law
in 1995 relieving the accounting profession of litigation
liability. That is not correct. Under that act accountants are
responsible proportionately for nonknowledgeable violations.
And when they are in knowledge of something negligent, they are
liable fully, in joint and several liability with their client.
That is current law. That has never been repealed. It has not
been repealed in the 1995 act.
Second, the 1995 act did not relieve accountants of
liability for making intentionally wrong statements. All the
act did was codify a court decision, a Federal appellate court
decision, relative to forward-looking information, we think the
company is going to do well, but here are the things that could
hurt it if it doesn't do well, that kind of stuff.
Third, the act that was discussed earlier did not change,
nor touch nor repeal nor alter the Supreme Court decision on
aiding and abetting; it had nothing to do with it. It retained
accountant's liability when they are negligent knowingly, fully
and completely, and when they are not knowingly, they are
proportionately liable with their clients. That is the current
state of the law.
I thank the gentleman for yielding.
Mr. Engel. Thank you for clarifying that. I think it is an
important clarification.
Mr. Greenwood. The Chair thanks the gentleman. And the
Chair will recognize himself, and we will begin a second round
of questions for those members who wish to participate.
It has been the position of Arthur Andersen all along that
the buck basically began and stopped with Mr. Duncan, that he
was not directed by superiors to destroy documents or to
command others to destroy documents. Now, is that correct?
That is your position that is--I understand Mr. Berardino
has testified to. That is what your press releases have said.
That is what you have all said today in your testimony.
Mr. Andrews. Congressman, I would like to clarify that.
What I have said and what I believe the firm has said at
this point is that we are engaged in an extensive investigation
of what happened. We are part of the way through that. At this
point in time, we had enough information to take the action we
took on Mr. Duncan, based on the gross errors in judgment.
That investigation continues. And I assure you that
wherever that investigation leads, to whomever it leads, we
will take appropriate action.
So our investigation is in process and certainly far from
finished. We don't mean to suggest that should it lead
elsewhere, we in any way would resist taking it in that
direction.
Mr. Greenwood. Very well. Early on, I think perhaps
September, Arthur Andersen created the Core Consultation Team.
I believe many of you, Mr. Andrews served on that, Ms. Temple
served on that, Mr. Odom served on that; is that correct?
Mr. Andrews. Congressman, no, I was not part of the Core
Consultation Team.
Mr. Greenwood. You invited--for instance, the memo of
October 23 that came out from Mina M. Trujillo, regarding a
conference call from the Core Consultation Team, was copied to
you, Mr. Andrews. Did you participate in that conference call?
Mr. Andrews. Congressman, I did not participate in that
conference call.
Mr. Greenwood. You did not participate in the consultation
of the consultation group? You were not a party to the
discussion?
Mr. Andrews. I am familiar with the Consultation Team. Yes,
I did have conversations at times with the Consultation Team. I
was not party to that call.
Mr. Greenwood. Why was the Consultation Team created?
Mr. Andrews. The Consultation Team was created because, as
we said, had indicated, during the third quarter there were a
number of activities going on in terms of transactions and
other things that have been discussed.
And that Consultation Team--there was a--there was, because
of the nature of the activities, the degree of things being
considered, the complexity of the things being considered, that
was created. And it is our policy and our culture to encourage
consultation. And so that would be appropriate.
Mr. Greenwood. You had senior members, you had people from
Chicago on this team, Rich Corgel was on this team, he was
Practice Risk Management Group Director, a superior position to
Mr. Duncan certainly and to Mr. Odom; is that correct?
Mr. Andrews. Mr. Corgel is what we call U.S.--he is in
charge of our U.S. Practice Director role. Mr. Odom is a
Practice Director as part of the Corgel team.
Mr. Greenwood. Let me get to this. What I want to know is,
when you had these discussions and there was a conference call
that was scheduled for 4 on October 23, on the agenda was
``status of documentation,'' and that is Tab 13.
This document that I am referring to, Tab 13, I would like
you to take a look at that. And there is a long list of agenda:
``SEC, third-party actions, legal representation, status of
documentation, response to SEC.''
Mr. Odom, are you looking at this document?
Mr. Odom. Yes, sir.
Mr. Greenwood. Now, in this conference call, I have
included Mr. Duncan, but also included senior management from
both Houston and Chicago.
Was there discussion at all about the document retention
issues? Because, what Ms.--''status of documentation'' is
listed in this as an agenda item. And Ms. Temple is saying that
was there to talk about the need to collect data from around
the world to analyze Enron's decisionmaking, and this was not
about a discussion of documentation that ought to be retained
or destroyed. Is that your testimony?
You are saying--you have testified, Ms. Temple, that that
was the--that the ``status of documentation'' is on that list
for the purpose of--that was there so you could discuss the
need to retain documents. Is that your recollection? That is
why that was on there?
Ms. Temple. My recollection was that--an inquiry as to the
status of the ongoing current work by the engagement team in
the third quarter and the issues that the team was trying to
deal with as they arose.
And my notes from that conference call indicate that the
engagement partner reported that Arthur Andersen was trying to
gather all of the documents regarding the transactions from
around the world.
But I believe----
Mr. Greenwood. And was that for purposes of litigation or
for purposes of preservation?
Ms. Temple. I believe that was for purposes of getting all
of the relevant information together, to understand the facts
and to preserve the facts.
Mr. Greenwood. Okay. Is that your recollection, as well,
Mr. Odom?
Mr. Odom. Yes, sir. I believe it is my recollection.
I would also like to clarify that the initial core team of
the people to whom the memo was sent to, and the cc's were
people who were invited to participate in this first call, and
I did participate in this call. I did not participate in all of
the core calls after that, although I did in some.
Mr. Greenwood. Let me ask you this question.
Mr. Berardino in his press release gave the reasons why Mr.
Duncan was fired. He said he was fired because he ordered the
destruction of documents.
Who told you, who told your team, who told your attorneys
that Mr. Duncan ordered the destruction of documents? Did Mr.
Duncan tell you that?
Mr. Andrews. Mr. Chairman, that information related to that
conclusion, and that is in Mr. Berardino's memo or press
release of January 15 as the result of the investigation work
we had done to that point in time.
Mr. Greenwood. Who said Mr. Duncan ordered the destruction
of documents? Was it Mr. Duncan or was it someone who was
destroying documents at Mr. Duncan's command?
Mr. Andrews. My understanding is that it was a result of
information from all of those interviews, including interviews
with Mr. Duncan, review of the information that we had on that,
as well as others.
Mr. Greenwood. Mr. Duncan acknowledged that he destroyed
documents contrary to Andersen's policy or that he ordered
others to destroy documents contrary to Andersen's policy?
Mr. Andrews. I did not directly interview Mr. Duncan. I
don't want to suggest that he made the statement that it was
contrary to Andersen's policy.
What Mr. Duncan did was conduct the meeting on October 23
and give instructions--and provide instructions to comply with
the policy.
Mr. Greenwood. How do you know that? Did he say that he did
that? Did others in the firm say that he did that?
Mr. Andrews. Mr. Chairman, my information is as a result of
the information shared with me as a result of the investigation
that we have going on, which included interviews with Mr.
Duncan and others, as well as review of documents that have
been recovered.
Mr. Greenwood. Did Mr. Duncan create this initiative to
comply with policy or in opposition to the policy?
Mr. Andrews. Mr. Chairman, Mr. Duncan would have to answer
that question.
Mr. Greenwood. So no one in Arthur Andersen has ever said,
Mr. Duncan told me to destroy documents?
Are you aware of any employee who said, Mr. Duncan told me
to destroy documents?
Mr. Andrews. I do not know the answer to that. Again, once
the investigation is completed----
Mr. Greenwood. But you have said--the Arthur Andersen press
release asserts that Mr. Duncan conducted himself in, using
poor judgment, violation of policy.
My question is, how did Arthur Andersen come to that
conclusion when you have not indicated that either he admitted
it, he came forth and said, You know what I did? I broke the
rules. I don't know what got into me. I started telling people
to destroy documents. And you have not said, and by the way,
these are the employees who destroyed the documents pursuant to
Mr. Duncan's directions, and that is why we fired the guy.
Mr. Andrews. Let me clarify. Mr. Duncan conducted a meeting
that----
Mr. Greenwood. Let me just clarify before you clarify.
The Andersen press release says, ``Although the firm is
still working to collect all of the facts, it has learned that
at the direction of the lead partner, an expedited effort to
destroy documents in Houston was undertaken.''
So how did you learn that?
Mr. Andrews. We have learned that as a result of interviews
with Mr. Duncan and others.
Mr. Greenwood. So Mr. Duncan said, I led an expedited
effort to destroy documents?
Mr. Andrews. No, that is not what I am saying, Mr.
Chairman.
What I am saying is that he conducted a meeting with a
group of the engagement team with the policy----
Mr. Greenwood. How do you know that? How do you know that
he did that?
Mr. Andrews. Through the interviews that we have conducted.
Mr. Greenwood. With whom?
Mr. Andrews. With our investigators.
Mr. Greenwood. No. Whom did the investigators query?
Mr. Andrews. Mr. Duncan, as well as others.
Mr. Greenwood. And who are the others?
Mr. Andrews. I don't have the information on the others.
Mr. Greenwood. We will need to know who those others are.
Mr. Andrews. But what I want to make clear is, as a result
of that meeting, after that meeting, an extensive document
destruction and e-mail removal process resulted. So clearly, to
us, the results of that meeting led to that activity, and Mr.
Duncan was engaged----
Mr. Greenwood. We know that that expedited effort didn't
occur because of telepathy. So therefore either Mr. Duncan
said, It is time to expeditiously, and contrary to our policy,
start destroying documents; or he didn't.
And he doesn't admit that apparently. He has not said I--he
didn't come to your investigations and say, you know what? Mea
culpa, I told these people to destroy documents contrary to our
policy. It was a rush. It was expedited.
Nor have you indicated to us at any time that his
underlings came and said, Boy, this is what we were told. We
were told to hurry up and rush and destroy documents.
He didn't tell our investigators that he did this.
Mr. Andrews. I am not here to defend a policy. What I have
said is that the activity that resulted from that meeting,
large quantities of destruction of documents, is at best an
incredible error in judgment and totally inappropriate and not
consistent with what we would intend to take place or what this
firm stands for.
Mr. Greenwood. Why do you think Mr. Duncan went about this?
You fired him. Pretty strong action. What does the company
think motivated Mr. Duncan to go forward with this expedited
rush to destroy documents, putting his job on the line, I would
assume putting at risk all of those under him who were engaged
in destroying documents in an expedited, rushed fashion,
contrary to your policy. Why would he do that?
Mr. Andrews. Mr. Chairman, I don't know. And I hope by the
time the investigation is done----
Mr. Greenwood. Nobody asked him why he did that? Before you
fired him, nobody said, Why did you do this? What got into your
head?
Mr. Andrews. I am sure our investigators had inquired along
many different lines. But what----
Mr. Greenwood. You are sure of that?
Mr. Andrews. I am clear they interviewed him, yes. They
have interviewed him on multiple times.
Mr. Greenwood. Before you came to testify about all of
this, did you ask your investigators what the heck he said?
Mr. Andrews. My understanding is that he said that he
conducted the meeting, he shared the policy, or discussed the
policy, with the people at the meeting, and the resulting
actions----
Mr. Greenwood. He passed out the policy and said, Here is
the policy?
Mr. Andrews. I don't know exactly how he passed it out or
if he passed it out. But he discussed the policy.
Mr. Greenwood. They just took the policy that had been
sitting around for years and said, We'd better get to work
here?
Mr. Andrews. Mr. Chairman, I don't know how he conducted
himself at the meeting because I wasn't present.
Mr. Greenwood. My time has expired.
The Chair recognizes the gentleman from Florida, Mr.
Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman. And I think we
actually, absolutely know more than we did before the meeting
started, not as much as I think any of us want to know.
I want to shift focus a little bit, because I think this is
going to probably be the last round, and at least give each of
you an opportunity to touch on this. And it goes back to my
original opening statement of the sort of big-picture issue,
which is really regulatory safeguards.
The whole premise of what we believe happened is that Enron
was gaming the public accounting system. At least that is a
very likely sort of scenario, that they, through these
partnerships and through offshore issues, were putting losses
in those areas that, effectively, their balance sheets did not
reflect; and analysts, Wall Street analysts or for that matter
any investor trying to understand what was going on with Enron,
was not able to do.
From any of your perspectives, from the public accounting
side--you know, again this is sort of more the big-picture
issue as opposed to some of the details that we have dealt
with. But from that perspective, can you offer suggestions to
us that--is the system broken?
If you recall, most of--I think all of you were here for my
opening statement. Are there other Enrons out there? Are there
other companies that are doing effectively exactly the same
thing that Enron is doing? And for that matter, all of them
have big five accounting firms, and the big five accounting
firms--again, not the issue of destruction of documents, but
the issue of reporting under present, you know, accounting
rules, clearly is a skirting of the rules, clearly is a gaming
of the system.
Now, again I am not ready to say that that gaming was
illegal. It was awful. It was terrible. I was about to say when
my colleague was talking about maximum security prison, that
might be too good a condition for some of those people. But the
reality is, in terms of that issue, which was really the big
issue, do any of you have any comments that you would like to
make on that?
I know it is not why you were asked to come here, but you
have a lot more experience in the public accounting world than
I do.
Mr. Andrews. Well, Congressman, let me comment on it.
I think the intent and objective of financial statements
and other disclosures should be to inform users of those
statements in a way that there is clarity to that information,
so they can make informed decisions, whether for investment
reasons or for others. So I totally concur with that.
And I believe we do need to improve that process for that
clarity to be at the level it should be. Because the investor,
or whoever uses financial statements, needs to be able to
understand them for their purpose.
Mr. Deutsch. Is it a fair thing to say that no one could
really look at your reports, Andersen's reports, about Enron
and really understand what was going on in Enron?
Mr. Andrews. Congressman, our responsibility with Enron
as--they are Enron's financial----
Mr. Deutsch. I am not saying you did anything wrong.
Because there are some very, very smart people--this is also a
company that didn't pay taxes for 6 years at the same time
people are making billions of dollars off of tax, so gaming the
system.
And again the whole thing we have talked about, you know,
even to the last day of gaming the system, of changing the
pension manager to lock people in for an additional 60 days.
In a sense, it is our job to prevent this. And I don't know
how--you know, we can't stop all crooks, especially white
collar crooks. But our job is to do the best we possible can.
You can respond.
Mr. Andrews. Well, Enron was a very complex company. There
is no question that their financial statements and related
disclosures are complicated. Many have said that they are
difficult to understand.
So, again, to the test of do you have the clarity that some
are requesting in those financial statements, from that vantage
point can an investor understand everything?
But very sophisticated investors had those financial
statements. They have a responsibility to understand them as
well. The company and ourselves have a responsibility to make
sure those financials are materially presented--fairly
presented in conforming with generally accepted accounting
principles.
But as you observed, many have commented on the perplexity.
But this is a very complex company.
Mr. Deutsch. But again we kind of look at the other sides.
But at this point we have no one--I am not aware--for instance,
the bond rating companies basically didn't downgrade on a
continuous basis. The company imploded.
At the same time--and, you know, you talk about people
being able to read it. These are the most sophisticated people
in the world trying to look at the statements that you provide
them, and they don't know what is going on. It is not the
employee with the $500,000 401(k); it is literally the best
analysts in the world couldn't understand what was going on
with your statements.
And again I am not ready to say you did anything wrong. But
the other issue is, if Enron did it, how do I know that there
are not other companies out there that are doing the same sort
of things, and that from a financial market basis--I mean, one
of the incredible success stories is the transparency that you
as an institution, Arthur Andersen, along with your colleagues
in the accounting profession, provide.
I mean, the system works. I mean, we have had unprecedented
strength in our economy for one of these reasons. We have
access to capital unprecedented in the history of the world for
your successes. And what I am saying is that, you know, it
failed incredibly here.
And, you know, is it going to happen again? Is it going to
happen this week? Is it going to happen next week? Next month?
For one company? For two companies? For three companies?
Because obviously there were individuals who made a lot of
money gaming the system.
I mean, who walked home, as Congressman Rush pointed out--I
mean, there are a lot of people who are sitting on tens,
hundreds of millions of dollars because of their involvement
with Enron.
Mr. Andrews. Congressman, I can't comment on the other
companies obviously.
But, first of all, as to financial statements, Enron was a
business failure. I don't think the financial statements caused
the business failure.
Mr. Deutsch. Right. And I agree, businesses do fail. But
people in public markets, let me just say--my time has expired,
but just a last question.
In the case of the efforts that Enron used, the
partnerships and the offshore partnerships and the offshore
investments, in terms of shifting the debt that we are now
aware of, that have now been disclosed, if Arthur Andersen was
in another company today and those same things were going on--
this has nothing to do with the destruction of documents--what
would your statement be?
What would you be saying in your public accounting report
about that company today, knowing what we know about Enron?
Would it be the same? Would you be issuing the same report?
And again, this is really the heart of the issue. I mean,
you know, if that same situation is going on today, is Andersen
saying everything is fine with the company?
And you have these internal debates, but ultimately, hey,
they are really sharp, they really know the rules, we are not
supposed to report those partnerships because they are off
book. I mean, let's--we don't have to. And everyone sort of
winks at each other knowing what is going on.
Again, I have to be--you know, you have very, very smart
people involved. And you know the people at Andersen, the
partners who are in charge of Enron, knew exactly what they
were doing. They knew exactly what Enron was doing in terms of
this shifting. I am 100 percent convinced of that.
Now, did they violate the law? Probably not. Did they
violate accounting practices? I don't know. Did they, you know,
did they engage in something which created a disaster for
untold people in so many ways? Absolutely.
And I guess my question is, you know, are you reevaluating
it now? Are the other--you know, four firms reevaluating it?
Because what would you do now? What would you do today with
Enron in terms of your transparency, to tell the market, to
tell the world what is going on in that company? Would it be
the same report?
Mr. Andrews. Well, the financial statements need to have
appropriate application of the principles and the appropriate
disclosure. And I think the Enron situation has certainly
heightened attention to that. And actually the SEC and others
have already taken some actions to recommend enhanced
disclosures, particularly in the management discussion and
analysis around risk factors and other items. That reaction, I
believe, is in direct reaction to the situation with the Enron
engagement.
So there is strong encouragement to make sure that the
risks are appropriately presented and disclosed, either in the
financial statements or other parts of the 10-K or annual
report of the company.
So, to your question, I think many of us, and we have said
this, that the financial reporting model can be improved so
that it is better; disclosure can be improved in many ways.
And so I think we definitely would subscribe to that, yes.
And I think progress has already started. I think the
profession is looking at that. The SEC is looking at that, as
is Congress. So I think there will be improvements. I think out
of any situation like this, let's hope that we all learn and
changes occur to improve in whatever direction is appropriate.
I would agree that financial disclosures would be one.
Mr. Greenwood. The time of the gentleman from Florida has
expired. The Chair recognizes the chairman of the full
committee, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman.
Before I begin this line of questions, I want to go back,
Ms. Temple, to a question Mr. Markey asked about your
interpretation of obstruction of justice and the requirements
of retention of documents when, in fact, a proceeding is
started. And I want to put you all on notice about that point,
because I don't want to lead you into answers that might put
any of you at risk unless want to be there.
But my understanding, Ms. Temple, is that obstruction of
justice can apply even before a proceeding is commenced when
documents are destroyed with the intent to make them
unavailable to a proceeding that is likely to be commenced, in
order to make sure that those documents are not available for
that proceeding and that those documents would, in fact, be
relevant to that proceeding.
Now, I don't know if I've got it exactly right, but that is
pretty much my understanding of obstruction of justice. And I
wanted to say that before I ask you all of these questions.
I want you all to respond yes or no if you can. I want to
take you through a timetable now of SEC activities in this
matter.
Beginning with October 17, SEC sends its first letter to
Enron requesting information regarding third quarter losses.
Please answer, each of you, whether you are aware of that
letter at that time.
Mr. Odom. No, sir, I was not.
Ms. Temple. I was not aware of that letter on October 17.
Chairman Tauzin. When did you become aware of it?
Ms. Temple. To the best of my recollection, I received a
copy of the letter on October 25. No later than October 23,
perhaps a day or two before, I learned that the SEC had written
a letter to Enron asking for documents about related party
transactions.
Chairman Tauzin. Mr. Odom, did you learn of that letter at
any time?
Mr. Odom. Yes, sir, about the same time Ms. Temple did.
Chairman Tauzin. How about you, Mr. Baskin?
Mr. Baskin. No, sir. I was not aware of the letter at that
time.
Chairman Tauzin. Have you ever been aware of it?
Mr. Baskin. Yesterday I became aware of it.
Chairman Tauzin. How about you, Mr. Andrews?
Mr. Andrews. No, sir. I definitely was not aware of it on
October 17.
Chairman Tauzin. When did you become aware of it?
Mr. Andrews. I am not sure. But sometime in the latter part
of October.
Chairman Tauzin. Now, Mr. Duncan did give us an extensive
interview prior to his taking the Fifth Amendment, as you know.
In that interview, he says that he learned of the SEC inquiry
of Enron on October 19-20, and that he informed others at
Andersen, including Odom and Temple, on that date.
Do either of you deny that?
Mr. Odom. I was not in Houston. He may have called me at
home, but I do not recall the call.
Chairman Tauzin. Ms. Temple?
Ms. Temple. I don't recall at this time. To the best of my
recollection, I recall focusing on the requests or learning
about the requests on the October 23 call.
Chairman Tauzin. On October 22, Enron publicly acknowledged
an informal inquiry had been started by the SEC--publicly
acknowledged. That is when I learned about it, when America
learned about it.
Did any of you learn about it with us on that date?
Mr. Odom. Yes, I believe that is the date.
Chairman Tauzin. So on the 22nd you learned publicly that
Enron acknowledged an informal inquiry by the SEC?
Ms. Temple?
Ms. Temple. Yes, I believe that is correct.
Chairman Tauzin. Mr. Baskin?
Mr. Baskin. I honestly don't recollect knowing about it,
no, sir.
Chairman Tauzin. Mr. Andrews?
Mr. Andrews. That is probably the time that I became aware
of it as well, so I said, sometime subsequent to the 17th.
Chairman Tauzin. Mr. Baskin, you really don't think you
knew about it when Enron announced that there was a public
announcement that the SEC has started an informal inquiry?
Mr. Baskin. I try to read the Wall Street Journal most
every day. And I probably read about it, but I don't recall.
Chairman Tauzin. So you probably were aware of it.
That is not the end of the SEC activities. On October 31,
the SEC upgraded its informal inquiry into a formal
investigation. Did any of you know about that decision by the
SEC to formally upgrade it to a formal investigation?
Mr. Odom.
Mr. Odom. I certainly knew about it the day that Enron
announced it.
Chairman Tauzin. How about you, Ms. Temple?
Ms. Temple. Yes. I learned when Enron announced it, yes.
Chairman Tauzin. How about you, Mr. Baskin?
Mr. Baskin. What I read in the newspaper.
Chairman Tauzin. How about you, Mr. Andrews?
Mr. Andrews. Somewhere around that time, yes.
Chairman Tauzin. Thank you.
It wasn't until November 8 that the subpoenas were issued.
Now, November 8 the subpoenas were issued. On November 9, Ms.
Temple, you leave the voice mail.
On November 10 you write this extraordinary memo. It is a
good one. This really is a good one. It says, we don't want
anybody to falsely accuse Arthur Andersen of destroying
documents. That is what it says. So we are not only going to
preserve current documents, I want you to preserve all of your
new documents. Save everything. And I want to read to you from
that memo.
On the second page this is what you told everybody to do--
everybody now. No. 1, existing documents. ``effective
immediately, all existing Enron-related documents and materials
must be preserved and nothing should be destroyed or
discarded.''
Now, I have got a very simple question to ask you. If that
was the policy that was announced on November 10, effective
immediately, what policy was in effect on November 9?
Ms. Temple. The firm's written documentation retention and
destruction policy.
Chairman Tauzin. Right. Which permitted destruction?
Ms. Temple. Right. Only in certain circumstances. And the
firm's policy continued to be in place.
Chairman Tauzin. Well, let me make sure I've got this on
the record.
On November 9, the day before this policy was issued,
``effective immediately,'' the policy of Arthur Andersen was
that it is okay to destroy documents that might be related to
the Enron investigation by the SEC and this committee. Is that
correct?
Ms. Temple. The policy states that if there is threatened
litigation, no related material shall be destroyed. It also
states that in any circumstance, all materials relevant to the
opinions and findings of the auditors shall be maintained.
Chairman Tauzin. But, you see, you felt it necessary, not
on the date that the SEC announced an informal inquiry but on
the date Enron announced it. You didn't find it necessary to
write this memo the date that the SEC upgraded its
investigation from informal to a formal investigation; you only
found it necessary to write this memo saying, keep everything,
don't destroy anything, the day a subpoena was issued.
And up until that time, the policy of Arthur Andersen was,
it is okay to destroy documents if you think that it fits our
policy of document destruction; is that right?
Mr. Andrews, you are itching to answer. Go ahead and
answer.
Mr. Andrews. I think the reason the memo is written at that
point, once a subpoena is received, there is no question there
should be no destruction of documents.
Chairman Tauzin. You don't think there was any question
documents shouldn't be destroyed when you learned that a formal
inquiry had been instituted by the SEC?
Mr. Andrews. Well, prior to the receipt of a subpoena what
I would expect, and we expect, our people to do is understand
the facts and circumstances when a situation----
Chairman Tauzin. How about when the SEC starts a proceeding
against you? Is it not the responsibility of all of the folks
at Arthur Andersen, every accounting firm, to not destroy
documents that might be relative to that proceeding?
Mr. Andrews. Whenever there is a proceeding against us,
absolutely we wouldn't destroy documents.
If I may, may I----
Chairman Tauzin. Well, please tell me when in the time line
I described to you, in your opinion, any one of you, please
tell me, on behalf of Arthur Andersen, when you thought it was
wrong to destroy any more documents? What date was that? Was it
the date that you found out the letter had been written? Was it
the date that you found out publicly, when we all found out
that Enron announced an informal inquiry by the SEC? Was it the
date that the SEC announced a formal inquiry? Or was it only
the day you got a subpoena saying, turn over the documents.
When in that time line was it the responsibility of Arthur
Andersen to stop destroying documents? Please tell me. Any one
of you.
Mr. Andrews. I believe the responsibility existed prior to
the receipt of the subpoena.
Chairman Tauzin. I think it did, too. When did it?
Mr. Andrews. The events around October 17, 18, 20, all of
the things that were happening, the receipt of the SEC letter,
the announcement of the quarterly results and the resulting
litigation, that those were factors that the engagement
partners----
Chairman Tauzin. I think so, too. And I want to ask you,
Ms. Temple, if you agree with Mr. Andrews--tell me if you don't
agree with him, first of all. You don't agree with him?
Ms. Temple. I agree that the policy requires retention of
related materials----
Chairman Tauzin. If you agree that the destruction should
have stopped back in October when Mr. Andrews said it should
have stopped, why didn't you write this memo then, saying
retain everything, don't destroy anything anymore, and all of
your new products, save it too, because we're under
investigation and there's litigation coming and you better make
sure that nothing is destroyed for the sake of the reputation
of our company and for the sake of the integrity of the
investigation? Why didn't you issue it then?
Ms. Temple. The issue was not raised with the legal group--
--
Chairman Tauzin. Nobody raised it.
Ms. Temple. [continuing] at that point in time. The policy
was in existence to require detention----
Chairman Tauzin. Does it have to be raised, Ms. Temple,
when you are the counsel representing this company internally
on litigation? Does anybody have to raise it, or is it
somebody's responsibility in the company to say, stop
destroying documents, we're under investigation? Whose
responsibility was it if it was not yours? Did somebody have to
raise it? Whose responsibility, Mr. Andrews? Was it the
president? Was it you? Who was it?
Mr. Andrews. In our policy, that responsibility--the policy
that we're revising, and I acknowledge we're revising--in that
policy, that responsibility is with the engagement party.
Chairman Tauzin. With an accountant, not a lawyer? You give
the responsibility to an accountant to decide whether it's
legally permissible to destroy documents relative to a
proceeding? Let me just tell you, I don't know what's going to
happen out of all of this, I really don't. I hope you're all
okay. I don't know. But I'll tell you this. Every accounting
firm that is listening to this had better listen very
carefully. If all of your policies are to let accountants
decide when it's legal to destroy documents in a pending
investigation, an awful lot of people are going to be in
trouble down the road, not just in this case. I hope you think
seriously about what kind of policies you have on the retention
of documents and whether those policies are clear, are vague,
or whether you just send memos out for somebody else to
interpret or whether you eventually recognize, as you did, Ms.
Temple, at some point, that they needed guidance on what not to
do and what to do. And they should have gotten that guidance a
long time sooner.
We wouldn't be here. We'd be scheduling the Enron hearing
right now. But we're here discussing what happened at your
company, because this guidance never went out when it should
have gone out and because your company did not have a clear
policy on making sure the documents were not destroyed once a
notice was given by the SEC that it was checking into your
business. That has got to change. If you don't change it, I
promise you we will. Thank you very much.
Mr. Andrews. May I respond?
Chairman Tauzin. Yes, sir.
Mr. Andrews. I'll comment on what I think should have taken
place and I'll comment on the policy. What I believe should
have taken place--I don't expect our audit personnel, as you
say, the accountants, to understand the law. That's why we have
other experts involved.
Chairman Tauzin. Indeed.
Mr. Andrews. What we do expect, a person in a responsible
position, an audit partner, to have an understanding of the
policy as well as the judgment to consult, and we encourage
consultation. So we do not expect an engagement partner or
audit partner or anyone else to make these decisions alone, but
we do expect them to understand the policy and to have enough
knowledge to raise the question and seek advice in this
situation----
Chairman Tauzin. Except, Mr. Andrews, except--and I'll
conclude, Mr. Chairman--except once a legal proceeding is
commencing or about to commence, all of that changes, and if
you rely upon your accountants to seek advice instead of giving
them advice at that time, all of you are going to be in deep
trouble as we go forward.
Mr. Andrews. My comment on the policy, I am not here
defending our policy in the sense that it was complete and
robust and anticipated all of the guidance that it should.
That's exactly when we realized this situation had occurred,
which was in early January, we suspended the policy we have. We
put in place an interim policy that essentially required
retention of everything and engaged a reputable firm to come
in----
Chairman Tauzin. Mr. Chairman, I want to make a request
upon Arthur Andersen, if you don't mind, Mr. Chairman. The
chairman has asked you to find out who the others were who
destroyed documents. I think you ought to do a thorough survey
within the company of everybody who destroyed documents, No. 1.
I know you didn't keep logs of what was destroyed. Now, I asked
about that. Is there a log kept under your policy of what was
destroyed and what was kept? And the answer was, of course not.
Then you'd know what we destroyed. So there are no logs kept.
I'm going to ask Arthur Andersen to do that, to go back and
reconstruct as much as you can about what was destroyed that we
can't recover from hard drives. I want you to be clean with us
about what was destroyed and what was not destroyed to the
extent you can. And if you're as clean as you can be about it,
then we're not going to have as many problems as we've had at
this hearing. But the clear picture we're getting at this
hearing is that somebody felt it was a good idea to get rid of
an awful lot of documents before our investigators got busy and
other investigators got busy. That is the clear message I'm
getting and it's not a pretty one.
Mr. Andrews. Can I respond to your points?
Chairman Tauzin. Yes, sir.
Mr. Andrews. First of all, in terms of the investigation
and other people, our investigation will be complete and
comprehensive, and we will take whatever action based upon that
investigation that's appropriate.
Chairman Tauzin. You have my request. I hope you fill it.
Mr. Andrews. I do. Trust me, we will do it and we're in the
process of doing it, and when it's completed we will take those
actions. And on top of our investigation being led by Davis,
Polk, we have in addition to that engaged former Senator
Danforth to come in and look at what we found, to see did we do
it thoroughly, was it completely. We, the firm, are not placing
any restrictions on the scope of that review at all, and it
will be thorough and it will involve everyone that was involved
in this process.
Chairman Tauzin. Just be aware that we too will be
examining the work you do to see that it was thorough and
complete, not just Senator Danforth.
Thank you, Mr. Chairman.
Mr. Greenwood. The time of the gentleman from Louisiana has
just expired. The Chair recognizes the gentlelady from
Colorado.
Ms. DeGette. So I'll have a commensurate amount of time?
Mr. Greenwood. When you're chairman you will, yes.
Ms. DeGette. Mr. Odom, I believe that you got the October
12 e-mail from Ms. Temple about the document destruction and
retention policy. Is that correct?
Mr. Odom. Yes, ma'am.
Ms. DeGette. And I believe you told our staff that to get a
memo like that was very unusual. Correct?
Mr. Odom. I don't recall--I mean, I don't remember using
those exact words.
Ms. DeGette. Okay. Well, you had never gotten a memo like
that reminding you of the policy, had you, sir?
Mr. Odom. I have never gotten one with a doc. link on it
like that, no, ma'am.
Ms. DeGette. One with a doc. link linking you back to the
document retention policy. Is that correct?
Mr. Odom. That's right.
Ms. DeGette. And how long have you been with the company?
Mr. Odom. Since 1969.
Ms. DeGette. Thank you.
Now, Ms. Temple, I wanted to ask you about something. This
October 12 memo that you sent out to everybody, was that your
decision to send that memo out?
Ms. Temple. This e-mail?
Ms. DeGette. Yeah.
Ms. Temple. The particular e-mail in the Web site
reference----
Ms. DeGette. No, no. I want to know who decided to send
this--that it would be a good idea to send this e-mail out to
everybody. Was that you?
Ms. Temple. I believe I thought of that based on the
discussions about the legal advice and the reference to the
policy I had with others.
Ms. DeGette. Okay. Now, who did you have those discussions
with?
Ms. Temple. I discussed the legal advice about appropriate
documentation with my supervisor and others----
Ms. DeGette. And your supervisor was Don Dreyfus?
Ms. Temple. Yes.
Ms. DeGette. Okay. And who else was involved in those
discussions?
Ms. Temple. I believe a senior risk management or practice
director by the name of Jim Freidlief.
Ms. DeGette. And Jim Freidlief also?
Ms. Temple. Yes.
Ms. DeGette. And you decided to send that e-mail out to
remind people of the document policy because there were
concerns about the growing thunderclouds over Enron?
Ms. Temple. No. Because of the questions that had arisen
about appropriate documentation and retention----
Ms. DeGette. People were wondering what documents they
should retain or destroy. Right?
Ms. Temple. I testified earlier about the specific
questions----
Ms. DeGette. No. Just--you know, just yes or no I think
would be good.
Ms. Temple. No. It was about questions about specific
documentation issues that had arisen.
Ms. DeGette. Uh-huh, about what should be kept or
destroyed?
Ms. Temple. About how to date current period documents,
about whether to acknowledge in writing--how to acknowledge in
writing currently the fact that the firm had concluded that the
prior accounting----
Ms. DeGette. Those questions that you testified to or that
you're delineating right now, does this policy that you linked
in your e-mail answer those questions?
Ms. Temple. It was used as a reference in providing advice
to answer the questions.
Ms. DeGette. Okay. But you gave the link to the entire
policy, correct, not just one section?
Ms. Temple. Correct.
Ms. DeGette. Now, at that time, Arthur Andersen had not
been served with a subpoena as of October 12. Correct?
Ms. Temple. Correct.
Ms. DeGette. And there is some sense, I think everybody
here will agree, that there was probably some concern about
pending litigation as of that time. Right?
Ms. Temple. To the best of my recollection, I don't
recall----
Ms. DeGette. Well, you knew that there were probably--that
there was a sense there might be lawsuits; I mean, really,
didn't you?
Ms. Temple. I don't recall that being a focus of discussion
or----
Ms. DeGette. I don't want to talk about a focus of
discussion. I mean, you're a Harvard-trained lawyer. You're a
litigator. You're an SEC expert, all of the things we've been
talking to. You knew there might be a risk of litigation didn't
you?
Ms. Temple. I knew there was a possibility of litigation--
--
Ms. DeGette. Thank you.
Ms. Temple. [continuing] but we did not discuss it.
Ms. DeGette. Now, Arthur Andersen's policy does not require
retention of all documents when there is simply a risk of
litigation but, rather, when Arthur Andersen is served with a
subpoena, doesn't it?
Ms. Temple. The policy has several different provisions
requiring retention----
Ms. DeGette. I know, uh-huh.
Ms. Temple. [continuing] and it requires retention if
there's threatened litigation----
Ms. DeGette. Okay. Stop for a second. Why did you not send
out an e-mail on October 12 telling people to retain all
documents?
Ms. Temple. At that point in time, there was no litigation
against Enron that I was aware of. There was no litigation
against Arthur Andersen----
Ms. DeGette. Right.
Ms. Temple. [continuing] that I was aware of----
Ms. DeGette. In truth--and I don't want to mislead you,
okay? I only got this document this morning. So it's taken me a
few hours to look through it, but luckily I've had a few hours
to look through it. And here's what I think the document says.
The thing that says retain the documents in case of threatened
litigation is in the executive summary. Right? And it's on page
2, paragraph 9 of the executive summary. That refers you to
paragraph 3.5.3, which I think is a typo and really means
paragraph 4.5.4, because 3.5.3 talks about the kinds of
information to be destroyed. 4.5.4 says in the event Arthur
Andersen BU is advised of litigation or subpoenas regarding a
particular engagement, the related information should not be
destroyed. See policy statement 780. Right? Your adviser behind
you is nodding his head yes.
Ms. Temple. I see where that is, yes. Thank you.
Ms. DeGette. And policy statement 780 says that you are
only to retain documents other than the--other than the
documents you're supposed to destroy if you're served with a
subpoena. Right?
Ms. Temple. Well, I think you have to read the retention
policy, which also provides that all information relevant to
the findings and opinions should be retained in 3.5.3.
Ms. DeGette. Well, that's your work papers. Right?
Ms. Temple. It says information having relevance to our
opinions or findings to be a part of the central client
engagement files.
Ms. DeGette. Right. Except for 3.5.3 talks about all of the
different things that should be destroyed. That's what we're
talking about here today.
Mr. Andrews, you don't know of any essential documents
being destroyed by Mr. Duncan, do you?
Mr. Andrews. What I know is that a large amount of
documents were destroyed. At this time I'm not aware that any
of those were what I call the permanent audit work papers.
Ms. DeGette. Right. What we're really talking about is the
backup papers, which you had said then, later on in November,
should be retained.
What I'm getting at here, Mr. Chairman, is I think the
problem is with Arthur Andersen's policy, because Arthur
Andersen's policy says if you're threatened with litigation,
then you are to notify, and then it has the whole notification
procedure of who you're to notify, but it does not say that you
are to retain these backup papers. And the only time you are
legally required, or under Arthur Andersen's policy--which it
applies, I assume, to all of its clients--the only time you're
required to retain those is if a subpoena is served, which is
exactly what Ms. Temple did.
And so my opinion, after looking at this, is that Mr.
Duncan probably interpreted this e-mail on October 12 saying,
oh, okay, I'm supposed to destroy all these documents, like
drafts and preliminary versions, et cetera. That's what she's
telling me. And then in November when they get the subpoena,
they say, loop, we're not doing it. And I think the problem is
that this policy allows reckless destruction of documents, and
I think that that's what the problem is. And with that, I'll
yield back any time I might have.
Mr. Andrews. Could I comment on that?
Mr. Greenwood. Yeah. You may certainly, Mr. Andrews.
Mr. Andrews. First, with respect to the policy, again, I
think we have acknowledged that we do not think the policy is
as robust and well written as we would like, after we
discovered this, and that's why we suspended it and introduced
an interim policy. And we'll have, I would imagine, as sound of
a policy as possible to cover all of these circumstances.
Now, having said that, no policy can anticipate every
situation that you can imagine. What I have said and what we
have said is that what took place at the end of October, the
volume of e-mail elimination, the volume of document
destruction, is completely out of character with this policy,
in my opinion. And even if it's not out of character with this
policy, it is in fact a gross error in judgment and totally
inappropriate and totally different than anything I've ever
experienced in my career.
Ms. DeGette. Let me just say something to you, Mr. Andrews.
I was a litigator for 15 years, and I advised a lot of
businesses. I didn't do SEC work, and I didn't work with ``Big
5'' accounting firms. My clients were small businesses. But I
will tell you that when I knew of threatened litigation against
a client, I called them up, and I said, don't destroy a thing.
And sometimes I had to go over and physically take possession
of papers.
And that's I think the ethical obligation of every attorney
who represents a client, and it's the ethical obligation of
every accounting firm or auditor who represents a client. I
don't think that that is so unreasonable, that that should have
been in your policy for all of these years, and I hope to God
it's in the interim policy that you have adopted.
Mr. Greenwood. The time of the gentlelady has expired. My
mother, I think, would say that your policy was dumb like a
fox.
The chairman recognizes the gentleman from Florida, Mr.
Bilirakis.
Mr. Bilirakis. Thank you, Mr. Chairman. Mr. Odom, does
Andersen rate all of its clients on the basis of risk
management--on a risk management scale?
Mr. Odom. Yes. Yes, sir, we do.
Mr. Bilirakis. What is--has been the rating for Enron?
Mr. Odom. It's always been at least maximum.
Mr. Bilirakis. At least maximum?
Mr. Odom. Yes.
Mr. Bilirakis. Now, is maximum the highest?
Mr. Odom. There's a max star.
Mr. Bilirakis. There's a max star. Has it also been a max
star?
Mr. Odom. Yes, sir.
Mr. Bilirakis. When was it at a max star? And max star is
the highest?
Mr. Odom. Yes, sir.
Mr. Bilirakis. When was it a max star?
Mr. Odom. It was a max star in 2000 and I think in the
year--I don't know prior to 2000, but in 2000 it was a max
star. In 2001 it was rated max, but we update that rating as
the year goes on, and I'm sure it would have hit max star again
before we did an audit--had we done an audit.
Mr. Bilirakis. All right. Now, the criteria that you use in
order to establish these ratings--there is a criteria,
apparently, that you use. Right?
Mr. Odom. That's correct.
Mr. Bilirakis. All right. Is that criteria reflected in the
work papers?
Mr. Odom. Yes, sir, it is.
Mr. Bilirakis. It is. And those work papers are available?
Mr. Odom. I believe they are, yes, sir.
Mr. Bilirakis. Boy, this better be more than a belief. I
sure hope that's more than a belief. Mr. Andrews?
Mr. Andrews. Yes. As consistent with what we have done, we
said we'll provide the information that this committee or the
SEC or the Department of Justice has requested.
Mr. Bilirakis. Okay. And when we get into that portion of
this set of hearings, those work papers--those work papers will
be available? They're not--they're available now--you're saying
they're available now because they have not been destroyed, and
there is no criteria for having destroyed them, right, in your
retention policy as I read it?
Mr. Andrews. Right. The actual audit work papers
themselves, certainly nothing will be destroyed now, and as I--
I'd like to just make sure I clarify one thing, because I may
have not been as clear as I could have when you were
questioning me earlier. I just want to make sure that we
understand what an audit work paper is. An audit work paper is
the permanent record, if you will, of the audit itself. That's
where once you've done all of your work, reviewed all of the
documents, it's where you reduced your documentation that
becomes the permanent support for that audit conclusion. As I
said earlier----
Chairman Tauzin. Would the gentleman yield?
Mr. Bilirakis. Yes.
Chairman Tauzin. Again, that may not be the most important
papers, however. The most important papers might be the
Andersen consulting documents.
Mr. Bilirakis. The initial papers.
Chairman Tauzin. I'm understanding that Enron would contact
Andersen for consulting services, we want to set up this
partnership, we want to set up this financing arrangement and
we want to know if it will pass audit later on, so comment on
the structure and the financing of this situation so that it
will pass audit later on. And then Andersen issues a consulting
report to its client, like Enron, saying it's okay to set up
Raptor. It's okay to set up Jedi the way you propose it; or no,
it's not, and here's how you should change it if it's going to
pass audit standards later on.
Those consulting documents are probably much more
important, Mr. Bilirakis, than the audit work papers. Is it
possible that consulting documents were destroyed in this
period when there was document destruction going on so
massively, Mr. Andrews?
Mr. Andrews. Well, let me comment. First of all, a client
in a situation you have a complex transaction or they need to
request, if you will, accounting advice regarding how a
transaction might be accounted for, that would be a normal
dialog that would occur with a client.
Chairman Tauzin. But answer my question. Is it possible
that those documents were destroyed?
Mr. Andrews. In that documentation, to the extent that that
documentation is important to an accounting and audit
conclusion, they would become part of the audit work paper
files. Your question about documents that were destroyed, as I
said, at this point in time in your investigation, what I know
was destroyed was a large quantity of e-mails and then other
hard documents that were shredded. Now, the documents that were
shredded, I do not know what was----
Chairman Tauzin. Let me----
Mr. Andrews. [continuing] the e-mail----
Chairman Tauzin. Any of you know whether consulting service
document reports were destroyed? Any of you know? Ms. Temple?
Ms. Temple. I have no facts about----
Chairman Tauzin. Mr. Odom?
Mr. Odom. I do not know what was destroyed.
Chairman Tauzin. Mr. Baskin, you have no knowledge?
Mr. Baskin. I have no knowledge.
Chairman Tauzin. Thank you, Mr. Bilirakis.
Mr. Bilirakis. Well, so getting back into the risk
management analysis, Mr. Odom and Mr. Andrews, whoever it might
be more apropos, the original documentation, the original work
sheets where you set out the criteria and your analysis and
everything of that nature, and then that led to this final
conclusion, I guess it is, which would be the document that Mr.
Andrews is telling us would remain in the file. Would that
original document be available, not the conclusion, if you
will, but the original documentation that led to that
conclusion? I mean, that's a work paper any way you look at it.
Mr. Andrews. If your question is related to the work paper
that led to that conclusion and that risk assessment----
Mr. Bilirakis. Yes.
Mr. Andrews. [continuing] there would be documentation in
the audit file related to that.
Mr. Bilirakis. And that would not have been destroyed?
There's no way that the retention--the retention policy would
have encouraged or required that to be destroyed?
Mr. Andrews. Obviously the documents are shredded. I don't
know what was in that, but to the extent that it's part of the
permanent core audit files, the core materials, it would----
Mr. Bilirakis. I think you can see where I'm leading here.
A point was raised, that you're an auditor on one hand, but
then you're also the consultant, and so you can see where the
potential problem might rise. So your analyses are so darn
important in terms of the risk management analysis, and why you
graded them so high, in fact the top risk at one point, and
then why you dropped it down the prior--the next year to just
plain max. That's awfully important.
Now, Mr. Andrews, hopefully that's all available in terms
of the risk analysis area, as well as what led--
disappointingly--I would say, to Andersen basically blessing
the Enron documentation, the financial statements and
everything of that nature. This hearing is focusing obviously
on the destruction of documentation, and I'm not belittling
that.
But I am really concerned with the thought process that has
gone into--resulting in all of this having taken place, and
hopefully whatever it is that we can do to keep it from
happening again. I know that people are aware now and whatnot,
but it's just terrible, and can anyone--I don't know whether I
have any time left. The red light is on. I was told they had--
--
Mr. Greenwood. We're keeping very strict rules today. The
gentleman from Florida has an additional minute. If he would
like, he will get the same indulgence.
Mr. Bilirakis. Can anyone explain, very briefly, in 1
minute, why the risk analysis dropped from max plus to max?
Mr. Baskin. I don't know the answer to that.
Mr. Bilirakis. Does anyone have the answer to that? Who
does that? Who makes the ultimate decision?
Mr. Andrews. The way the process works, the engagement
partner, the engagement team makes the initial assessment, and
to the extent that the risk ratings are at certain levels--and
in this case a maximum risk rating requires, then, the
consultation with others in the firm, and that in fact is what
occurred in this situation. As to why it changed from max star
to max, I don't know.
Mr. Bilirakis. So it goes back to Mr. Duncan again?
Mr. Andrews. That's where the process begins, but then once
he goes through the process, the engagement team completes its
analysis. If it results in a risk rating at a maximum risk, it
then requires further consultation. And that's in fact what
occurred.
Mr. Bilirakis. Ms. Temple, very quickly--I haven't gone
into you at all--you're house counsel. Were you aware of this
risk management rating? Have you been aware of it all along?
Ms. Temple. To the best of my recollection, I learned about
the level of risk management rating much later. I don't recall
the exact time, but much later.
Mr. Bilirakis. Much later after all the problems----
Ms. Temple. After I----
Mr. Bilirakis. You became aware of?
Ms. Temple. [continuing] was initially consulted on
September 28, and I don't recall exactly when I exactly learned
about the risk rating. Probably sometime in November is my best
recollection now.
Mr. Bilirakis. Well, see, that's what looks bad, is you
yourselves in your own minds, you've established a risk
management rating, and you rate them as really bad--rated them
as really bad guys; but then you continued on, and obviously it
was for the money, I don't know. If there wasn't millions of
dollars at stake, I guess we could sort of understand that.
Mr. Andrews. Can I respond----
Mr. Bilirakis. Well, very briefly, sir. I don't mean to tie
up----
Mr. Andrews. [continuing] very briefly?
The risk process is designed so we assess the risk
environment within a client, and as Mr. Odom said, we do this
on all of our clients. And depending on what that risk rating
is, it will influence various actions that we take on our
audit; including, for example, because this was maximum risk,
it required Mr. Duncan to consult with others in the acceptance
of that client. It also drives certain other procedures we do
in the course of the audit. So the risk rating is a very
important part of helping us determine the scope of the audit,
the consultation that occurs on an audit, and it has a very
meaningful purpose in our audit process. And each year we go
through a process of reassessing the risk of each of our
clients in that regard, and it drives certain processes and
audit procedures as a result of that. I mean, so it is a very
important component of the audit process.
Mr. Bilirakis. If you hadn't been a consultant also earning
whatever the fee was for that, would you have--would you have
continued on as an auditor, taking into consideration that
very--the highest risk rating that existed?
Mr. Andrews. Congressman, I do not believe our role as
consulting played any part of our decision in reaching that
conclusion.
Mr. Greenwood. Time of the gentleman from Florida has
expired. The Chair recognizes the other gentleman from Florida,
Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman. Mr. Odom, I just--as
I understand it, you have been relieved of your duties. Is that
true?
Mr. Odom. I am no longer the practice director for the Gulf
Coast market, sir.
Mr. Stearns. Say that again slower, sir.
Mr. Odom. I am no longer the audit practice director----
Mr. Greenwood. Perhaps you could bring your microphone a
little closer, Mr. Odom, please.
Mr. Odom. I am no longer the audit practice director for
the Gulf Coast market circle.
Mr. Stearns. And when did that change occur with your job
description, or when were you relieved of that duty?
Mr. Odom. It was announced in the same press release where
Mr. Duncan was discharged.
Mr. Stearns. Okay. And did they call you in and say to you,
Mr. Odom, we are going to relieve you of your duties; you've
been with the company since 1969?
Mr. Odom. I did get a telephone call, yes, sir.
Mr. Stearns. And who did the telephone call come from?
Mr. Odom. Rich Corgill.
Mr. Stearns. And who is Rich Corgill?
Mr. Odom. He is the head of the U.S. Practice directors.
Mr. Stearns. And what did he say to you?
Mr. Odom. He told me that the firm had decided that they
needed to make management changes in the Houston office and
that I was one of the management changes.
Mr. Stearns. And were you surprised?
Mr. Odom. I was not surprised that the firm had decided to
do something to demonstrate that they were being active in
dealing with, obviously, the perception problems. I was
disappointed.
Mr. Stearns. Do you feel that you're a part of the problem
and that's why you were let go and that's why you sort of did
not protest or indicate that they were wrong and that you
wanted to be a part of the proactive program to clean this up?
Why did you just acquiesce so easily?
Mr. Odom. I've been with the firm a long time, Congressman
Stearns, and sometimes you have to trust other people's
judgment. And you don't always have to agree with them, but you
can trust their judgment.
Mr. Stearns. In your position which they relieved you of,
how many people worked--responded or worked for you?
Mr. Odom. Actually, I didn't have any employees.
Mr. Stearns. Oh, you just had a title?
Mr. Odom. I just had a title.
Mr. Stearns. Okay. So they just----
Mr. Greenwood. Would the gentleman yield? I'll give you
plenty of time. You know that.
Mr. Stearns. Okay. Sure.
Mr. Greenwood. Mr. Odom, did you say that they changed your
responsibilities to demonstrate that they were making changes.
Did they tell you what you did wrong?
Mr. Odom. No, sir they did not.
Mr. Stearns. Mr. Chairman, that's what I was going to ask.
Well, if someone called me up and said they wanted to relieve
me of a position, even if it was just a title position with no
people working for me, I'd ask them why. And you never asked
why?
Mr. Odom. I asked what the reason was, and I was told the
firm felt they needed to make some bold moves to regain
confidence in the Houston community.
Mr. Stearns. Is it true that you told our committee staff
that some clients in the past had been upset that old or
extraneous documents had been unnecessarily maintained and
discovered during IRS and SEC inquiries? I mean, our staff
indicated that you told them that.
Mr. Odom. That's correct.
Mr. Stearns. Is it also true you told the committee staff
that with a high-profile client about to take a big charge,
people will want to look at Andersen's files, people with, in
your words, ``adverse interests to Enron and Andersen.'' Is
that true?
Mr. Odom. I think I said that was a possibility, yes, sir.
Mr. Stearns. Now, based upon those two statements that you
just admitted that you told the committee staff, and when they
called you up, I find it implausible that you wouldn't say to
them in a candid discussion, why--ask why you were being
relieved and what the story was, and they were explaining it to
you in certain code words, saying, hey, we're trying to--I'm
not going to use the word ``cover-up,'' but there seems to be
something going on here to see a man of your stature to be let
go, you accept it mightily and to step forward for the
company's benefit, and you step down, and now you're in a
different--total different title, and you just acquiesce to it.
It seems to me, based on what you said to the staff, that there
seems to be something else out of mind, out of sight, going on
here. Am I wrong?
Mr. Odom. Yes, sir.
Mr. Stearns. Okay. Tell me how I'm wrong.
Mr. Odom. I don't know of anything out of mind, out of
sight.
Mr. Andrews. Congressman, could I----
Mr. Stearns. Yes.
Mr. Andrews. Since I obviously was involved in those
decisions, I'm probably more appropriate to answer it, if you
will allow me to. The actions that we took, that's announced in
that press release, were really two separate actions. One
related specifically to the document destruction issue and the
action we took at that point in our investigation, which is
incomplete as I've said, was to relieve Mr. Duncan of his
responsibilities, dismiss him from the firm. Three other
engagement partners were relieved of their responsibility but
are still with the firm, certainly pending the rest of our
investigation.
The second action that we took was really not directly
related to the document destruction. It was in fact an action
we believed, as an organization, we needed to do to begin the
process of rebuilding the trust in the Houston community, as
well as a statement beyond Houston, externally and internally,
that we are serious about getting this issue behind us and
doing the things that we need to do.
Mr. Stearns. Mr. Andrews, couldn't Mr. Odom have done it in
his position? Why did his position have to be changed? Couldn't
he have done this? He's a loyal employee.
Mr. Andrews. Again, this was a judgment, we made that
collectively; the management changes we made, we believed as an
organization, were changes we needed to make to rebuild the
confidence.
Mr. Stearns. Mr. Odom, it looks like to us that the reason
you were let go, and based upon the comments you told the
staff, is these folks were out to work on the files, and here
it is mid-October, and they've got all of this possibility of
the SEC and the Justice Department and our committee and others
coming down, that they wanted to make this adjustment, as you
say, because of adverse interests to Enron and Andersen. It
wasn't a salubrious effect. It was basically that they were
trying to get rid of these files and to instigate a process to
do it.
And based upon what you say, wouldn't you agree that
adverse interests were coming at Enron and Andersen and that
that's why--using you sort of not as a scapegoat but somebody
to say, well, we're changing things?
Mr. Odom. I don't believe that to be true, Congressman
Stearns.
Mr. Stearns. Well, you also indicated that they're upset
some old extraneous information was still being kept, dealing--
discovered during some SEC inquiries in the past, and they
wanted to make sure that that information wasn't there either.
So----
Mr. Odom. That had nothing to do with Enron.
Mr. Stearns. Yeah, no. But I'm just saying that we have
here you being let go in early to mid-October when Andersen was
trying to clean up their files, and it appears that it was less
than ingenuous. That's my point.
Mr. Odom. It wasn't early to mid-October.
Mr. Andrews. Congressman, I was involved in that decision.
First, January 15 was the date of the action. The management
actions we took have nothing directly to do with the audit
engagement itself. And so I'm not privy and I haven't seen the
comments that you have there regarding Mr. Odom's testimony,
but nonetheless, it has no core connection to that whatsoever.
Mr. Stearns. Thank you, Mr. Chairman.
Mr. Greenwood. The time of the gentleman from Florida has
expired. Mr. Odom, have the firm's investigators who were doing
the investigation, Davis, Polk, have they interviewed you?
Mr. Odom. No, sir, they have not.
Mr. Greenwood. Mr. Andrews, have they interviewed Mr.
Bauer, Tom Bauer, the engagement partner?
Mr. Andrews. I----
Mr. Greenwood. Also put on administrative leave?
Mr. Andrews. Again, I don't know all they have and all they
have not----
Mr. Greenwood. We understand they haven't. It just seems a
little odd that you've taken this administrative action. You
tell us today that you're busily engaged in getting to the
bottom of this, and you've got a couple of big guys that you've
laid off that you haven't even talked to yet.
Mr. Andrews. Mr. Chairman, I do not know if our
investigators have interviewed Mr. Bauer or not.
Mr. Greenwood. Well, you know they haven't interviewed Mr.
Odom. He just told you that.
Mr. Andrews. Yes, he did.
Mr. Greenwood. What are you waiting for?
Mr. Andrews. Again, our counsel is performing the
investigation. We commit to you that that will be a full,
complete investigation. And we, Andersen----
Mr. Greenwood. They're charging you by the hour and they
haven't gotten Mr. Odom yet----
Mr. Andrews. But we are not restricting in any way the
scope of that investigation. We want it to be full and----
Mr. Greenwood. Mr. Andrews, will you give us a list of all
of the members of the firm who have been interviewed in this
internal investigation by Davis, Polk and who you expect to
have interviewed during the course of this investigation?
Mr. Andrews. Well, we certainly will fully cooperate and
provide a full reporting and accounting of our investigation,
yes.
Mr. Bilirakis. Mr. Chairman?
Mr. Greenwood. I'm asking you a straightforward question.
We would like a list of the people within the firm, for that
matter outside the firm, who have been interviewed as part of
this internal investigation that we thought you were going to
tell us about today. And we would like a list of the
individuals you anticipate interviewing in the course of your
investigation, because it's obviously critical to everything
we've spent the last 6 hours here doing.
Mr. Andrews. May I have a moment?
Mr. Odom. Mr. Chairman, may I clarify one thing?
Mr. Greenwood. Mr. Odom, you wanted to say something?
Mr. Odom. Yes. I did have an appointment to meet with
Davis, Polk in New York a couple of weeks ago, and actually
flew up there, and they were unable to meet with me. But I
don't know whether that was their investigators or whatever.
Mr. Greenwood. When was that?
Mr. Odom. I think it was about 2 weeks ago.
Mr. Greenwood. Mr. Andrews, have you completed your
consultation?
Mr. Andrews. Uh-huh.
Mr. Greenwood. Do you want to say something?
Mr. Andrews. Yes, yes. What I will do is, since Davis, Polk
is conducting the investigation, I will talk with them as soon
as we complete the hearing, and I will put them appropriately
in touch with whoever from the committee to----
Mr. Greenwood. And you'll direct--you're the client, you're
paying them--so you'll direct them to provide us the
information we're asking for?
Mr. Andrews. I will direct them to immediately talk with
you, and you request the information of them, and we'll make
sure that that happens immediately.
Mr. Greenwood. Thank you. Thank you.
The Chair recognizes the gentleman, Mr. Green, for 5
minutes. Pardon me, just yield for a moment.
Mr. Bilirakis. May I have 30 seconds out of order?
Mr. Greenwood. Sure.
Mr. Bilirakis. I just wanted to follow up, Mr. Andrews,
very quickly, on the work paper thing. You can see it's sort of
sticking with me. Now, these papers are--you've requested that
they be submitted from whatever your--the various offices are
regarding the Enron situation. And they're filed in one central
location; is that correct? Are they--is there a central
location for all of this documentation in Houston?
Mr. Andrews. Well, Enron was a very complex company in many
geographical areas, and the work papers themselves, to the
extent work is done in other offices, the work papers
themselves would be maintained in the other offices.
Mr. Bilirakis. In the other offices. They haven't been
pulled into--all to one central location yet. Is that right?
Mr. Andrews. Well, at this point in time, I believe they
have, but normally--I thought your question was related to how
do audit work papers typically get created and where are they--
--
Mr. Bilirakis. Now, are they numbered? Are they lettered,
numbered? Is there some sort of identification?
Mr. Andrews. Well, an audit engagement file does have an
indexing scheme and an order to it, yes.
Mr. Bilirakis. They're numbered, Mr. Odom?
Mr. Odom. Mr. Andrews and I are both old auditors. He can
answer the question just as well as I can.
Mr. Andrews. They are indexed, and there's a filing order
to them and all that sort of thing; yes, we certainly capture
the information of what files exist and what the descriptions
are of those files.
Mr. Bilirakis. All right. Thank you.
Mr. Greenwood. The time of the gentleman from Florida has
expired. The Chair recognizes the gentleman from Texas, Mr.
Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman, and thank you again for
the courtesies. Let me follow up on both Mr. Bilirakis--
Chairman Bilirakis's--the high-risk rating or higher rating for
risk, I would assume, equates that Andersen has to spend more
time with a client, then the higher the fees. Is that correct?
Mr. Odom, Mr. Andrews? The higher the risk, the more time, if
you're going to continue with a client, the more it's going to
cost that client?
Mr. Andrews. Congressman, as I said before, the higher the
risk rating, it will require you or lead you to do additional
procedures and consultation, which would be more time, yes.
Mr. Green. So the higher--okay. So what Chairman Bilirakis
said, that it obviously--if--even if it's in Enron, which is
the seventh largest company, you know, it would be a
substantial fee, because those fees have been talked about, you
know, $52 million, a million dollars a week. Now, I know
auditing was a small percentage of that, so to speak, compared
to the consulting, but it was rated as higher. When was that
done? When was that decision made on the higher--that Enron
made--that it needed a higher risk rating?
Mr. Andrews. Well, the risk rating process occurs annually,
and the last----
Mr. Green. Do you have it in a month--what month did it
occur last year?
Mr. Andrews. The 2001--which, of course, we never completed
the audit--the documentation that at least I think you have
been provided information--early February.
Mr. Green. Oh, early February of last year. So that was
also the discussion at one time--and I know this has been
publicized--about a memo about whether continuing Enron as a
client. So----
Mr. Andrews. I think that's the right timeframe, yes, sir.
Mr. Green. Let me go to some--and I'm sorry----
Mr. Andrews. If I could clarify one point, though, in terms
of the fees. Actually, the audit-related fees on Enron were $25
million, essentially half of the total fee.
Mr. Green. And then 27 for the consulting. Okay.
Mr. Odom. Excuse me, Congressman Green--of that consulting,
a lot of it is work that is typically done by the auditor, you
know. So, I mean, correct me on this, Dorsey, but the SEC
requires when you report fees in the matter that you're looking
at them, that the top fee, the audit fee, be only the fee for
the annual audit. So if the auditor, for example, does a
statutory audit in the United Kingdom that is not part of the
annual audit, that gets plopped down into consulting.
Mr. Andrews. As do tax fees and comfort letter and
registration statements.
Mr. Green. Mr. Andrews, let me go back to--and again, like
a lot of members, we have a lot of things we have to do, and
then come back when it's our turn. I apologize for having been
gone, but during--while I was gone, you mentioned something
about the clarity of Enron's financial statements and that--I
was told that--we've talked in our office to numerous Wall
Street analysts who could not tell what was going on at Enron
by looking at the financial disclosure statements signed off by
Arthur Andersen. And is it Arthur Andersen's opinion or your
opinion, and maybe you gave it earlier, that Enron's quarterly
financial statements accurately reflected Enron's financial
position? Is that what was said earlier in questioning, that--
--
Mr. Andrews. Congressman, your question referred to
quarterly financial statements?
Mr. Green. Did their quarterly financial statements
accurately reflect Enron's true financial position?
Mr. Andrews. We don't audit the quarterly financial
statements.
Mr. Green. Okay. The annual financial statements, you know,
the annual financial statements, all those partnerships that
were--and I know partner--those--to take out liability is
something that is not unusual in the industry, but yet Enron
took what is not unusual and then shot the moon with it. In the
annual financial statements, are you saying that those were--
that someone--even Wall Street analysts could tell the true
financial position of Enron?
Mr. Andrews. In terms of the Wall Street analysts, you
know, obviously we would have to address that question to them.
I don't know what they did or didn't understand. I would hope
if they didn't understand them, then they wouldn't recommend
investing in the stock----
Mr. Green. That will be subject to another hearing that
we----
Mr. Andrews. Right. So I can't comment on what they would.
The company's responsibility and ours is to make sure that
those financials are presented and conforming with generally
accepted accounting principles, which includes the basic
financials and the disclosures as well. And at this point in
time those financial statements made by the company have been
restated and our opinions have been withdrawn. So that has
since changed.
Mr. Green. Starting in 2000, October of 2000, some folks on
Wall Street actually started to figure out that there was
something going on. And are you familiar with the story in the
Wall Street Journal, ``Heard on the Street,'' in October of
2000 from a James Chanos? Are you familiar with that?
Mr. Andrews. Congressman, I don't recognize it, no.
Mr. Green. The story cited this short seller named Mr.
Chanos who began saying that in October of 2000, Enron's books
were not clear. His position, obviously, has been borne out, as
we know, from October of 2001. Maybe all of us should have read
the Wall Street Journal closer in October of 2000. In his--I
have never heard of any financial analysts I've spoken with
with Enron that said they were--that their financial
disclosures are easily understood. And that's--and I guess
that's been reported widely, too, and I--that it was so
difficult to understand Enron's true financial picture.
Do you feel like, again, those annual statements reflected
the true financial picture at Enron?
Mr. Andrews. Congressman, again, our reports have been
withdrawn now, so we don't have an opinion on those statements.
But the point I would make is that Enron is an extremely
complex company, and I think any complex company of that
magnitude, the financial statements are going to be complex.
It's hard to simplify complex issues and those disclosures can
be improved. Can the accounting model be improved? Absolutely.
Mr. Green. Again, those partnerships were signed off on at
the time, and I know you've retracted that, but at some time in
the past they were the typical way that Enron was doing
business, I guess, and they were signed off. But I know that's
been retracted.
But let me go on to Mr. Odom and go back to the October 12
e-mail that you received from Ms. Temple and----
Mr. Greenwood. This will be your final question, Mr. Green.
Mr. Green. Okay. Thanks, Mr. Chairman. And was it your
testimony you had never received a memo in your 32 years with
Arthur Andersen--because you said you started work in 1969--
that explained or denoted what Enron's destruction of documents
policy was?
Mr. Odom. This had nothing to do with Enron's destruction
policy----
Mr. Green. Well, no. With Arthur Andersen's policies.
Mr. Odom. I do not recall someone sending me a memo saying,
you know, here is a doc. link to our policies. Clearly, on many
engagements and many training sessions, we've talked about what
Arthur Andersen's policy was, because we try to teach our
people to comply with our policy.
Mr. Green. But you never received anything like that from
the legal side of Arthur Andersen?
Mr. Odom. No, sir.
Mr. Green. And so you looked at it as advice, I would
assume, from legal counsel?
Mr. Odom. I looked at it. I didn't view this really as
advice from legal counsel, no, sir. Somebody had sent me a doc.
link. I knew Nancy was a lawyer, but I didn't take it as being
legal advice.
Mr. Green. Well, normally when a lawyer sends you----
Mr. Greenwood. The time of the gentleman from Texas has
expired. I see that the gentleman from California has arrived.
Does the gentleman wish to inquire?
Mr. Waxman. I do, Mr. Chairman.
Mr. Green. Before my colleague has his time, it seems
like--I'm glad our committee is going to continue this,
because, you know, there are so many questions that are still--
haven't been answered, and I just appreciate the time today of
this subcommittee and, Mr. Chairman, of the full committee,
because obviously there's a lot that needs to be discussed.
Mr. Greenwood. We'll be back. The gentleman from
California, 5 minutes.
Mr. Waxman. I want to follow up on the questions I asked in
the last round. Mr. Odom, you indicated that with regard to the
partnership LJM 2, there's a, ``private placement memorandum''
that details the names and identities of the secret partners.
Mr. Odom, some press reports have said there could have been
hundreds or thousands of secret partnerships. Can you tell us
approximately how many secret partnerships Enron had?
Mr. Odom. I do not know the number of partnerships.
Mr. Waxman. And do any of the other witnesses have any
answer?
Mr. Andrews. I do not know the number.
Mr. Waxman. Is it fair to say it's hundreds?
Mr. Odom. I'm not sure what you mean by secret.
Mr. Waxman. Partnerships.
Mr. Odom. Partnerships weren't necessarily secret, but they
did use a number of partnerships. Hundreds would be a fair
statement. Perhaps more.
Mr. Waxman. Perhaps more. Do you know, would it be as much
as a thousand?
Mr. Odom. I don't know.
Mr. Waxman. Are there private placement memoranda for each
of the partnerships that Enron had created?
Mr. Odom. I don't believe so.
Mr. Waxman. Okay. And I'd like to ask the chairman a
question. Mr. Chairman, obviously this is a very important
issue. We have a situation where I believe secret partners may
have made a lot of money without being exposed to any risk. At
the same time, shareholders and employees lost millions. And I
understand that currently the committee subpoena may cover
documents that identify some of the partners but not
necessarily all of them, and I want to ask the chairman of the
subcommittee and the chairman of the committee if they will
subpoena the necessary documents to reveal the identity of all
of the secret partners and make them available to all of the
members of the committee.
Mr. Greenwood. We certainly will, Mr. Waxman, and we'll be
happy to work with you in that regard.
Mr. Waxman. Thank you.
Chairman Tauzin. Would the gentleman yield? Among other
things, let me read you what we have already requested from
Enron. A list of all Enron's SPEs, partnerships, other
subsidiaries, a list of all the Enron officers, individuals,
entities who hold or held equity interest in any Enron SPE,
subsidiary or partnership----
Mr. Waxman. If I could reclaim my time, my point is that we
could look at the precise language of the subpoena better, but
it will certainly be--if I understand Mr. Greenwood's
statement, it would be the intent of the Republican leadership
on this committee to get by subpoena all the necessary
documents to reveal the identity of all the secret partners and
make them available to the members of the committee.
Chairman Tauzin. It's not only our intent. It's the working
agreement I have with Mr. Dingell to make sure we get all of
that information. We've requested it. We expect Enron to
deliver it to us. They're in compliance right now. If it is not
delivered, we will all have something serious to say about it.
Mr. Waxman. Thank you. Do any of the witnesses know or have
you heard discussions of the identities of any of the secret
partners? Mr. Odom?
Mr. Odom. I've seen a listing of some of the investors in
some of the partnerships. I don't know that they're secret.
There is a listing of some of the investors and some of the
partnerships.
Mr. Waxman. And from your recollection, would you give us,
for the record, some of the names that you've heard of as
partners?
Mr. Odom. I don't recall the names, but many of them are
names you will recognize in terms of retirement systems and
things like that.
Mr. Waxman. Andrew Fastow, a former Enron official,
reportedly made $30 million from his role in these
partnerships. Did other Enron or Andersen executives
participate in or profit from these secret partnerships, and
what can any of you tell us about the identity of these secret
partners?
Mr. Odom. It's already been disclosed, I believe, that in
the Chewco partnership, an Enron employee named Michael Koppers
had an interest, I believe in the LJM 2 prospectus. There are
two other Enron employees who are mentioned as being part of
LJM 2, ex-Enron employees, Mr. Glisan is one of them, and I
don't know who the other one was. It could have been Mr.
Koppers again. I'm certainly not aware of any Arthur Andersen
people.
Mr. Andrews. When you ask the question, you may not have
intended it this way, but you mentioned Andersen investors.
We're not allowed, obviously, to invest in our clients.
Mr. Waxman. I understand. I said Andersen executives.
Mr. Andrews. Oh, Andersen executives, as investors in----
Mr. Waxman. Well, did any of the Andersen executives
participate in or profit from these partnerships?
Mr. Andrews. Congressman, no; we're not allowed to invest
in our clients.
Mr. Waxman. And do you have any information about those
partners that were involved with Enron?
Mr. Andrews. I'm not part of the audit engagement team, so
I'm not familiar with the audit itself. It's my understanding
that on the related party transactions, I think that is what
you're referring to, that those particular investments, that
the board took specific action, took exception to its policy
and put in special oversight procedures related to that and to
deal with related party transactions.
I'm not familiar with the individual names and the
individuals involved, but that's my understanding of what was
done. And, of course, Andersen in no way would be an investor
or anybody at Andersen would not be an investor in anything.
We're not allowed to do that from an independent standpoint.
Mr. Greenwood. The time of the gentleman from California
has expired. We thank the witnesses.
Chairman Tauzin. Would the gentleman yield first?
Mr. Greenwood. The Chair yields a minute to the chairman.
Chairman Tauzin. I want to tell Mr. Waxman also that our
staff is attempting to interview the partners that we are aware
of that had been mentioned here by the witness, and we're in
the process of attempting to do that. We've written letters to
them; investigators on both of our staffs are doing their work
as we speak. So the gentleman should be aware of that as well.
Mr. Waxman. And so you are involving the Democratic staff.
Chairman Tauzin. Yes, sir. I think I made the announcement
at the beginning of the hearing. Mr. Waxman, you should know
that Mr. Dingell and I reached an agreement at the onset of
this investigation that we would share investigative staff and
consult with each other as we go through the process.
Mr. Greenwood. Mr. Andrews, will you provide the committee
with the interim policy that you've--we have that.
Mr. Andrews. Do you have that?
Mr. Greenwood. All right. Thank you. I want to thank
witnesses. It's been a long day. You've been here for 5 hours.
I'm afraid you might have to consider this practice, because we
may have to have you back, because at the end of the day here,
we still don't have evidence that suggests that Mr. Duncan, who
did not testify, is a rogue employee of Andersen. We still
don't have information from you that suggests that Mr. Duncan
admitted to errors. We still don't have information that you've
interviewed individuals who have implicated Mr. Duncan in
ordering them to violate the policies of the company, and we
still don't have any information as to what documents were
actually destroyed at Mr. Duncan's orders. So we have a lot of
information we need to gather from you, and we may need to call
you back.
Mr. Andrews. May I say something?
Mr. Greenwood. Yes.
Mr. Andrews. I just want to reiterate, as we are here
today, our commitment to cooperate fully as your investigation
is in process. When we have completed with that, we intend to
share it with you. We will continue to share documents, we will
continue to cooperate. And so I just want to make that clear;
and we're working to recover any of these destroyed documents
we can to provide for our own investigation, as well as to make
available to you, the SEC, and other parties.
Mr. Greenwood. Thank you, Mr. Andrews.
Mr. Andrews. We intend to fully cooperate.
Mr. Greenwood. And we'll need to cooperate with you not
only when you've completed your investigation, but in the
course of your investigation.
All of that said, this hearing is now adjourned.
[Whereupon, at 2:36 p.m., the subcommittee was adjourned.]