A former Arthur Andersen LLP accountant Monday testified that Enron Corp. tried to avoid reporting millions of dollars in losses within its water subsidiary by announcing in mid-2001 that it would invest $1 billion in the failing business. However, no evidence of its growth strategy was ever found, John R. Sult told jurors.
Sult, who oversaw the books for Enron's Azurix water subsidiary as one of more than 100 Andersen auditors assigned to the company, kicked off the eighth week of testimony in the trial of Enron founder Kenneth Lay and ex-CEO Jeffrey Skilling. Sult testified that in 2001 Enron management tried to revise a planned sale of Azurix to avoid declaring millions in losses, and instead, the company unveiled a $1 billion growth strategy for the water company. "By merely standing up and making the assertion that the strategy exists somehow [made] the problem go away," Sault told jurors.
Azurix had one major asset: Wessex Water Ltd., a British water utility it bought for $2.2 billion in 1998. However, the business lost money, and in 4Q2000, net income at Azurix declined by 77% (see Daily GPI, Jan. 23, 2001). By early 2001, Sult said, Enron was planning to sell off the assets, and it bought back all of Azurix's public stock in March 2001. Sult considered it would be a write off that year. Under an accounting rule scheduled to take effect in January 2002, Enron's sale would have required the company to book losses on Wessex for about $700 million or more -- which is what it was worth by mid-2001, Sult testified.
However, in October 2001, as the company's stock fell precipitously, Sult said he was asked to reevaluate the goodwill writedown of Wessex, and he was surprised to learn that Enron was then saying it planned to spend $1 billion to continue to grow its water business. Sult said the public statements were contrary to what he thought was going on at Azurix because it appeared to have no development at all.
Sult's testimony is important because the government's charges against Lay include an allegation that he lied to Andersen auditors in October 2001 by claiming Enron planned to invest in Wessex instead of sell it. According to the indictment, writing down Wessex's assets could have prompted credit rating agencies to downgrade Enron's credit rating, which was key to its ability to borrow money.
Asking for more proof that Enron was going to invest $1 billion to the water company, Sult said his Andersen supervisors, David Duncan and Mike Odom, along with another Andersen accountant, Thomas Bauer, met with Lay to seek assurances. Sult said he also continued to look for evidence that Enron would backup Azurix's growth. What Sult was told following Duncan's and Odom's meeting was not heard by the jury; presiding U.S. District Judge Sim Lake sided with a defense objection and declared those remarks hearsay.
Asked about whether Enron could have avoided writing down the losses, Sult testified, "This stuff is not elective. If there's an impairment, there's an impairment. It has to be recorded."
In an Oct. 23, 2001 conference call with financial analysts, Lay said Enron's auditors had reviewed the goodwill issue at Wessex and "determined the impairment was not needed." On that call, Lay got into an argument with an analyst about Azurix's funding (see Daily GPI, Oct. 24, 2001).
But despite Lay's assessment, Sult said that at the time of the conference call, his review of Azurix was still under way, and he was still having trouble finding proof of any growth strategy.
After the lunch break, Sult's fellow accountant Bauer took the stand. He once oversaw the financial books for Enron North America, the company's trading arm. Bauer, who attended the Oct. 12, 2001 meeting with Andersen management and Lay, said Duncan asked Lay about Azurix's future prospects. Lay, Bauer answered, said water was "the commodity of the 21st century," and told the Andersen auditors Azurix would be Enron's platform in the future.
After Bauer, Ron Barone, who was a financial analyst for Standard & Poor's when Enron declared bankruptcy, is expected to take the stand. Barone is expected to be followed by Ben Glisan, who worked directly for ex-CFO Andrew Fastow. Glisan is been serving a five-year sentence for his role in Raptor, a special purpose entity transaction put together by him and Fastow.
To view the government's trial exhibits, visit http://www.usdoj.gov/enron/index.html. Lay has a separate website, and his trial exhibits and other information are available at www.kenlayinfo.com/public/JNNSX534334444.aspx.
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