The Vinson & Elkins investigation of Enron employee Sharon Watkins’ allegations of accounting improprieties was conducted by two of the law firm’s partners who had minimal accounting background and no help from associates or consulting accountants, testimony revealed Thursday at a House Energy and Commerce subcommittee hearing.
Managing Partner Joseph C. Dilg outlined under questioning from committee members how his firm performed what he termed a “preliminary investigation,” requested by CEO Kenneth Lay last August after he received Watkins’ letter outlining her fears the company would “implode in a wave of accounting scandals.”
Dilg said his firm performed no detailed examination of the alleged improper transactions, but simply asked the Arthur Andersen accounting firm, which had passed on the transactions initially, if there were any problems. The Vinson & Elkins lawyers said they received assurances from Andersen, but did not request or receive a detailed analysis.
“How can you conclude there is not a problem with the accounting if you don’t look at the accounting?” asked Rep. Diane DeGette, D-CO. Other members of the Subcommittee on Oversight and Investigations attacked the law firm’s qualification of the investigation as “preliminary,” asking how they could determine if a full investigation was necessary, if the preliminary probe was cursory.
Committee members also questioned former Enron General Counsel James V. Derrick Jr., as to why, when Watkins had specifically advised not using Vinson & Elkins, he retained that same firm, possibly compromising any investigation. Derrick said he went to V&E because as Enron’s regular attorneys they would be familiar with company transactions and could perform the investigation quickly, while another outside firm would take longer to get up to speed on company business.
Derrick said the decision at Enron was not to have a complete forensic investigation, unless the preliminary investigation showed a need for further inquiries. Committee members pointed to memos between Dilg and Derrick outlining “an initial approach” that included not looking closely at Andersen’s reports, no full scale discovery and not specifically investigating the cases cited by Watkins. Responding to questions, Dilg said V&E had not interviewed any of the persons Watkins had told them could verify her account.
Derrick confirmed committee evidence that he subsequently had asked for a legal opinion from V&E as to whether Enron could legally fire a whistle-blower, and was told it could not.
Dilg said V&E did not advise Enron there were no problems, but noted that by the time the law firm’s report was completed, the questionable Raptor partnership had been terminated, CFO Andrew Fastow had taken himself off of other partnerships and Enron had restated earnings and disclosed losses related to the partnerships.
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