With Capitol Hill feeding reporters a steady diet of Enron Corp. stories last week, it fast became the issue du jour. Who’s kidding who, it was the only story in a town that thrives on scandals — real or imagined. In fact, there was such a rapid fire of “new” disclosures about the energy trader’s financial sleight of hand, outside auditor Arthur Andersen’s extracurricular activities, and the Bush administration’s ties and Capitol Hill lawmakers’ links to the bankrupt corporation, that somewhere along the way last week it became one big blur.

In what was probably the most revealing development, the House Energy and Commerce Committee disclosed that an Enron whistle blower had warned Chairman Kenneth Lay months before the company’s financial collapse and descent into bankruptcy of serious problems with the company’s accounting treatment of its off-balance-sheet partnerships that hid debt and inflated profits. The letter also revealed the existence of heretofore unknown off-balance-sheet partnerships, which could force Enron to further have to restate its earnings.

“I am incredibly nervous that we will implode in a wave of accounting scandals,” wrote Sherron Watkins, Enron’s vice president of corporate development, in a letter to Lay last August. “It sure looks to the layman on the street that we are hiding losses,” she continued. “Is there a way our accounting gurus can unwind these deals now?” Watkins asked, although expressing doubt. “We are under too much scrutiny and there are probably one or two disgruntled ‘redeployed’ employees who know enough about the ‘funny’ accounting to get us in trouble.”

The committee said it obtained the Watkins’ letter as part of its wide-ranging investigation into the Enron financial debacle. In addition to revealing Lay’s knowledge of the accounting problems, the Watkins’ letter to Lay raises the possibility that the company may have to reduce past earnings by another $1.3 billion. It discloses two investment vehicles — one not previously disclosed — which could cut into earnings more than its four-year restatement in an 8-K filing with the Securities and Exchange Commission (SEC) last November.

In its restated financial earnings statements filed with the SEC, Enron consolidated several of its off-balance sheet partnerships, which deducted about $1.2 billion from its net worth. The consolidation also reduced profits from the previous four years by about $586 million. In its regular third quarter earnings statement, released last October, Enron also took charges of more than $1.01 billion in failed investments in the third quarter, mostly related poor investments in the water business, broadband trading and retail electricity. That write-off reduced shareholder equity and precipitated the horrifying rush toward bankruptcy.

Enron has made no comment about Watkins’ letter or any of its allegations. Other developments on Capitol Hill last week were:

In the series of developments in the market last week, Arthur Andersen fired its lead auditor of the Enron account (Duncan) and placed four other auditors — all based in Houston — on leave as part of its inquiry into the destruction of related auditing documents. Andersen said it would replace the management in the Houston office, noting that the Andersen partners there “have been relieved of their management responsibilities.” It also noted it would fire any other employees who participated in the “improper destruction of documents.”

The four partners placed on administrative leave were D. Stephen Goddard Jr., Michael M. Lowther, Gary B. Goolsby and Michael C. Odom. But Enron trumped Andersen’s moves last Thursday — it fired Andersen as its outside auditor.

In related action, attorneys for Samson Investment Co., a Tulsa-based natural gas-heavy energy company, filed a lawsuit against Andersen, accusing the Big 5 accountant of complicity in Enron’s bankruptcy.

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