.as held regarding the related party transac-ions with LJM" (one of Enron's Special Pur-pose Entities). Apparently, several Andersenauditors thought that LJM costs should not beept off of Enrorr's books. Jones goes on to

say, "The discussion focused on Fastow's con-.cts of in terest in his capacity as CFO and the

:"JM manager, the amount of earnings thatFastow receives for his services and participa-tion in LJM, the disclosures of the transactionin the financial footnotes, and Enrori's BOD's~oard of Directors] viewsregarding the trans-actions." Enron's activities were described as"intelligent gambling," and Andersen's audi-ors acknowledged "Enrori's reliance on itscurrent credit rating to maintain itself," its "de-pendence" on a supporting audit to meet its fi-nancial objectives, and "the fact that Enronoften is creating industries and markets andtransactions for which there are no specificrules [and therefore] which requires signifi-cant judgment." Enron was also described as"aggressive" in the way it structured its finan-cial statements.

But the risks of Enron were not the only is-sues discussed at that meeting. Andersen's au-ditors realized that Andersen was also doingsignificant consulting business with Enron,business that could be jeopardized by an un-favorable audit. "We discussed whether therevould be a perceived independence issuesolely considering our level of fees. We dis-cussed that the concerns should not be onthe magnitude of the fees but in the natureof the fees. We discussed that it would notbe unforeseeable that fees could reach $100million per year. Such amounts did not trou-ble the participants as long as the- nature ofme services was not an issue." In the end,Andersen decided that the risks were worthlaking. "Ultimately the conclusion was reachedto retain Enron as a client citing that it ap-peared that we had the appropriate peopleand processes in place to serve Enron andmanage our risks."

Ethical Issues in Finance and Accounting 411

Less than a year later, Enrori's third-quarterfinancial report would reflect Andersen's newand different judgment concerning the SPEs.On October 16,Enron reported a quarterly lossof$618 million and announced mat as a resultof Andersen's auditing decisions, they wouldtake a $1.2 billion reduction in shareholder eq-uity.Within one week, the SEC announced thatit had opened an investigation into Enron's ac-counting practices. By the end of October,Enron's stock was trading atjust $10 per share,an almost a 90% drop in 18 months.

It is fair to say that Andersen overestimatedtheir ability to manage the risks of Enron.Several decisions made by Andersen's profes-sional staff during October proved to be dis-astrous for the company. On October 12, asAndersen prepared for the public release ofthe new financial statements, Andersen attor-ney Nancy Temple advised head auditorDavid Duncan to get "in compliance" withAndersen's document retention policy. Be-cause Andersen's document retention policyincluded directions to destroy documentsthat were no longer needed, Duncan inter-preted that advice to mean that he shouldhave Enron-related documents destroyed.Duncan then instructed Andersen employ-ees to shred Enron documents. Duncan hasacknowledged that he and others at Andersenwere aware of a possible SEC investigation atme time.

Four days later, on October 16, Duncanshared a draft of a press release on Enronwith Temple. In her role as Andersen attor-ney, Temple advised changing the press re-lease to delete some language that mightsuggest that Andersen's audit was not in com-pliance with Generally Accepted AccountingPrinciples (GAAP), as well as certain refer-ences to discussions within Andersen's legalgroup concerning Enron. Temple concludedher e-mail by promising to "consult furtherwithin the legal group as to whether weshould do anything more to protect ourselves

412 Ethical Issues in Finance and Accounting

from potential Section 10 issues" (Section 10refers to SEC rules that require auditors toreport illicit client activity). In early Novem-ber, two weeks after they began shreddingdocuments, Andersen received a federal sub-poena for documents related to Enron. Onlyat this point did Temple advise Andersen towrite a memo advising auditors at Andersento "keep everything, do not destroy anything."By the end of November, the SEC investiga-tion was officially expanded to include ArthurAndersen.

At one time, Sherron Watkins was anArthur Andersen auditor who worked on theEnron account. In 1993, she left Andersen tojoin Enron, working for Andrew Fastow inEnron's finance, international, broadband,and finally, its corporate development divi-sion. Thus, for 18 years she participated in awide range of Enron's business activities. InAugust 2001, shortly after Jeffrey Skilling re-signed as Enron's CEO, she wrote a memo toKenneth Lay.Watkins became widely knownas the Enron whistle-blower as a result ofthismemo, despite the fact that she had not ex-pressed concerns earlier and she did notshare her concerns with anyone outside ofthe company. In part, her memo to Lay readsas follows:

Has Enron become a risky place to work? Forthose of us who didn't get rich over the last fewyears, can we afford to stay?

Skilling's abrupt departure will raise suspi-cions of accounting improprieties and valuationissues. Enron has been very aggressive in itsaccounting-most notably the Raptor transac-tions and the Condor vehicle. We do have valu-ation issues with our international assets andpossibly some of our EES MTM positions.

The spotlight will be on us, the market justcan't accept that Skilling is leaving his dreamjob. I think that the valuation issues can be fixedand reported with other good willwrite-downs tooccur in 2002. How do we fix the Raptor andCondor deals? They unwind in 2002 and 2003,we will have to pony up Enron stock and thatwon't go unnoticed ....

It sure looks to the layman on the street thatwe are hiding losses in a related company andwill compensate that company with Enron stockin the future. I am incredibly nervous that we willimplode in a wave of accounting scandals. My 8years of Enron work history will be worth nothingon my resume, the business world will considerthe past successes as nothing but an elaborate ac-counting hoax. Skilling is resigning now for "per-sonal reasons" but I would think he wasn'thaving fun, looked down the road and knew thisstuff was unfixable and would rather abandonship now than resign in shame in 2 years ....

Is there a way our accounting gurus can un-wind these deals now? I have thought andthought about a way to do this, but I keep bump-ing into one big problem-we booked the Con-dor and Raptor deals in 1999 and 2000, weenjoyed wonderfully high stock price, many ex-ecutives sold stock, we then try and reverse or fIxthe deals in 2001, and it's a bit like robbing thebank in one year and trying to pay it back twoyears later. Nice try, but investors were hurt, theybought at $70 and $80 a share looking for $120a share and now they're at $38 or worse. We areunder too much scrutiny and there are proba-bly one or two disgruntled "redeployed" em-ployees who know enough about the "funny"accounting to get us in trouble. What do we do?I know this question cannot be addressed in theall-employee meeting, but can you give someassurances that you and Causey will sit downand take a good hard objective look at what isgoing to happen to Condor and Raptor in 2002and 2003? ..

I realize that we have had a lot of smart peo-ple looking at this and a lot of accountants in-cluding AA & Co. have blessed the accountingtreatment. None of that will protect Enron ifthese transactions are ever disclosed in the brightlight of day. (Please review the late 90s problemsof Waste Management where AA paid $130 mil-lion plus in litigation re questionable accountingpractices.) ...

I firmly believe that executive management ofthe company must have a clear and preciseknowledge of these transactions and they musthave the transactions reviewed by objective ex-perts in the fields of securities law and account-ing. I believe Ken Lay deserves the right to judgefor himself what he believes the probabilities ofdiscovery to be and the estimated damages tothe company from those discoveries and decideone of two courses of action: