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Thaddeus Herrick Alexei Barrionuevo

Were Enron, Anderson Too Close to Allow Auditor to Do Its Job?

Were Enron, Anderson Too Close

To Allow Auditor to Do Its Job?

By THADDEUS HERRICK and ALEXEI BARRIONUEVO

Staff Reporters of THE WALL STREET JOURNAL

HOUSTON -- Big companies and their outside auditors often have close relationships, but few become as cozy as the ties that developed between Enron Corp. and Arthur Andersen LLP.

Questions are being raised about whether they were so tight that they hindered Andersen from scrutinizing Enron's books as thoroughly and independently as it should have.

Indeed, the distinctions between the dozens upon dozens of Andersen workers assigned to the Enron account and Enron's own workers were so blurred that many at the energy-trading company's headquarters here couldn't tell the difference.

Andersen auditors and consultants were given permanent office space at Enron headquarters here and dressed business-casual like their Enron colleagues. They shared in office birthdays, frequented lunchtime parties in a nearby park and weekend fund-raisers for charities. They even went on Enron employees' ski trips to Beaver Creek, Colo. "People just thought they were Enron employees," says Kevin Jolly, a former Enron employee who worked in the accounting department. "They walked and talked the same way."

Many Andersen accountants in Andersen's Houston office, one of its biggest, eventually became Enron employees as the energy-trading company sharply increased its hiring of Andersen workers in the late 1990s. While other companies also hire talent from their auditors, so relentless was Enron's hiring that Andersen in the late 1990s grew uncomfortable and discussed solutions, including capping the number of people who could be hired, said a current Enron employee and a former Enron employee.

Neither Andersen nor Enron will say how many Andersen employees were hired away. An Andersen spokesman declined to comment on such a cap, saying only that "it's not an issue that is addressed in one of our standard agreements" with a client. Enron spokesman Mark Palmer says he was unaware of a cap.

Andersen's close ties to Enron raise a conflict-of-interest issue, says John Markese, president of the American Association of Individual Investors. Noting that the Andersen-Enron relationship evolved into an informal alliance, an unusual arrangement for a Big Five accounting firm to have with a client when it is supposed to keep watch on the books, Mr. Markese notes, "All that closeness goes a long way toward breaking down barriers of independence."

Andersen, while conceding errors in judgment in its handling of the Enron account, has defended its work, saying that Enron in some cases didn't provide Andersen auditors all the information they needed. Enron fired Andersen last week, days after Andersen officials disclosed that the firm's employees destroyed documents related to Enron's financing arrangements.

Andersen has drawn fire for signing off on accounting practices related to Enron's partnerships, which allowed Enron to keep debt off its balance sheet and has made it the subject of a federal investigation. Another problem, critics say, is that auditors are reluctant to question their big clients' books too much because they earn such large fees, not just for the auditing work but for nonaudit services, such as consulting.

Enron paid Andersen $27 million for nonaudit services, including tax and consulting work, compared with $25 million for audit services, making Enron one of its biggest clients. "We would marvel at the amounts of money we were spending" with Andersen, says a former Enron analyst, whose job was to streamline costs.

Also, documents show that Andersen executives believed Enron's fees to the firm could eventually total $100 million a year, which would have made the energy trader Andersen's biggest client by far.

Ties between Enron and Arthur Andersen stretch back to the late 1980s but became especially close in 1993 when Enron hired the accounting firm to undertake its internal audit. While that made some Enron employees uneasy, they became even more troubled by the hiring of Andersen employees, among them Richard Causey, Enron's chief accounting officer, and Jeffrey McMahon, the company's chief financial officer.

"It was like Arthur Andersen had people on the inside," says Judy Knepshield, formerly director of accounts payable at Enron. "The lines became very fuzzy."

Andersen's Houston office, which employs some 1,400 people out of the firm's total of 85,000 world-wide, was a sort of farm club for Enron. The Andersen employees wore Enron golf shirts, former employees say, and decorated their desks with Enron knick-knacks.

David Duncan, the Andersen partner in charge of the Enron account, was a Texas A&M University graduate and recruited heavily from A&M for Andersen's Houston office. Many of the recruits landed jobs on the prestigious Enron account and were often hired by Enron itself, current and former employees say. In addition to graduating from Texas A&M, Mr. Duncan sits on the advisory council for the university's accounting department. The tight-knit crowd of A&M graduates "would take care of each other," says one former Enron employee.

Mr. Duncan last week was fired by Andersen after revelations that he directed the document shredding; Mr. Duncan's attorneys have denied that he did anything wrong.

Andersen ultimately became troubled by the number of employees it was losing to Enron, Enron employees and former employees say. When the company unveiled its so-called new power project in 2000, for example, it hired all 35 of the Andersen consultants who had helped develop the model, former employees say.

But the hiring between Andersen and Enron worked both ways. In 1993, when Andersen took over Enron's internal audit operation, 40 people moved from the company's payroll to Andersen. Also in the early 1990s Enron's Thomas Chambers, the energy trader's vice president of internal audit, left Enron to run the Andersen group assigned to Enron's internal audit.

A former Andersen employee now at Enron says the attitude was that rivals would handle an account of Enron's size similarly, so there wasn't a reason to raise issues. "Another auditor would have done the same thing anyway," the employee says, "So what's the point of losing all that money?"

-- Jonathan Weil in New York and Elliot Spagat in Houston contributed to this article.

Write to Thaddeus Herrick at thaddeus.herrick@wsj.com and Alexei Barrionuevo at alexei.barrionuevo@wsj.com

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