Enron and Andersen: The Story So Far

(From Time.com)

The collapse of Enron, the largest bankruptcy in U.S. history, led to thousands of employees losing their life savings in 401(k) plans tied to the energy company's stock. The reputation of Andersen, Enron's auditing firm, is damaged after company officials admitted that thousands of Enron documents were destroyed.

Those events led to a flurry of probes, including a criminal investigation by the U.S. Justice Department of Enron. The SEC and the Labor Department -- as well as six congressional committees -- are also investigating the company's collapse. Enron officials have donated millions of dollars to Republicans and Democrats alike.

At the heart of Enron's troubles were numerous outside partnerships, set up to keep debt off its books, which were reviewed by Andersen. In addition, it was revealed that Enron has paid no income taxes in four of the last five years, using almost 900 subsidiaries in tax-haven countries and other techniques.

A major issue brought to light by the scandal is Andersen's dual role as Enron's auditor and consultant, which critics claim is a serious conflict of interest. Andersen has been accused of overlooking the huge sums of money kept off Enron's books because Enron represented a potential $100 million-a-year in fees to the auditor. Enron fired Andersen as the feuding corporations both came under growing scrutiny for their roles in the collapse of the world's largest energy trading company.

Enron Company Background:

Enron Corp. is one of the world's largest energy, commodities and services company. Before its Chapter 11 bankruptcy filing, it marketed electricity and natural gas, delivered energy and other physical commodities, and provided financial and risk management services to customers worldwide.

Based in Houston, Texas, Enron was formed in July 1985 by the merger of Houston Natural Gas and InterNorth of Omaha, Nebraska. Initially a natural gas pipeline company, Enron rapidly evolved from delivering energy to brokering energy futures as energy markets were deregulated. The company began marketing electricity in 1994 and entered the European energy market in 1995.

In 1999, Enron launched a plan to buy and sell access to high-speed Internet bandwidth, and it launched EnronOnline, a Web-based commodity trading site, making it an e-commerce company.

The company reported revenues of $101 billion in 2000. It has stakes in nearly 30,000 miles of gas pipeline, owns or has access to a 15,000-mile fiber optic network and has a stake in electricity generating operations around the world.

Timeline: Enron's rise and fall (From The Associated Press)

July 1985 - Houston Natural Gas merges with InterNorth, a natural gas company based in Omaha, Neb., to form Enron, an interstate natural gas pipeline company with 37,000 miles of pipe.

1989 - Enron begins trading natural gas commodities. Over the years, the company becomes the largest natural gas merchant in North America and the United Kingdom.

December 2000 - Enron announces that president and chief operating officer Jeffrey Skilling will take over as chief executive in February. Kenneth Lay will remain as chairman. Shares hit 52-week high of $84.87 on Dec. 28.

August 2001 - Skilling resigns after running the company just six months; Lay becomes CEO again.

Oct. 15 - Lay talks to Commerce Secretary Don Evans while Evans is in Russia leading a trade mission. Commerce officials say the call dealt with an Enron energy project in India and did not cover Enron's financial troubles.

Oct. 16 - Enron reports a $638 million third-quarter loss and discloses a $1.2 billion reduction in shareholder equity, partly related to partnerships run by chief financial officer Andrew Fastow.

Oct. 22 - Enron acknowledges Securities and Exchange Commission inquiry into a possible conflict of interest related to the company's dealings with the partnerships.

Oct. 24 - Enron ousts Fastow.

Oct. 28 - Lay talks by telephone with Treasury Secretary Paul O'Neill to inform O'Neill of the financial problems facing the company, according to O'Neill spokeswoman Michele Davis. Davis said the two also talked on Nov. 8. She said Treasury officials could detect no ripple effects in financial markets from Enron's troubles and O'Neill did nothing to help the company.

Oct. 29 - Lay talks by telephone with Evans. A Commerce spokesman says Lay asked Evans if he could do anything to influence a decision by Moody's Investors Service to downgrade Enron's credit rating. Evans, after talking to the general counsel at the Commerce Department, determines it would not be appropriate to intervene in a decision by a private credit rating agency, according to Commerce spokesman Jim Dyke.

Oct. 31 - Enron announces the SEC inquiry has been upgraded to a formal investigation.

Nov. 8 - Enron files documents with SEC revising its financial statements for past five years to account for $586 million in losses.

Nov. 9 - Dynegy Inc. announces an agreement to buy its much larger rival Enron for more than $8 billion in stock.

Nov. 19 - Enron restates its third-quarter earnings and discloses it is trying to restructure a $690 million obligation that could come due Nov. 27.

Nov. 20 - Concerns about Enron's ability to weather its spiraling financial problems send the company's stock down nearly 23 percent to its lowest level in nearly 10 years.

Nov. 21 - Enron reaches agreement to extend $690 million debt payment.

Nov. 26 - Enron shares fall 15 percent, to $4.01.

Nov. 28 - Dynegy backs out of deal after Enron's credit rating is downgraded to junk bond status. Enron shares plunge below $1 amid the heaviest single-day trading volume ever for a NYSE or Nasdaq-listed stock.

Dec. 2 - Enron files for Chapter 11 bankruptcy protection, sues Dynegy for wrongful termination of merger.

Jan. 9, 2002 - Justice Department confirms it has begun a criminal investigation of Enron.

Jan. 10 - The White House discloses Lay sought the administration's help shortly before the company collapsed. The company's auditor, Andersen, says it destroyed some Enron documents.

Jan. 23 - Lay resigns as chairman and CEO of Enron, but will stay on the company's board of directors.

Jan. 24 - Fired Enron Auditor David Duncan pleads the Fifth on the first day of Congressional hearings after being denied immunity for his role in document shredding.

Graphic from CNN.com

Andersen's Role:

• Andersen Under Fire Over Document Destruction in Enron Furor

Andersen's destruction of thousands of pages of documents involving Enron Corp. has jolted its credibility and could jeopardize its future as a Big Five accounting firm, the AP reported.

Already under fire as auditor for the bankrupt Houston energy-trading company, Andersen is now under even more intense scrutiny for its disclosure that its employees destroyed documents related to Enron.

Still unknown was why Andersen auditors destroyed the documents of a client in the process of collapse and whether the shredding and deleting of files was done to keep them from the government -- which securities law experts say could lead to criminal prosecution.

The extent of any business setback for the $9 billion-a-year consulting and professional services firm, which employs 85,000 people worldwide, won't be known until clients decide whether to renew their contracts as they come up for renewal over the coming months.

• Andersen Knew Enron Was in Trouble

Andersen knew Enron was in trouble as early as Feb. 2001, a company memo showed, and Andersen debated dropping the collapsed energy firm all together, Reuters reported. Additionally, Andersen knew in mid-August of a senior Enron employee's concerns about improprieties in the energy company's accounting practices.

Andersen confirmed that a memo dated Feb. 6 recounted a meeting between Andersen executives about whether Andersen should retain the now-bankrupt Enron as a client.

The memo said that Andersen executives discussed the amount kept off the books and the materiality of related party transactions with LJM, one of several partnerships that Enron kept off its balance sheet, Andersen spokesman Charlie Leonard confirmed.

Andersen officials sought guidance from their lawyers in mid-August about how to respond to fears from Enron employees about accounting improprieties, according to Congressional investigators studying the company's collapse.

The Fallout and Ramifications:

• SEC Unveils New Accounting Oversight Board

Harvey Pitt, the Security and Exchange Commission chairman, said at a Thursday press conference that the commission intends to implement a public regulatory body that will "restore public confidence in the integrity of the accounting profession."

The SEC plan called for a private oversight body staffed by public members, with two goals in mind: discipline and quality control.

The SEC will oversee all instances where laws may have been violated, while ethical and technical competency violations will come under the scrutiny of the public member board. The public member board will have the authority to conduct disciplinary proceedings -- which will all be subject to SEC oversight, publicize findings of those proceedings and if need be restrict those firms' auditing functions.

• Public Oversight Board to Disband After Left Out of SEC Plans

The Public Oversight Board (POB) has voted to shut down, saying the accounting oversight panel was excluded from plans for a new system of regulation for the accounting profession by the nation's top market regulator, Reuters reported.

But the U.S. Securities and Exchange Commission urged the accounting board to reconsider its decision, saying that its proposal for a new supervisory board was not meant to exclude the POB from the process.

SEC Chairman Harvey Pitt proposed a new oversight panel for accountants, in response to growing pressure from investors and lawmakers fed up with a series of high-profile accounting debacles culminating with the collapse of Enron Corp. The POB said it was not consulted on the issue before the proposed changes were announced and has voted to disband no later than March 31.

The little-known POB was set up in 1977 and oversees the accounting profession's self-regulatory process, which mainly involves peer reviews.

• Senator Seeks Auditing Restrictions in Enron Wake

With accounting firm Andersen mired in controversy over its audit of collapsed trading giant Enron Corp., a senator announced plans to introduce a bill to ensure auditors remain independent, Reuters reported.

Sen. Barbara Boxer, a California Democrat, said accounting firms should be banned from providing management consulting services for the companies that they audit.

Joseph Berardino, chief executive of the No. 5 accounting firm, said the firm was considering whether to end its consulting and other services and focus strictly on auditing to avoid potential conflicts.

• House Set to Subpoena Andersen

The head of a House of Representatives panel said he was set to subpoena testimony if necessary from Andersen, according to a report by Reuters.

Making clear Andersen was heading for very rough waters on Capitol Hill, Rep. Jim Greenwood, a Pennsylvania Republican, said: "Everything that we've seen so far indicates that there was an unusual and urgent sense of need to destroy documents at Andersen,'' independent of any pressure from Enron.

• Tougher UK Standards

Following the Enron scandal, international pressure is mounting to break up the close relationship that can develop between companies and their auditors, CNN.com reported .

The UK's Financial Services Authority is reviewing plans to force public companies to change auditors every five years or so. It's also considering a ban on accountancy firms selling non-audit services like strategic planning to its audit clients.

Accountants say the rotation of audit partners that already exists is sufficient, and that the greatest risk for auditors occurs in the first year or two, when the auditor is learning the workings of the client's business.

Until now, the profession -- led by the so-called Big Five firms of international chartered accountants -- has been self-regulatory. The importance of their reputation has been enough to maintain high standards.

• Enron Europe Creditors Face $900 Million Trading Loss

Enron's European trading partners face losses of about $900 million, Reuters reported.

In the first firm indication of trading losses resulting from Enron's record-breaking bankruptcy, the industry source said London-based Enron Capital Trade Resources Ltd. had outstanding liabilities of about a billion dollars.

Enron traded power and gas in Europe with some 300 counterparties including many of the continent's utilities, oil majors, trading houses and banks that traded in energy.

At the time of its collapse, the company was sitting on around 250,000 open contracts in the forward markets, the official said.

• The Average Joe

The collapse of energy trader Enron left thousands of people out of work and also cost many of them their life savings. A year ago, 62 percent of Enron's 401(k) retirement funds -- worth $1.3 billion -- were invested in the company's stock.

Many shareholders chose not to sell and watched as the stock went from a high of more than $80 last January to less than $1 since Enron filed bankruptcy Dec. 2.

Enron blocked employees from selling their shares between Oct. 26 and Nov. 8. During that period the stock fell from $15.40 to just over $9 per share.

Some Enron employees claim they were defrauded by Enron executives who assured them the stock would rebound, even as they unloaded their own shares in the company.

William Lerach, an attorney for shareholders suing Enron, said 29 top executives and directors of the energy-trading company sold about $1.1 billion in stock during a time when "they have now admitted they were overstating the reported profits of Enron by $600 million and the stockholder equity of the company by $1.1 billion."

Government Ties

• Major Political Contributors

Before the company's collapse, Enron executives were major players on the national political scene, Retuers reported .

According to the nonpartisan Center for Public Integrity, Enron executives poured more than $2.2 million to campaign committees and federal candidates from both the Democratic and Republican parties during the 2000 political cycle.

President Bush's campaign received more than $74,000 from Enron executives. Among the company's directors, Lay and his wife were the biggest contributors.

The Lays have given more than $87,000 to political campaigns since 1999 -- half of that going to the Bush campaign.

• Ashcroft Recuses Himself From Enron Probe

Attorney General John Ashcroft and a top aide recused themselves from the Justice Department's criminal investigation of Enron Corp., the AP reported.

Justice Department officials said Ashcroft was advised to step away from the investigation because of contributions he received from the company's executives during his campaign for the Senate.

According to the Center for Public Integrity, Ashcroft received nearly $61,000 from Enron executives and the company's political action committee, including $25,000 from Lay.

• Bush Administration Had Six Meetings With Enron

The White House revealed for the first time that Vice President Dick Cheney or members of the White House's energy task force met six times with representatives from Enron in the months before its bankruptcy filing, the AP reported.

Reports of Cheney's actions come at a time some Democrats in Congress are suggesting Enron benefited from its deep ties with senior Bush administration officials.

Those Democrats are pressing for information on Enron-administration contacts and any administration actions that might have benefited Enron.