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KWAME HOLMAN: Members of the Senate Commerce Committee had to cancel their hearing yesterday because the most wanted man on Capitol Hill, former Enron CEO Kenneth Lay, reneged on his commitment to appear.
SEN. ERNEST HOLLINGS: The committee will please come to order.
KWAME HOLMAN: Members said Lay should address an Enron bankruptcy that has shaken people’s faith in major parts of the economic system.
SEN. MAX W. CLELAND: There are teachers in my state that are scared to death about their economic future, about their pensions, and it’s because of the actions of Mr. Lay and his top officials. So I think that’s where the explaining has to come in, not so much to us, but to the people of America that trusted him and trusted his corporation.
SEN. OLYMPIA SNOWE: Enron in and of itself has really rattled the economic underpinnings in this country. It’s reflected and manifested itself in the markets. So this isn’t a run-of-the-mill bankruptcy. This is deception and manipulation and complicity and duplicity on a widespread basis with the largest bankruptcy in the history of this country. It deserves our attention. And whether Mr. Lay decides to testify or not before this committee, that should not deter us from doing what is right and finding out how exactly did this happened.
KWAME HOLMAN: With that, all the committee’s democrats and Republicans voted to issue a subpoena.
SPOKESMAN: Clerk call the roll.
KWAME HOLMAN: February 12 was set for lay’s appearance, but Senators acknowledged an appearance may be all they get because a subpoena cannot force him to testify.
SEN. JOHN BREAUX: He’s going to come here as a result of this subpoena. But I t you a dollar to a doughnut that he doesn’t testify and invokes his right under the fifth amendment.
SEN. CONRAD BURNS: I also want to associate myself with the words of Senator Breaux, that if you think he’s going to tell us anything in this room, I’ll probably eat my hat in front of the Senate steps. And that’s kind of dry chewing.
KWAME HOLMAN: Simultaneously this morning, another committee rebuffed by Kenneth Lay heard from the head of Arthur Andersen, Enron’s accounting firm. Andersen CEO Joseph Berardino already had testified before Congress. Today’s appearance before the House Financial Services Committee was his first since the release of an Enron internal investigative report. The report by a new committee of Enron’s board accused the Arthur Andersen firm of lax oversight that contributed to Enron’s collapse.
JOSEPH BERARDINO, CEO, Arthur Andersen: The Committee did not speak to people at Andersen. When the Committee was formed, we offered to assist it. But the company’s lawyers indicated they were not ready to discuss anything with us. We did provide the committee with our work papers when requested. The committee asked to speak with some of our people. We were in the process of working out interviews when Enron fired us. We never heard from the committee again.
KWAME HOLMAN: The board’s report said Arthur Andersen should have reveal the hidden and tenuous partnerships created by top Enron officials that ultimately brought down the company.
REP. RICHARD BAKER: Is there some evidence that there was active participation in the crafting of these off- the-books entities, that Andersen did play a role in setting these up. That is true, is it not?
JOSEPH BERARDINO: We were aware of the transactions.
REP. RICHARD BAKER: You were more than aware.
JOSEPH BERARDINO: We gave judgments.
REP. RICHARD BAKER: Steve Powers was pretty clear in saying that there was clear evidence that Andersen’s people were involved from the get-go in creating these off the books entities. Now that… Are you… Is Andersen denying that they were involved in the take off of these?
JOSEPH BERARDINO: Mr. Chairman, I think we’re talking past each other in terms of what involved and what this setting up means. This committee did not talk to us, did not get our perspective on what our involvement was. I wasn’t there. I can’t tell you how active and what the nature of all our people’s judgments were. Suffice it to say, that we were very much involved as a company was setting up transactions — giving our advice on whether they would pass the rules.
REP. GARY ACKERMAN: Mr. Bernardino, let me tell first before I ask you a question what’s on my heart. You’ve come back now for the second time to amend some things that you said before that weren’t necessarily as accurate as you would have liked them to be. And we’ve been listening to you for a while and we’ve basically got nothing. I’m finding it difficult to believe that a person who has risen to a position of such prominence and importance in the financial community can present himself as knowing absolutely nothing about what is going on in his own business. And maybe it’s better to be dumb than culpable. But we want some answers.
JOSEPH BERARDINO: We are still getting facts. You want me to give you conclusions without all the facts.
REP. GARY ACKERMAN: How long… How long have you been the auditors of this company and how long have you been their consultants?
JOSEPH BERARDINO: This committee had conclusion that’s use words like apparently…
REP. GARY ACKERMAN: Could you just answer that question first, how long have you been the auditors for…
JOSEPH BERARDINO: Our firm has bee the auditor since I think the mid-80s.
KWAME HOLMAN: Even as members pressed for answers on the role of Enron’s accounting firm, the man whose report sparked the latest Enron firestorm was preparing to testify before the House Energy Committee’s investigative branch. Last October, William Powers, dean of the University of Texas Law School, joined Enron’s board of directors charged with raveling the complex partnership schemes that brought down the mammoth company. Having testified before another committee last night, Powers told his story for the second time today.
WILLIAM POWERS, Enron Investigator: What we were charged with was investigating transactions between Enron and partnerships controlled by its chief financial officer or people who worked in his department. That’s what our report discusses and frankly Mr. Chairman as I have said before, what we found was appalling.
KWAME HOLMAN: Powers said his probe focused on the activities of Andrew Fastow, Enron’s former chief financial officer.
WILLIAM POWERS: First, we found that Fastow and other Enron employees involved in these partnerships enriched themselves in the aggregate by tens of millions of dollars that they should never have received. Fastow got at least $30 million, Kopper at least $10 million, two others $1 million each, and still two more in amounts that we believe were at least in the range of hundreds of thousands of dollars, so there was self enrichment.
Second, we found that some transactions that were improperly structured. But if they had been structured correctly, Enron could have kept assets under accounting rules– especially debt– off of its balance sheet. But Enron did not follow the accounting rules. Finally, we found something more troubling than individual instances of misconduct or a failure to follow accounting rules.
We found a systematic and pervasive attempt by Enron’s management to misrepresent the company’s financial condition. Enron management used these partnerships to enter into transactions that it could not, or would not have done with unrelated commercial entities. Many of the most significant transactions apparently were not designed to achieve bona fide economic objectives. Let me say that while there are questions about who understood what concerning these many very complex transactions, there is no question that virtually everyone knew, everyone from the board of directors on down. Everyone understood that the company was seeking to offset its investment losses with its own stock. That’s not the way it’s supposed to work. Real earnings are supposed to be compared to real losses.
As a result of these transactions Enron improperly inflated its reporting earnings for a 15 month period from the third quarter of 2000 for the third quarter of 2001. It overstated its earnings or inflated its reported earnings by more than one billion dollars. This means that more than 70% of Enron’s reported earnings for this period were not real. Now how could that have happened? Tragic consequences of the related party transactions and accounting errors were the result of failures at many levels by many people. A flawed idea, self-enrichment by employees, inadequately designed controls, poor implementation, inattentive oversight, simple and not so simple accounting mistakes and an overreaching culture that appears to have encouraged pushing the limits.
REP. PETER DEUTSCH: One of the mandates of your committee was to recommend discipline at Enron. What discipline is the committee going to recommend?
WILLIAM POWER: We did not recommend discipline in the end, and the reason was, I’ll… We have been going nonstop getting this done. My testimony was… Had been requested. We wanted to get this report out and thought that frankly exhausted at the end of it we didn’t want to make judgments about discipline and I think the facts speak for themselves and others are going to have to make the judgment we didn’t in the end… We didn’t mean to imply there should not be discipline imposed here.
KWAME HOLMAN: Finally late today the second congressional committee spurned by Kenneth Lay announced it had served a subpoena compelling him to appear.