Enron Corp.'s outside auditor said yesterday that "illegal acts" may have been committed at the energy-trading company before it sought bankruptcy protection last week.

The chief executive of Arthur Andersen, the big accounting firm that approved years of financial statements that overstated Enron's profits and understated its debts, also said Andersen made "an error in judgment" that accounted for $103 million in overstated profits.

While Joseph F. Berardino testified yesterday on Capitol Hill, giving Andersen's first substantive explanation of why it certified Enron's reports, top Enron officers detailed a reorganization strategy for creditors at a meeting in New York. And former Enron chief financial officer Andrew Fastow, after failing to honor a Securities and Exchange Commission subpoena, surfaced at a news conference to dispel speculation that he had fled the country.

In addition to Congress and the SEC, the Justice and Labor departments are investigating Enron's collapse. More congressional hearings are expected next month.

Enron shifted hundreds of millions of dollars in debts and losses from some business ventures off its books to partnerships run by Fastow. After the extent of the partnership's troubles became known in late October, the company quickly lost the financing and customers needed to keep its massive energy-trading operations going.

That prompted Dynegy Inc. to walk away from a $23 billion merger deal and forced Enron to make the largest bankruptcy filing in history on Dec. 2. Billions of dollars in shareholder value disappeared, and thousands of employees lost their jobs and much of their retirement savings, which were heavily invested in Enron stock.

Accounting rules say a company can keep enterprises such as the Enron partnerships off its balance sheet as long as unrelated parties provide at least 3 percent of their value. But it appears that Arthur Andersen "was not provided critical information" about one of those arrangements, Berardino said at a joint hearing of two subcommittees of the House Committee on Financial Services.

In 1997, when Andersen examined Enron's relationship with a partnership called Chewco, the auditors were informed that $11.4 million of Chewco's funding had come from a large financial institution unrelated to Enron, which satisfied the 3 percent test, Berardino said.

But Andersen recently learned that Enron had agreed to an arrangement that cut in half the amount of money the institution actually put at risk, Berardino said. That meant the partnership had so little outside money that its finances should have been disclosed in Enron's statements. Chewco accounted for about 80 percent of the profit overstatements related to the partnerships, Berardino said.

Why that information wasn't given to the auditors isn't clear, Berardino said. "We don't know if that was willful or not," he said.

Berardino said that withholding information from an auditor is illegal. On Nov. 2, he said, Andersen notified the audit committee of the Enron board of directors "of possible illegal acts within the company."

That was after the Securities and Exchange Commission began looking into Enron's finances.

In a response issued yesterday, Enron said "it was the company's management, not Andersen, that discovered the arrangement and its relevance and reported it to Andersen within 24 hours." Enron said it referred the matter to a special investigative committee of the board that is working with separate lawyers and accountants.

"It has always been Enron's policy to be open with its accountant," CEO Kenneth Lay said in a statement.

Questioned after the hearing, Berardino would not say how Andersen learned the truth about Chewco. "I don't think that's something we want to get into right now," he said.

Rep. Richard H. Baker (R-La.), who presided over the hearing as chairman of one of the subcommittees, said it appears that high-level people at Enron "did not provide the disclosures that are required perhaps by law but certainly by good moral judgment."

Lay turned down an invitation to appear before the committee, citing a conflict with the creditors meeting in New York.

At that meeting, Enron Chief Financial Officer Jeff McMahon said the firm is considering selling much of the business activity that helped define it in recent years in order to settle debts of more than $31 billion.

Sources said Citigroup and UBS Warburg, two of Enron's largest creditors, are in the final stages of preparing a bid for a controlling interest in Enron's Houston-based energy-trading business, which until recently handled one-fourth of all U.S. electricity and natural gas trading. The bid would be put before the bankruptcy court, and others could then submit competing bids. J.P. Morgan Chase & Co., another major creditor, is also considering putting a bid in, but sources say the firm doesn't want to be the first to make an offer.

McMahon said Enron also wants to sell its water and foreign power assets to raise as much as $6 billion. That would leave the company with its energy development, generation and exploration divisions, refashioning it into a firm of tangible assets -- the very kind of you-can-kick-the-tire items that Enron's top brass scoffed at in recent years in favor of more esoteric, less-tangible assets such as financial contracts.

Details of the plan would have to be accepted by the 15-member creditors' committee that was named yesterday and then approved by U.S. Bankruptcy Court Judge Arthur Gonzalez.

Fastow, meanwhile, appeared in New York yesterday with one of his attorneys, David Boies. Fastow will meet with SEC investigators in the future, Boies said, but had not had time to prepare his testimony yesterday. Fastow faces a civil fraud investigation by the SEC and a federal criminal probe, according to an SEC affidavit.

Boies would not allow Fastow to speak, other than to let him tell reporters: "Hello. I wish you a happy holiday season. Thank you for coming."

Enron's collapse has focused new attention on weaknesses in the nation's financial system and the track record of Arthur Andersen, on whose watch regulators allege glaring accounting problems festered at companies such as Sunbeam and Waste Management.

"There is a crisis of confidence in my profession," Berardino told lawmakers, adding that "real change will be required to regain the public's trust." The system for regulating and disciplining accountants "will have to be improved," he said.

Berardino vowed that Andersen "will take the steps necessary to reassure you . . . that our backbone is firm and our judgment clear."

Rep. Paul E. Kanjorski (D-Pa.) said he thought he could rely on the decency and honesty of professionals, but the Enron debacle offered a strong argument for government action. "The business interests in this country seem to be making the most compelling case in the world that we need heavy regulation," Kanjorski said.

Staff writers Kathleen Day and Peter Behr and special correspondent Carol Vinzant contributed to this report.