Former energy giant Enron Corp.’s rapid fall from grace and descent into bankruptcy became the center of attention on Capitol Hill and elsewhere in Washington, DC, last week, as legislators and regulators warned of more Enron-like companies that were top-heavy in debt, calling for more transparent and frequent financial reporting by companies, simpler accounting rules, stepped-up oversight by the Securities and Exchange Commission (SEC) and legislative changes to protect employee pension plans. In short, they see Enron’s collapse as just the tip of the iceberg.

The most startling disclosure last week came from Joseph F. Berardino, CEO of Enron auditor Arthur Andersen LLP, who told a joint House subcommittee hearing that the Houston energy trader may have committed “illegal acts” prior to seeking Chapter 11 bankruptcy protection this month. He testified that Andersen’s “audit team was not provided critical information” on one of Enron’s off-balance sheet partnerships, which under current accounting rules can be kept off the books if an outside investor ponies up at least 3% of the value of the partnership. Enron “flunked the [3%] test” for certain partnerships, he said, but it still kept the partnerships off of its books.

Enron has “had a history of not being forthcoming,” said Rep. Spencer Bachus (R-AL). He noted Andrew Fastow, the former Enron CFO who many blame for setting up the questionable partnerships that led to the company’s unraveling, was quoted in an earlier Fortune Magazine article as saying “we don’t want to let [anyone] know what’s on our books.”

The lead accountant for the SEC assured House lawmakers that the agency will deal “swiftly and completely with any wrongdoers” at Enron if it uncovers evidence of securities fraud or other irregularities during its ongoing investigation into the company.

The SEC “will move expeditiously in the Enron matter and take appropriate actions,” said Chief Accountant Robert K. Herdman during a joint hearing of two subcommittees of the Financial Services Committee last Wednesday. Although he was unable to disclose specifics of the agency’s still-active investigation, he indicated there would be “vigorous enforcement” of Enron if it finds improprieties. He declined to comment on potential penalties.

For the most part, lawmakers sidestepped the issue of criminal charges against the company and/or its executives during the hearing. However, BusinessWeek in its Dec. 17 issue cites an SEC source as saying that four different Attorney General Offices are looking into whether to pursue criminal charges against Enron and its officers.

While lawmakers appeared convinced that Enron’s financial breakdown reflected a deeper problem in the system, the SEC’s Herdman wouldn’t make that leap. “I really can’t say at this point what led to Enron’s demise,” he noted, adding it was too early to conclude that “systemic problems” may have contributed to the company’s financial collapse and ultimate slide into bankruptcy. He also said it was “premature” to speculate about whether there were more Enrons out there, but he later conceded “there may be.”

He said the agency was taking action to prevent anymore corporate surprises. The SEC announced last week it was considering new regulations that would require companies to make more “precise disclosures about [their] accounting policies.” The news of an impending agency crackdown was immediately felt throughout the energy industry and and in other circles.

The SEC often has come under attack on Capitol Hill for failing to set rigorous guidelines for financial reporting, thereby setting an environment for companies, such as Enron, to be “extremely creative” in their accounting practices.

Financial Services Committee Chairman Rep. Michael Oxley (R-OH) said the joint hearing last Wednesday was just the opening volley. The full committee plans in January to conduct a “comprehensive review of all the policy issues that this debacle raises,” he said. A number of other House and Senate committees also intend to make Enron a priority when Congress reconvenes next year.

House lawmakers believe the financial downfall of Enron was a “wake-up call” for needed reforms — more frequent and transparent financial disclosures by corporations, a review of special-purpose entities (SPEs) or off-balance sheet partnerships, re-evaluation of accounting standards/rules and regulation of accounting firms, closer SEC oversight of companies, more accurate company analyses by financial analysts, possible modifications to the Employee Retirement Income Security Act of 1974 (ERISA) to prevent a “wipe-out of [pension] savings,” and congressional legislation.

In the wake of Enron, some lawmakers are questioning whether corporate financial disclosures have become far too complex for even the SEC to adequately review. “I assure you [that] we have on the staff [people] who are quite expert” in the area of financial statements, the SEC’s Herdman said. But he agreed there was room for the SEC to “improve our review process,” adding that there’s lessons for everybody to take away from the collapse of Enron.

“I don’t think the Enron situation raises questions about our entire system of financial reporting.” In fact, he said it would be an “overreaction” to call the current system for financial reporting “not trustworthy.” He preferred to call it “challenged,” and agreed some steps should be taken to improve it.

But Rep. Ken Bentsen (D-TX) said he believed the problems were more deep-seated. “I think the increasing volume of [earnings] restatements is somewhat alarming,” he noted, adding that he hoped the SEC was looking at this trend more closely.

Herdman believes that “simplification” of the accounting rules, which exceed the breadth of the Internal Revenue Service tax code, “would be a good thing.”

“I think this is a time for change” in the way companies are audited, Arthur Andersen’s Berardino observed, adding that the “stresses” at Enron should prompt people to “think outside the box.”

There is a “need for improvements [to the] system,” agreed a subcommittee member, but the question is “where do we [Congress] start.” He suggested that Capitol Hill might begin with the issue of corporate governance, requiring audit committees to be made up of members who are outside of a corporation, so that they will not have a “vested interest in doctoring earnings.”

Rep. Richard Baker (R-LA), who chaired the joint subcommittee hearing, called Enron’s recent slide into bankruptcy the “most stunning business reversal in recent history.” While many saw Enron as a “new business model,” it turned out to be “too good to be true.” The energy trader in retrospect became a “hedge fund that just happened to own an energy company.”

He and other lawmakers sharply attacked the way Enron mishandled its employees’ 401(k) pension plans, which lost the bulk of their value when Enron stock skidded. “Have you actually met a financial adviser that would tell you to put all your eggs in one basket?” asked Baker, referring to Enron’s practice of matching employee 401(k) investments with company stock.

Rep. Luis Gutierrez (D-IL) suggested that Enron may have violated the ERISA law by “over-concentrating” employee pension plans with its stock.

Several lawmakers were dismayed at the failure of Enron Chairman and CEO Kenneth Lay to appear before the joint subcommittee hearing last week, despite the “numerous requests” that were made. Lay was a no-show because he had to participate in the first hearing of creditors in the company’s bankruptcy proceeding. Several lawmakers, however, vowed to get Lay in front of Congress before their investigation is completed, even if it takes a subpoena.

A few members of the House subcommittees warned their colleagues to go slow and to not reach “sweeping conclusions” about the causes for Enron’s downfall, but the majority of them clearly had made up their minds already. A number were angry that Enron allegedly forced rank-and-file employees to “watch helplessly” as the value of the company stock that they held plunged to below the $1 mark, while several top management officials — Lay included — had dumped a lot of their stock months before. Enron late last week issued a statement saying that the limited freeze on employee sales of stock was due to a changeover in the plan administrator and that employees were notified well in advance (see related story).

The Department of Labor has estimated that Enron “captive investors” lost 70% to 90% of the value of their retirement portfolios because they were barred by company officials from selling the sinking stock. Labor also has begun an investigation into Enron’s actions.

The Enron executives were allowed to grab for a “life raft,” while the company’s employees had to go down with the ship, observed one congressman. If it’s determined that fraud was involved, the SEC’s Herdman said the agency could go to court to “disgorge” the proceeds from the stock sales of Enron executives, assuming they “still have the proceeds to the fraud.”

Elsewhere on Capitol Hill last week, the chairmen of two House panels blanketed the key players in the financial fiasco — Lay, Fastow, former Enron CEO Jeffrey Skilling and Arthur Andersen — with letters seeking mounds of financial records and information, and personal interviews as part of a committee investigation into potential irregularities. In addition, the SEC was called on to turn over its reviews and records associated with Enron’s accounting practices and filings since 1997.

In a Dec. 7 letter to Fastow’s attorney, Reps. W.J. “Billy” Tauzin (R-LA), chairman of the House Energy and Commerce Committee, and James C. Greenwood (R-PA), chairman of the Subcommittee on Oversight and Investigations, demanded that the former Enron executive “make yourself available” for a committee staff interview by no later than Dec. 21, and turn over sought-after documents by Dec. 14.

Fastow was ousted from Enron in early November amid allegations that he created and benefited from the off-balance sheet transactions that ultimately led to the company’s financial breakdown and subsequent bankruptcy filing this month. Fastow failed to show up at the SEC last Wednesday to answer questions, forcing the agency to seek a subpoena from the U.S. District Court in Washington, DC, to require him to appear.

The interviews with Fastow, Skilling and other Enron employees are in preparation for a planned House Energy and Commerce Committee hearing early next year into potential irregularities that resulted in the downfall of Enron, the laying off of thousands of employees, and the depletion of employee pension benefits.

“If you are unable to travel to Washington, DC, the committee staff is willing to travel to Houston, TX, or another specified location,” the letter told Fastow.

In a similar letter to Lay, the House energy panel asked to meet by Dec. 21 with Enron employees Rick Causey, Steve Kane and Rick Buy, as well as with members of Enron’s Audit and Compliance Committee: Robert Jaedicke, Paulo Ferrz Pereira, John Wakeham and Wendy Gramm. The letter did not indicate why House committee staff members were focusing on these directors. It also set Dec. 14 as the deadline for Enron to supply requested financial documents. A House Energy spokeswoman said last week that neither Lay nor Fastow had responded yet to the Dec. 7 requests.

Among the financial information being sought from Enron and Fastow, in advance of the interviews and the committee’s hearing of Enron, are:

In a letter to Arthur Andersen last Thursday, Tauzin’s committee asked specifically to interview by Dec. 21 David Duncan, Andersen’s partner-in-charge of the Enron account, as well as Andersen employees who worked on audits of Enron from 1997 to the present.

The committee also called on Andersen to turn over stacks of financial and audit records and correspondence that was traded between Andersen and Enron during the past four years. Andersen supplied the SEC with similar data and records after being subpoenaed.

As for Skilling, who resigned from Enron in August, the committee last Tuesday asked the former boy wonder at Enron to also be available for an interview by no later than Dec. 21, but it did not request any records that he might have in his “possession or control” pertaining to the financial dealings of the company.

Tauzin and Greenwood wrote, in a separate letter to SEC Chairman Harvey Pitt, that the House Energy and Commerce Committee was “profoundly disturbed” by issues raised in the wake of Enron’s financial downfall. “In accordance with committee oversight obligations, we are conducting a full review of the issues surrounding Enron’s collapse as well as the accounting issues that have arisen in the recent disclosures,” they told Pitt. “The committee will also review the implications for the U.S. electricity and natural gas markets.”

In addition to requesting all SEC reviews of Enron filings on forms 10Q and 10K dating back to January 1997, Tauzin and Greenwood asked the SEC to provide all records relating to any proposed adjustments to Enron’s filings submitted by Enron’s auditors. If reviews of those Enron filings were conducted, they asked Pitt to make available to the committee the SEC employees who reviewed and commented on the filings.

In a related development, the Senate Commerce Committee said it plans to hold a hearing Tuesday to examine the collapse of Enron. The committee, which is chaired by Sen. Ernest Hollings (D-SC), is expected to take a broad look at the financial debacle.

Also on Capitol Hill, Rep. Henry Waxman (D-CA) has set up an “Enron Tip Line” to receive information on “fraud, mismanagement, self-dealing and improper political activities” of the Houston energy trader. At the urging of Waxman, the Special Investigations Division of the Government Reform Committee, the chief investigative panel for the House, also is carrying out an investigation into allegations of misconduct on Enron’s part.

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