THE FALL OF ENRON: Cutting Losses

Concerns Grow Amid Conflicts

By Peter Behr and April Witt
Washington Post Staff Writers
Tuesday, July 30, 2002

Third of five articles

David B. Duncan, the Arthur Andersen LLPpartner in charge of the Enron Corp. audit team, had reason to be nervous when he sat down with two lawyers from a prominent Houston law firm, Vinson & Elkins LLP, on Sept. 5, 2001.

Enron Chairman Kenneth L. Lay had hired the lawyers from Enron's leading outside law firm to look into allegations of deceptive bookkeeping, corrupting conflicts of interest and hidden partnership investments gone dangerously awry.

Sherron Watkins, an Enron vice president and an accountant, put the allegations in an Aug. 15 memo to Lay. They were aimed right at Duncan, 43, a rising star at Andersen who made $700,000 a year. His audit team had approved the risky partnership investments that propped up Enron's finances.

He had reason to be nervous, but he gave composed and reassuring answers.

There was no problem with Enron's accounting, Duncan told the lawyers.

While some of the accounting that troubled Watkins "may look facially questionable, it satisfies the technical requirements," Duncan told V&E lawyers Joseph C. Dilg and Max Hendrick III.

"Unique control features" are in place to protect Enron, top-drawer consultants had reviewed the deals for fairness and decision-makers "from the highest levels" of Enron had approved them, Duncan said.

Duncan didn't mention important facts. Watkins's allegations had reignited a serious dispute inside the accounting firm. Senior experts at the firm complained that Duncan's team had used improper accounting in approving the partnership investments code named the Raptors -- just as Watkins had alleged -- and then created a false paper trail to justify their actions, according to internal Andersen memos.

Duncan said nothing about that in his interview, according to the lawyers' notes.

'A Whitewash'

Five days later the two lawyers met with Watkins. She repeated the outlines of the calamity she had described to Lay:

The Raptors were failing and Enron would be faced with huge losses -- $500 million was at risk. Enron's chief financial officer, Andrew S. Fastow, ran the outside partnership that had created the Raptors with Enron, a conflict of interest that the company's board had approved. Fastow was "blackmailing" banks to invest in the partnership, known as LJM2, and getting rich.

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