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77–569CC 2002

DESTRUCTION OF ENRON-RELATED DOCUMENTS

BY ANDERSEN PERSONNEL

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JANUARY 24, 2002

Serial No. 107–80

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

2

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

Vice Chairman

CHARLES F. BASS, New Hampshire

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

PETER DEUTSCH, Florida

BART STUPAK, Michigan

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

CHRISTOPHER JOHN, Louisiana

BOBBY L. RUSH, Illinois

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

3

C O N T E N T S

Page

Testimony of:

Andrews, C.E., Senior Executive, Andersen LLP; Michael C. Odom, Audit

Partner, Andersen LLP; Dorsey L. Baskin, Jr., Managing Director,

Professional Standards Group, Andersen LLP; and Nancy Temple, Attorney, Andersen LLP ................................................................................... 30

Duncan, David, Former Andersen Partner-in-Charge of Enron Engagement ............................................................................................................... 26

(III)

(1)

DESTRUCTION OF ENRON-RELATED

DOCUMENTS BY ANDERSEN PERSONNEL

THURSDAY, JANUARY 24, 2002

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, Washington, DC.

The subcommittee met, pursuant to notice, at 9:40 a.m., in room

2322, Rayburn House Office Building, Hon. James C. Greenwood

(chairman) presiding.

Members present: Representatives Greenwood, Bilirakis,

Stearns, Burr, Whitfield, Bass, Tauzin (ex officio), Deutsch, Stupak,

Strickland, DeGette, John, Rush, and Dingell (ex officio).

Also present: Representatives Ganske, Fossella, Waxman, Markey, Engel, Green and Jackson-Lee.

Staff present: Tom DiLenge, majority counsel; Jennifer Safavian,

majority counsel; Mark Paoletta, majority counsel; David Cavicke,

majority counsel; William Carty, legislative clerk; Peter Kielty, legislative clerk; Shannon Vildostegui, majority counsel; Edith

Holleman, minority counsel; Consuela Washington, minority counsel; and Jonathan Cordone, minority counsel.

Mr. GREENWOOD. The hearing will come to order. The Chair recognizes himself for the purposes of making an opening statement.

We are here this morning to confront one critical aspect in the

collapse of the Enron Corporation. This is only the first step in a

thorough and rigorous examination by the Energy and Commerce

Committee into what the chief executive officer of Andersen, Mr.

Berardino, referred to in recent testimony as a tragedy. It is surely

that. More than 4,000 employees lost their jobs. Thousands more

lost their life savings. Millions of investors, both great and small,

watched in disbelief as $70 billion in wealth vanished, but not before 600 Enron employees divvied up more than a $100 million in

bonuses this past November.

The essential tenet in our Nation’s unparalleled achievement is

that private enterprise in a well-regulated marketplace is a great

engine for human freedom, innovation, improved standards of living, better quality of life, and individual liberty. That is why when

the marketplace endures a collapse such as this, we have a duty

to restore confidence by putting real and effective safeguards in

place for the future and by bringing any wrongdoing into the bright

light of public scrutiny so that those responsible suffer the consequences.

Today’s hearing will explore how one of the world’s premiere professional organizations could have actually compounded the cataVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HEARINGS\77569 pfrm09 PsN: 77569
2

strophic business failure by allowing the systematic destruction of

Enron-related audit documents at a time when it was clear to everyone, certainly to Andersen, that government investigators and

civil litigants would soon be demanding the documents needed to

understand how things could have gone so wrong so quickly.

To its credit, Andersen voluntarily disclosed the destruction to

this committee and the Department of Justice and then promptly

provided us with most requested information on this subject.

While committee investigators have not had a full opportunity to

interview all those involved, and while we have not yet received all

of the documentation requested, we have interviewed the key witnesses, including Mr. Duncan, Ms. Temple and Mr. Odom, of whom

the latter two will be testifying today. I thank these three individuals for their timely cooperation with the committee. I am, however, disappointed that while Mr. Duncan has complied with the

subpoena requiring his appearance today, by invoking his fifth

amendment rights, as we expect he will today, he will hamper the

important work of this committee in our search for the truth about

what transpired at Andersen during the critical period we are examining.

But before we begin the litany of what we know and what we

have learned, I want to say what I find most troubling. It is clear

that scores of professionals and support staff were involved in the

shredding of paper and deletion of computer files relating to the

Enron audit. Yet to date, committee investigators have been unable

to locate or learn about a single Andersen employee who raised any

concerns or objections about destroying Enron-related documents,

even after the SEC inquiry became public. That behavior is a far

cry from the American Institute of Certified Public Accountants

first principle of professional conduct, which states that, quote, in

carrying out their responsibilities as professionals, members should

exercise sensitive professional and moral judgments in all of their

activities.

So what have we learned so far? Some key points seem

uncontrovertible. First, there was an unusually high degree of concern throughout the Andersen chain of command in the fall of 2001

about ensuring that individuals working specifically on Enron matters complied with Andersen’s document retention policies, which

might better be termed destruction policies since they call for disposal of all nonessential draft or conflicting documentation relating

to an audit, including the e-mails, voicemails and desk files of

those working on the audit.

This may be commonplace and even appropriate in most cases,

but when a high-profile client is about to implode in an accounting

scandal, those, quote, nonessential documents may be just what investigators and litigants will be looking for, and it is clear that Andersen’s senior management knew just that. How could they not,

given their recent and embarrassing experience with the firm’s

audit of Waste Management, Inc.?

Second, Andersen’s legal group waited until November 9, after

Andersen had already received a subpoena from the Securities and

Exchange Commission and had been named in at least one civil

lawsuit relating to Enron, to give instructions to its Enron audit

personnel to suspend normal document destruction policies. We

3

now know the destruction of records continued up to that last day,

maybe even beyond, according to Andersen and others.

Andersen’s managing partner and CEO Mr. Berardino said over

the weekend that the firm’s policy was that all document destruction should have stopped once Andersen learned in mid-October

about the SEC inquiry into Enron’s related party transaction. So

why didn’t the firm advise its personnel of that until nearly 3

weeks later?

Third, Andersen has sought to place the blame for this debacle

solely on Mr. Duncan, the partner in charge of the Enron account,

who, according to Andersen, orchestrated an expedited effort

among the engagement team to destroy documents after he learned

of the SEC inquiry. Mr. Duncan surely has a lot of explaining to

do, given the facts as the committee has uncovered them. He certainly is guilty of poor judgment, if not worse. Even if he truly believed he was instructed by Andersen’s legal counsel on October 12

to clean up the Enron files, as he has told the committee investigators, that does not explain why he waited until October 23, after

learning of the SEC inquiry, to call an urgent meeting of his Enron

audit managers to discuss compliance with the firm’s document retention and destruction policies. It is also inexplicable that he

would not seek legal counsel before doing so, rather than relying

on an e-mail from Ms. Temple sent prior to the SEC inquiry.

Fourth, the now well-publicized e-mails from Ms. Temple to Andersen’s personnel working on Enron matters in the mid-October

timeframe to remind them of the firm’s retention and destruction

policies were by all accounts highly unusual and of questionable

timing. She has told committee investigators that her intent was

to ensure that proper documentation of key conclusions was being

generated and retained at this critical juncture in the Enron account. We have no reason at this point to doubt her good intentions, but as she herself conceded, the policy also requires the destruction of all other records, and it was absolutely reasonable for

recipients of those e-mails to view her reminders in exactly that

way.

And the fact that she never acted to instruct or advise Andersen

personnel otherwise until November 9 only served to confirm such

interpretations and to compound these errors. Indeed, the November 10 memorandum confirming her November 9 voicemail to Mr.

Duncan makes plain that Andersen’s legal group believed the obligation to start preserving all Enron-related documents did not kick

in until that time. This is particularly hard to swallow, given what

Andersen already knew by then, accounting errors with billion-dollar impacts, serious allegations from within Enron about accounting scandals, internal investigations and reviews by Enron and Andersen, a plummeting Enron stock price, an SEC inquiry, civil lawsuits and daily press reports raising the specter of much worse to

come.

This is not to say that Ms. Temple alone was at fault. It appears

clear that she was consulting closely with her superiors in that

legal group, as well as outside counsel that had already been retained by Andersen by the mid-October time period.

Perhaps it is too late to save the reputations and careers of many

of those caught up in the web of the Enron collapse, but for those

4

in business and the professionals who may watch these proceedings, it would be wise to recall the admonition of an ancient

Japanese proverb: The reputation of a thousand years may be determined by the conduct of 1 hour.

The Chair would note that a number of members of the full Energy and Commerce Committee who are not members of this subcommittee have asked to participate in today’s hearing. We, of

course, are happy to do that. While the members of the subcommittee will be recognized for opening statements, the members

of the full committee who are not members of the subcommittee

will not be afforded the opportunity for opening statements, but

will have the opportunity to ask questions, and I will now recognize

the ranking member of the full committee Mr. Dingell for 5 minutes.

Mr. DINGELL. Mr. Chairman, you are most courteous and gracious. I commend you, Mr. Chairman, the chairman of the full committee Mr. Tauzin, and Mr. Deutsch for these hearings today, and

I would note that we on this side are anxious to join you in an effort to develop all of the facts and to pursue wrongdoers as far as

is necessary.

We are here today to address a serious breach in corporate integrity, the destruction of documents by an accounting firm bearing on

the corporate wrongdoing of its client and perhaps on its own

wrongdoing, during a time when accounting wrongdoing was at

issue in the press and a matter of regulatory attention. The event

was either criminally stupid or stupidly criminal, or both. We must

confront why were senior Arthur Andersen employees especially reminded by their lawyers to implement their document retention

policy, in other words, get rid of papers, just as concerns about

Enron’s accounting were reaching a fever pitch.

Why didn’t Arthur Andersen’s litigation attorney or its outside

litigation counsel send Andersen’s Enron team a memo on October

22, the day Enron announced an SEC inquiry, and tell them to retain all documents? Mr. Berardino, who refuses to be with us

today, told us Sunday on Meet the Press that Andersen’s policy

was to do so, yet Ms. Temple did not write such a memo until November 10, after Andersen had received a subpoena. Why did Arthur Andersen management let this happen? Why did anyone at

Andersen in their right mind think that document destruction,

when an SEC inquiry involving accounting practices was under

way, was in any way appropriate? Was that the real Andersen policy, which is what company officials told our staff in interviews?

Today we start to learn what happened. Today we start the process of holding people accountable. Today we start to determine

what kind of tough action is required to prevent this kind of affront

to our system of laws from happening again. And if these witnesses

can’t tell us, Mr. Chairman, I look forward to hearing from others

who can. And I suspect we will have to hear from others before we

have gotten the answers we seek today on these matters.

I also look forward to additional hearings on the accounting

skullduggery that flourished. How should all of these shadowy special partners and partnerships have been disclosed; and how were

they not and why not? How did Arthur Andersen’s overlapping

roles as outside and insider auditors and its conflicting roles as

5

auditors and consultant hurt full and fair disclosure? How did the

lack of transparency, accountability and enforcement for the accounting industry enable the Enron shell game to go undiscovered?

Or was it discovered and not told? How has the additional legal

perfection and protection given the accounting industry by Congress over President Clinton’s veto hurt the ability of victims to

seek redress?

What happened here? Are Andersen’s document destruction and

accounting shenanigans a matter of individual conceit of—wayward

individuals intent on protecting their own careers and futures? Are

those a matter of corporate conceit—a company thinking that it

was above the law and acting in that fashion? Are these a matter

of industry conceit—an industry thinking that its powerful political

patrons would protect it once again as they did when we sought to

see to it that the practice of consulting and auditing were separated?

I look forward, Mr. Chairman, to a most vigorous hearing, and

we on this side look forward to working with you and seeing to it

that we have a most vigorous inquiry and pursuit of wrongdoing

and look forward to a continuation and expansion of a vigorous,

thorough and careful investigation. Thank you, Mr. Chairman.

[The prepared statement of Hon. John D. Dingell follows:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

We are here today to address a serious breach in corporate integrity—the destruction of documents by an accounting firm bearing on the corporate wrongdoing of its

client during a time the accounting wrongdoing was at issue in the press and a matter of regulatory attention. This destruction was criminally stupid, or stupidly criminal.

Why were senior Arthur Andersen employees especially reminded by their lawyers to implement their document retention policy—in other words, to get rid of

paper—just as concerns about Enron’s accounting were reaching a fever pitch? Why

didn’t Arthur Andersen’s litigation attorney or its outside litigation counsel send Andersen’s Enron team a memo on October 22—the day Enron announced an SEC inquiry—and tell them to retain all documents? Mr. Berardino, who refused to testify

today, told us Sunday on ‘‘Meet the Press’’ that Andersen’s policy was to do so. Yet

Ms. Temple did not write such a memo until November 10, after Andersen received

a subpoena.

Why did Arthur Andersen management let it happen? Why did anyone at Arthur

Andersen in their right mind think that document destruction when an SEC inquiry

involving accounting practices was underway was appropriate? Was that the real

Andersen policy, which is what company officials told our staff in interviews?

Today we start to learn what happened. Today we start the process of holding

people accountable. Today we start to determine what tough action is required to

prevent this kind of affront to our system of laws from ever happening again. And

if these witnesses can’t tell us, Mr. Chairman, I look forward to hearing from those

who can.

I also look forward to additional hearings on the accounting skullduggery that

flourished. How should all of these shadowy special partnerships have been disclosed? How did Arthur Andersen’s overlapping roles as outside and inside auditors,

and its conflicting roles as auditor and consultant, hurt full and fair disclosure? How

did the lack of transparency, accountability, and enforcement for the accounting industry enable the Enron shell game to go undiscovered? How has the additional

legal protection given the accounting industry by Congress over President Clinton’s

veto hurt the ability of victims to seek redress?

What happened here? Are Arthur Andersen’s document destruction, and accounting shenanigans, a matter of individual conceit—wayward individuals intent on protecting their careers? Are these a matter of corporate conceit—a company thinking

it was above the law? Are these a matter of industry conceit—an industry thinking

that its powerful political patrons would protect it once again?

6

I look forward to a most vigorous hearing, and the continuation and expansion

of a most vigorous investigation.

Mr. GREENWOOD. The Chair thanks the ranking member, and

would note that the bipartisanship has been exemplary up to date.

I expect it will continue, and we will pursue each and every one

of the issues raised by the gentleman from Michigan.

Mr. DINGELL. Mr. Chairman, we do want to note that the inquiry

to date has been conducted in a proper, thorough, fair, impartial,

bipartisan fashion. For that we commend you.

Mr. GREENWOOD. The Chair thanks the gentleman.

The Chair recognizes the chairman of the full committee, Mr.

Tauzin, for an opening statement.

Chairman TAUZIN. Thank you, Mr. Chairman. Let me echo those

sentiments, Mr. Dingell, and express my full appreciation for the

fact that this investigation began with a bipartisan staff, a team

of investigators, and your cooperation and assistance has been

deeply appreciated, will continue to be appreciated as we go forward. You can be assured again that we will keep you and all of

your staff thoroughly informed as we go forward, sir, and involved.

Mr. Chairman, let me personally thank you and the staff of our

committee for the extraordinary work already done on this investigation. Let me first explain where we are, and hopefully where

we are going, with this investigation. Last year when we announced it, we made it clear that before we held public hearings,

we intended to get the facts. We intended to have our investigators

interview the witnesses, dig up the documents and to get the evidence before we actually put witnesses before our committee to explain what happened to the American public and to learn ourselves

how we might, No. 1, understand, and, second, deal with this incredible tragedy for American investors, Enron employees and

other creditors of this massive corporation.

When we made that announcement, we indeed put that investigative team to work, and we have learned a lot. The Washington

Post detailed some of what we have learned, including instances

where Enron Corporation dealing in numerous partnerships, using

the corporate equity to borrow money and to accumulate debt that

was not disclosed to investors and others on their balance sheet,

miraculously and through accounting tricks and gimmicks converted that debt into a phony income that never appeared and perhaps never would appear to the corporation, and, as one of the

whistleblowers wrote in a memo, perhaps not only misled, but

fraudulently misled consumers and investors in this important corporation.

At one point it is clear to our investigators and—through our

reading of their results that this incredible corporation somehow

suspended the rules of corporate ethics and perhaps even put corporate morality on vacation and accumulated massive amounts of

debts that were not reported on its balance sheet and were somehow allowed to count as income, again income from these partnerships that never truly should have been counted as income, very

much like the MicroStrategy case, where had its arrangements

with NCR been reported authentically, realistically, MicroStrategy

would have reported losses rather than enormous gains, and conVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
7

sumers and investors might have gotten the truth instead of a lot

of phony baloney.

The bottom line is that we are uncovering instances of corporate

behavior that I think almost every corporation in America would

abhor and would condemn, and we are preparing to lay it all out

for the American public at a series of hearings on the Enron operations. That process was interrupted abruptly by an amazing admission by Arthur Andersen of a massive coordinated effort to destroy documents that may be extremely relevant to our investigation and to the investigation that we are working hand in glove

with the SEC and now with the Justice Department.

We will hear today of conversations and e-mails and discussions

dating back to early fall about the problems at Enron and about

the need for somebody to explain them properly to people in this

country who are investing in this company, and at the same time

a decision to invoke something known as a document retention policy.

The chairman has put it correctly. The document retention policy

which we have a copy of, vague in its language, can properly be described as a document retention and destruction policy. Why else

would corporate employees and attorneys within Arthur Andersen

have instructed its members, including Mr. Duncan, to expeditiously carry out the policy, even working overtime if necessary to

complete it within a matter of weeks, the policy of getting rid of

documents in the file? If it was simply a retention policy, a simple

1-hour process of locking the files would have done the job. Instead

a massive overtime effort involving scores and scores of employees

to get rid of documents, documents which we have sought, the SEC

is seeking, and obviously the Justice Department is now interested

in.

I don’t know whether crimes were committed, but it is clear to

us that our investigation and other investigations have been impeded by this policy of destruction. We are going to learn a lot

about it today. And the reason we have scheduled this hearing in

advance of the Enron hearings is because our investigation depends

upon the full cooperation of Arthur Andersen and Enron, its employees, in obeying the law, in retaining and providing to this committee and to other government agencies the documents relevant to

this case, and we will brook no exception to that rule. So let the

word go out to all those who currently work for these two firms

that we fully expect their cooperation and we expect to receive all

the documents that we request.

I am disappointed that this is the first time in my tenure as

chairman that I have had to sign subpoenas to compel the appearance of witnesses before our committee, not even until the Ford

Firestone case were we obliged to sign a subpoena. I am disappointed we have reached this point, and I suspect we will be

there again when we conduct our full committee hearings on

Enron. But let me make it clear, this committee will cut no one any

slack as we go forward. We are going to lay the facts down, and

we are going to try to find some answers and hopefully some solutions that will give American investors and consumers some confidence in the system again. And where we have made policy that

8

needs to be changed, we will boldly face the fact that we need to

strengthen those policies and those standards, and we will do so.

And I want to thank again Mr. Dingell for his cooperation, and

you, Mr. Chairman, for the extraordinary work you are doing.

There are many hours yet to go, but before we finish; I believe we

are going to lay all the facts on the table for the American people

to make their own decisions, but more importantly, if there has

been corporate wrongdoing, we will unroot it. If there has been personal or corporate attempts to hide the facts, we will uncover them,

and people will answer for them, and in the end we are going to

do our best to make sure something like this awful tragedy never

occurs again.

We are going to learn, for example, why Enron decided to change

pension managers in the middle of this crisis and therefore invoke

a 60-day period when its own employees could not dump the stock

as some of its corporate officers were dumping. We are going to

learn a lot before we are through, but in the end we are going to

try and get some answers, too, and the questions raised by you, Mr.

Chairman and Mr. Dingell, are deeply appropriate. And before we

have finished, we hopefully will pass some changes in policies and

laws that will help ensure that investors and consumers can have

some confidence again in the audit systems, in the reporting systems, in the way in which Americans learn whether corporations

are really earning money or just accumulating debt. Thank you,

Mr. Chairman.

[The prepared statement of Hon. W.J. ‘‘Billy’’ Tauzin follows:]

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Thank you Chairman Greenwood. And let me commend you for putting together

this morning’s hearing, which will take us on a path of inquiry we certainly did not

expect to be on when the Committee began ramping up its Enron investigation in

December—the destruction of potentially critical documents.

Yet this is a path we must—and will—follow not only so we can eventually piece

together as fully as possible the facts surrounding Enron’s financial collapse, but

also so we can make very, very clear that this Committee will not allow its investigations to be hindered in any way.

Overall, our wide-ranging investigation, which we will address in more detail at

next week’s full Committee hearings, involves sorting out the complex bookkeeping

and various parties and policies that had a role in that collapse. It also involves a

dogged pursuit of the various leads—wherever they take us—that might explain

why people did what they did and how things went so wrong.

Only with such full information will we then be able to consider how Congress

might address the policy issues raised by Enron’s actions. Which brings me back to

the disturbing topic of today’s hearing: Enron-related audit documents were destroyed by employees of Andersen—the company’s own accounting firm—when signs

of outside investigations were emerging early this past fall.

So we have a situation where the Committee is trying to conduct a thorough, indepth investigation and now it is facing destruction of documents that may well

have provided critical answers to its questions.

The loss of these documents certainly came as a surprise to our Committee investigators when they were invited by Andersen to look through its Enron materials

earlier this month. And the loss certainly is hindering our ability to create a full

picture of what Andersen knew about Enron’s bookkeeping.

The document destruction raises several troubling questions about Andersen’s relationship with Enron and role in its collapse.

Our witnesses today should help us sort through some of the issues raised by

these troubling activities.

For example, why did key Andersen employees suddenly decide—in October, just

as it was becoming clear that outside investigation was imminent—to enforce document destruction policies? And why did destruction continue for several weeks after

9

investigations commenced, which was clearly against Andersen policy, according to

Mr. Berardino?

The destruction also raises some broader questions about document-retention policies that we may have to address: For example, how do corporations implement

these policies, particularly when investigations may be developing? Is this a widespread, though under-appreciated, problem?

Revelations of document destruction have severely harmed Andersen’s reputation.

I hope what we learn today will help us get a more accurate picture of Andersen’s

policies, and whether the actions it took represent broader problems within the company, the industry as a whole, or the mistaken decisions of a handful of individuals.

In the end, what we gather should help us understand more fully where we are

in our investigation, and where we need to look next as we proceed into some of

the substantive issues involving Enron directly.

There is, however, another message this hearing should impart—one highlighted

by emerging news of document destruction at Enron, now under investigation by the

FBI: This Committee takes document destruction very seriously. It will not allow

efforts to impede its investigations to go unpunished.

Thank you again, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the chairman and recognizes

for an opening statement the ranking member of the subcommittee,

the gentleman from Florida, Mr. Deutsch.

Mr. DEUTSCH. Thank you, Mr. Chairman. You know, all the previous speakers have alluded to what the big picture of the Enron

disaster is, and the big picture really is that the public accounting

system and our capital market system failed, and that failure, in

terms of the implication it has to our macroeconomy, potentially

could be very, very significant.

There, you know, was not an Enron prior to Enron. I take great

exception to the Secretary of Treasury’s comments right after

Enron filing for bankruptcy that this was business as usual in

America; that companies, you know, succeed, and companies fail.

That is the case, but the seventh largest company in America effectively imploding in a matter of weeks has not happened before,

should not happen again, and that is in a sense the big picture of

what we are looking at and what we will end up being able to determine, and whether the issues were systemic or criminal or, you

know, specific, I think we will determine, and this committee has

shown in the past that we have incredibly competent staff and

competent Members to get to that point.

There are many issues as well that I think are part of that. I

mean, obviously this hearing is a component of that, but there are

many issues as well, and, again, just to put in perspective my—the

chairman of the committee mentioned the figure of $100 million of

bonuses that were given during the period of—before the implosion

of Enron to management. There was also literally over a billion dollars, $1.3 billion of stock held by managers of Enron that was sold

prior to Enron’s implosion.

We also again are aware of a number of political appointees in

the administration who sold stock prior to the implosion of Enron.

What we are also aware of, though, is that for the thousands of

Enron employees and their 401(k)s, for them personally, many of

whom were restricted from selling at least part of their stock, in

some cases maybe all of their stock, for the lockout period, they

also were very directly affected, but in an opposite—completely opposite way in that they lost over $1 billion. Now, that number is

huge, but the number is personal, and, you know, we have seen

people, you know, whether in television stories or congressional

10

hearings, but some of my colleagues in the Houston area have

talked to dozens of constituents that tell horror stories on a daily

basis. I mean, just again in the scope, the pension fund, the Florida, lost $300 million.

You know, K-Mart filed for bankruptcy this week. It was not a

surprise. The public accounting system in a sense worked. Analysts, the public, anyone who was looking at their balance sheet

could, in fact, understand what was going on. The question today,

you know, obviously is are there other Enrons in our public markets; are there other people who have gamed—other corporations

and individuals who have gamed the system, whether through systemic problems or corrupt activities, that will implode tomorrow?

And if there is not that transparency and faith in the capital system, there is a significant problem.

What I would like to do, I know the chairman has said that

members who are not on the subcommittee cannot take opening

statements, but I haven’t used my 5 minutes. I would like to yield

to Mr. Green from Houston for the remainder of my 5 minutes to

talk about some of the specific issues.

[The prepared statement of Hon. Peter Deutsch follows:]

PREPARED STATEMENT OF HON. PETER DEUTSCH, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

Thank you, Mr. Chairman, for holding this very important hearing. What we are

dealing with today is the alleged destruction of documents by Arthur Andersen, the

accounting firm for Enron, which unexpectedly declared bankruptcy on December

2nd. While document destruction is the scope of today’s hearing, securing confidence

in our capital markets is the fundamental issue facing Congress.

It was no surprise to anyone that Kmart Corporation declared bankruptcy this

week. With Kmart, the system worked—but why in the case of Enron was the entire

Wall Street Community shocked to witness the sudden collapse of America’s seventh

largest corporation? Sophisticated analysts were caught completely off guard, but

the real tragedy are the thousands of workers and seniors who have lost billions

in retirement savings, including a $300 million loss in Florida’s pension system. If

the analysts couldn’t understand Enron’s books, average shareholders and workers

didn’t stand a chance.

We are going to address in detail why Andersen’s Enron team continued to purge

their files of drafts, memos, e-mails and the back-and-forth discussions about accounting decisions that Enron made and Arthur Andersen approved—even after (1)

Enron announced the initiation of an inquiry by the Securities and Exchange Commission into the financial accounting of certain off-the-books special purpose entities

by Enron; (2) Enron established a special committee of its board to look into related

party transactions and their inclusion in Enron’s financial statements; (3) an Enron

‘‘core consultation group’’ established at Andersen was discussing litigation; and (4)

Andersen retained litigation counsel.

Not until November 10th, after Andersen itself received a subpoena was anyone

told to stop implementing the company’s document retention policy, thus finally

halting the destruction of documents. Mr. Berardino told Meet the Press on Sunday

that the company’s policy was not to shred documents ‘‘if you have a reasonable

basis to anticipate an investigation.’’ He stated that basis was not established until

October 22nd, the day that the SEC publicly announced it inquiry. Mr. Berardino

chose not to be here today to explain exactly what Andersen’s policy is. But from

our Subcommittee’s investigation, it appears that Mr. Berardino’s understanding of

the policy was not observed by the relevant principals—not the lawyers, not the accountants. In fact, the lawyers kept reminding the Enron team to comply with the

retention policy, which was a highly unusual move in a company in which complying

with the written policy appeared to occur on an irregular basis at best. Perhaps that

is why the three partners that Andersen put on ‘‘administrative leave’’ are actually

still in the office every day. Perhaps that explains why no one representing Andersen has—to this day—questioned these partners or their staff to get their version

of what exactly happened.

11

Perhaps, more importantly, Mr. Chairman, is the fact that companies are allowed

to release financial reports to shareholders that no one can understand. Even the

professional analysts recommending purchase of Andersen stock until at least October 24 cannot figure out how Enron was making money. Unlike Kmart’s collapse,

the rapid bankruptcy of Enron was a total shock. Employees, shareholders, public

pension plans, professional investors and banks lost billions of dollars, and there are

many tragic personal stories.Ensuring transparency in our financial accounting system is essential to securing public confidence in America’s capital markets. Something has to be done to ensure that publicly held companies and their accountants

provide accurate financial information that the average investor can understand.

Mr. Chairman, I look forward to learning the facts about Andersen’s role in the

Enron debacle. I also look forward to additional hearings when we will focus on

Enron’s destruction of documents and the role of company management in the collapse of America’s seventh largest corporation.

Mr. GREEN. Thank you, Mr. Chairman, and I thank my colleague

from Florida. I want to thank the chairman for allowing me as a

member of the full committee to——

Mr. GREENWOOD. If the gentleman would desist, it is going to be

a courtesy that is going to have to be accorded to all of the Members, and the gentleman Mr. Green contacted me earlier and asked

if he could participate in the hearing, and we said of course he can,

but under our rules and under our procedures, members who are

not on the subcommittee are not afforded the opportunity to make

opening statements. I will be very liberal with the precursors and

the introductions to the questions that Mr. Green wants to make

to the witnesses, but I think we are going to need to draw a line

with regard to the opening statements.

Mr. GREEN. Thank you, Mr. Chairman. With that, I would just

like permission to submit an opening statement.

Mr. GREENWOOD. Certainly it will be a part of the record and——

[The prepared statement of Hon. Gene Green follows:]

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Mr. Chairman: I want to begin by thanking you for allowing me the opportunity

to participate in today’s important hearing.

The Enron meltdown and the associated causes need to be throughly examined,

and that all starts with today’s hearing.

Enron’s economic collapse brought on by the decision makers at Enron and it’s

supposed watchdogs at Arthur Andersen have devastated investors, employees,

creditors large and small, and our Houston Community as a whole.

For only a 16 year old company, Enron was an integral part of Houston’s art,

medical, educational, and business community.

Enron’s name is even on our new Major League Baseball stadium.

Enron’s demise has taken the American Dream away from thousands of employees and stockholders, and I am hearing more and more of these stories every day.

Former employees now have no income, no health insurance for their children,

and no pension for their retirement and the fulfillment of the American dream.

Our committee’s job is not to prosecute, that will come if we can find someone

at the Department of Justice who has not recuse themselves.

No, our job is to investigate how we can prevent this from happening again.

Over the last several weeks it appears that, Arthur Andersen has attempted to

hide facts and destroy documents related to their work for the Enron Corporation.

After being briefed by committee staff, reading all the recent news accounts, and

talking to impacted Enron workers, I am stunned by the activity of Arthur Andersen a once venerated 88 year old company.

What I find most interesting is that Arthur Anderson’s experiences with both the

Waste Management and Sunbeam corporations seemed to be only practice for their

crown jewel of bankruptcies, Enron.

12

1 Arthur Anderson had a policy known as the ‘‘documentation preservation policy’’ that required their auditors to destroy all documents not specifically related to their final audit report.

Ms. Temple sent an e-mail to Mr. Odom reminding him of this policy on Enron related documents.

I am hopeful that today’s witnesses will be able to shed some light on Arthur Andersen’s ‘‘document destruction policy’’ 1. Not a document preservation policy.

As a lawyer, I always understood that if their was even the hint of some kind

of official investigation that it was better to retain documents rather then destroy

them.

This is because if an investigation is started and the investigators learn that I

started a large scale shredding operation, it makes me look guilty.

Ms. Temple’s e-mail to Mr. Odom that was subsequently relayed to Mr. Duncan

reminding everyone of the so-called ‘‘document preservation policy’’ is at least highly

suspicious and at most criminal.

Mr. Chairman, Arthur Andersen definitely played a role in the Enron collapse,

but we all know the true problem resides with Ken Lay, Jeffrey Skilling, and Andrew Fastow.

Arthur Andersen is only a large cog in the wheel that was Enron, and the Committee needs to stay focus on this fact.

I want to thank you again Mr. Chairman for allowing me to participate today,

and I look forward to hearing the witness testimony.

Mr. DEUTSCH. If I could yield back my time, then, and just mention, you know, I don’t know how much we will get in this hearing,

but Mr. Green—I know my colleague also from Houston area as

well has unfortunately—I mean, we just came back from a coupleweek break where he was telling me some of the stories before the

hearing started, and literally, I mean, tearing can come to your

eyes, that he is met the people, he has talked to people on a daily

basis. Obviously that information of what the status of Enron was

not provided for them, and clearly the insiders knew what was

going on.

Chairman TAUZIN. Would the gentleman yield?

Mr. DEUTSCH. I am out of time. If he would——

Chairman TAUZIN. Just quickly to announce that we are going to

have a full committee hearing on Enron to lead off the rest of the

hearings by the subcommittees, and the gentleman will, of course,

have a chance then to make full opening statements.

Mr. GREEN. Thank you.

Mr. GREENWOOD. And if I may say so, the gentleman from Texas

Mr. Green has expressed his profound concern with regard to the

well-being of his constituents, and we appreciate his participation

this morning.

The Chair now recognizes the gentleman from Florida Mr. Bilirakis for an opening statement.

Mr. BILIRAKIS. Thank you very much, Mr. Chairman. I don’t

have a prepared opening statement, but I would just like to make

a couple of points very briefly. One is that both Mr. Tauzin and

Dingell have emphasized bipartisanship of this hearing and of the

entire investigation, and of the subsequent hearings that are going

to take place. I think we should all keep that in mind. This particular hearing is limiting itself, as I understand it, to the destruction of Enron-related documents by personnel working for the company, and I would hope that we would limit ourselves to that. As

much as we all would want to go into the other areas, I hope that

we would try and hold off on those.

The second point as has been made by so many others in other

ways is credibility, or I guess I like to say maybe lack of credibility.

13

We depend on you accountants and you auditors. We, the American

people, depend on you so very much. We depend on your truth. We

depend on your veracity. We depend on you not hiding and on you

not misstating and not miscommunicating to us the facts as you

see them. What is happening here is that we are losing that sense

of credibility in you. I am not sure that any of the American people

are paying attention at all, although I expect that they practically

all are. I am not sure that they will, in the future place, complete

confidence in information that they might receive from the auditors

and the accountants of any of the companies throughout this country of ours. And for that, you should be, I think, very, very much

ashamed.

Now, I don’t know what happened. I don’t know why the documents were destroyed. We are supposed to go into these hearings

with an open mind, and I like to think that we all have an open

mind. However, I think we all probably have been back there sort

of saying, hey, if they destroyed these documents the way they did

when they probably should not have, they must have had something to hide. That is certainly there, and I hope that you will clear

that up.

Did the process of destruction of documents mean that you are

hiding the truth, that you did not reflect the truth, that you did

not really do the job that American people expected you to do, even

though you were employed by the company in the process of reporting their activities? So many people are let down, not only the

stockholders around the country, but certainly the employees who

have lost so much in their retirement fund. Certainly it is a shame

when you see a big company go under the way it has, and it is a

terrible crime that retirement funds have been lost. However, I

think more than anything else we have lost that sense of credibility

that we have always had in the auditors and in the accountants,

and I think that is just really terrible. And, again, you should be

ashamed of all that.

Having said all that, Mr. Chairman, I will yield back.

Mr. GREENWOOD. The Chair thanks the gentleman from Florida

and recognizes for his opening statement for 3 minutes the gentleman from Michigan Mr. Stupak.

Mr. STUPAK. Mr. Chairman, I thank you for holding this important hearing. This is the first of what will likely be many hearings

this committee will hold on the collapse of Enron and the roles that

the executives at Enron and Arthur Andersen played in that collapse. Today’s hearing about shredding documents by Arthur Andersen employees is one with extremely serious implications, including possible civil and criminal penalties. I look forward to

learning more about Andersen’s policies on document retention and

destruction.

In reviewing the materials provided by the committee, it appears

that there were—was a clear effort on Andersen’s part to cleanse

their files after they were made aware that the SEC had begun an

inquiry on October 22 and well after Andersen was informed by

one of their former employees who was working for Enron that

shady accounting practices were going on at Enron.

While I do look forward to hearing about what Andersen’s official

policy is on document retention, I also hope that our panelists will

14

be able to shed some light on what is being done to recover the documents that were purged from computers and shredded by staff.

Certainly Andersen runs backups of their computer files, just as

my office does, and would have them available to recover many of

the deleted files. Hopefully Mr. Baskin will be able to provide us

with an update as to what is being done to recover these documents.

The actions taken by Andersen and Enron executives in recent

months give us reason to be concerned about the cavalier attitude

that is all too prevalent in today’s corporate world. I can’t help but

believe that this cavalier attitude was encouraged by the passage

over a Presidential veto of the Securities Litigation Reform Act of

1995.

In 1995, only a few other members on this committee and I opposed the bill, which essentially shredded the rights of investors to

take action against companies for these deplorable business actions. The Security Litigation Reform Act, or the securities rip-off

act as some of us called it back then, provides immunity from the

private fraud liability for written or oral corporate forward-looking

statements even when those statements are deliberately false. This

so-called reform act significantly limits victims’ recoveries by curtailing joint and several liability, making it more difficult for Enron

employees to sue corporate officials who cashed in close to a billion

dollars worth of stock while Enron was collapsing.

Finally, the Securities Reform Act failed to restore the liability

of aiders and abetters in private action. Here we have Andersen

aiding Enron or Enron aiding Andersen, and the whole crooked

bunch avoids liability. So once again, the defrauded shareholders

are left holding an empty bag.

Unfortunately, Mr. Chairman, we are seeing firsthand the results of that terrible law. Thousands of Enron employees who used

to have what they thought would be a secure retirement will now

be forced to work well into what should be their retirement years

and have little ability to take action against the individuals who

shredded their hopes for a secure retirement.

Chairman Tauzin said this morning, and I compliment him, he

said in a TV interview that our first commitment must be to the

investors. I agree, and we can help these and millions of other

shareholders by immediately repealing the 1995 Securities Reform

Act so we can put teeth back into our security exchange laws.

Mr. Chairman, it is not just the employees who are taking a

beating on their retirement hopes. There are countless numbers of

people, ranging from teachers in California, police and fire officials

in New York City, who have lost hundreds of millions of dollars in

their pension plans and 401(k)s. That is a subject of future hearings, which the chairman said we will be having beginning next

week, and I look forward to discussing this in more detail and more

depth at future hearings. And I thank you, Mr. Chairman, for the

time.

[The prepared statement of Hon. Bart Stupak follows:]

PREPARED STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Mr. Chairman, I thank you for holding this important hearing this morning. This

is the first of what will likely be several hearings that this committee will hold reVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 E:\HEARINGS\77569 pfrm09 PsN: 77569
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garding the collapse of Enron and the roles of the executives at Enron and Arthur

Andersen in that collapse.

Today’s hearing about the shredding of documents by Arthur Andersen employees

is one with extremely serious implications including possible civil and criminal penalties. I look forward to learning more about Anderson’s policy on document retention and destruction. In reviewing the materials provided by the committee, it appears that there was a clear effort on Anderson’s part to cleanse their files AFTER

they were made aware that the SEC had begun an inquiry on October 22nd and

well after Andersen was informed by one of their former employees who was working for Enron that shady accounting practices were going on at Enron.

While I do look forward to hearing about what Andersen’s official policy is on document retention, I also hope that our panelists will be able to shed some light on

what is being done to recover the documents that were purged from computers and

shredded by staff. Certainly Andersen runs back-ups of their computer files, just as

my office does, and would have them available to recover many of the deleted files.

Hopefully Mr. Baskin will be able to provide us with an update as to what is being

done to recover these documents.

The actions taken by Andersen and Enron executives in recent months give us

reason for concern about the cavalier attitude that is all too prevalent in today’s corporate world. I can’t help but believe this cavalier attitude was encouraged by the

passage—over a presidential veto—of the Securities Litigation Reform Act of 1995.

In 1995 only a few other members on this committee and I opposed the bill which

essentially shredded the rights of investors to take action against companies for

these deplorable business actions. The Securities Litigation Reform Act, or Securities Rip Off Act as some of us called it, provides immunity from private fraud liability for written or oral corporate forward looking statements even when those statements are deliberately false. This so-called Reform Act ‘‘significantly limits victims

recoveries by curtailing joint and several liability making it more difficult for Enron

shareholders to sue corporate officials who cashed in close to 1 billion dollars worth

of stock while Enron was collapsing. Finally, the Security Reform Act failed to restore the liability of aiders and abettors in private action. Here we have Andersen

aiding Enron or Enron aiding Andersen and the whole crooked bunch avoids liability, so once again the defrauded shareholders are left holding an empty bag.

Unfortunately Mr. Chairman, we are seeing first hand the results of that terrible

law. Thousands of Enron employees who used to have what they thought would be

a secure retirement will now be forced to work well into what should be their retirement years and have little ability to take action against the individuals who shredded their hopes of a secure retirement. Chairman Tauzin said this morning in a TV

interview that ‘‘our first commitment is to the investors. I agree and we can help

these and millions of other shareholders by immediately repealing the 1995 Securities Litigation Reform Act—so we can put teeth back into out security exchange

laws.

Mr. Chairman, it is not just the Enron employees who have taken a beating on

their retirement hopes. There are countless numbers of people ranging from teachers in California to police and fire officials in New York who have lost hundreds

of millions of dollars in their pension plans and 401K’s , but that is a subject for

future hearings and I look forward to discussing this more in depth at those hearings.

Mr. GREENWOOD. The Chair thanks the gentleman from Michigan and recognizes for the purposes of an opening statement for 3

minutes the gentleman from Florida Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman, and let me commend

you for having this hearing and, of course, also to commend the

staff on both sides of the aisle for all the work they did, of course,

during the holidays when lots of the Members were back enjoying

the Christmas holidays.

The hearings, of course, today are focusing on destruction of documents, an allegation that will carry serious implications should

deliberate wrongdoing be discovered. I think I am not alone. I

think all of my colleagues would agree that a person will fare better in cooperating with this subcommittee and the full committee’s

investigation as opposed to subverting our efforts. We need to have

16

answers for investors, and we need to develop transparency on this

question of the auditing of large corporations. Florida State pension fund incurred a loss to the tune of $300

million. Individual constituents have called me to render their complaints at losing their retirement savings from their 401(k) accounts. And I promised, as my colleagues on both sides have, to do

everything possible to get to the bottom of this matter and prevent

a reoccurrence. So I look forward to the testimony of our witnesses.

It is my understanding that a memo from February 2001 detailed

Andersen’s concern with Enron and whether that company’s dealing would harm Andersen’s reputation. I think I can say that Andersen now has wounded its own reputation. It is self-inflicted. So

if they are here today, it is their own fault. Mr. David Duncan, the

former Andersen partner in charge, is alleged to have ordered the

expedited destruction of Enron-related documents. One of our witnesses, a counsel for Arthur Andersen, Ms. Temple, prior to the

document destruction e-mailed a, ‘‘reminder,’’ of Andersen’s document retention policy. So is Mr. Duncan being made a scapegoat

here this morning, for it sees maybe an explicit order was given to

destroy a document, yet backsides were covered through the, ‘‘reminder’’ e-mail on document retention.

This is kind of like the code word—the code red instruction that

Colonel Jessup used in A Few Good Men, that movie, as you will

remember. When he issued the code red, it was a term that did not

appear in any manual or standard operating procedure, yet carried

specific actions once it was given.

So, Mr. Chairman, I think this hearing should give us an opportunity to get to the bottom of this destruction of documents, and

I might say, the chairman of our full committee has also talked

about transparency in auditing procedures. I would like to note

that I chair the committee that has jurisdiction over the Financial

Accounting Standards Board, and I would like to know personally

if our accounting standards are responsive to today’s challenge

posed by the increasingly complex business and financial transactions of companies like Enron. Are there other companies doing

this same procedure with these limited partnerships, sheltering of

the debt? So we need to look at these standards and to assure our

constituents and the American public that there is transparency

and honesty dealing with these accounting procedures.

So, again, I commend you and the full chairman of the staff for

the work you are doing.

Mr. GREENWOOD. The Chair thanks the gentleman from Florida

and recognizes for the purposes of an opening statement for 3 minutes the gentleman from Ohio Mr. Strickland.

Mr. STRICKLAND. Thank you, Mr. Chairman, and I would like to

submit a longer opening statement, and I will be short.

Mr. GREENWOOD. Without objection, the gentleman’s statement

will be a part of the record.

Mr. STRICKLAND. It isn’t clear exactly when the collapse of Enron

began, but on October 16, 2001, Enron announced its third-quarter

results, which included a loss of more than $600 million, and disclosures of a $1.2 billion reduction in shareholder equity. The next

day, October 17, the SEC opened an informal inquiry into Enron’s

business practices, and on October 22, Enron publicly acknowlVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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edged the SEC’s inquiry was under way. Only 1 day later, the Andersen/Enron audit managers met, and the team was instructed to

ensure that they are in compliance with the firm’s, ‘‘documentation

retention and destruction policies.’’ Subsequently and alarmingly, an estimated thousands of Enronrelated documents were destroyed. This destruction of documents

takes place after the SEC began its inquiry. Furthermore, the destruction of documents continues not for a few hours or for a few

days, but I understand it wasn’t until November 9, 2001, that an

e-mail was sent to the Enron audit team calling for, ‘‘no more

shredding.’’ This behavior by Enron’s accounting firm is brazen, outrageous,

and completely unacceptable. In fact, the document shredding may

render it impossible for this committee, the other House and Senate committees, the SEC and the Department of Justice to know

exactly who and what led to Enron’s collapse.

Andersen was responsible for auditing Enron’s books and recognizing the company’s problems. Not only did the accounting firm

neglect to do its job, but it may have made it impossible for the

SEC to do its job because it continued to destroy documents relevant to the agency’s investigation.

When Enron declared bankruptcy last month, thousands of workers found themselves unemployed, and investors, including many of

those same unemployed workers, lost billions of dollars when

Enron’s stock fell. As workers and investors suffered the consequences of Enron’s apparently fraudulent behavior, and the company’s executives, embarrassed perhaps, but rich, walk away with

millions of dollars, the employees walk away with little or nothing.

It is imperative that we uncover what happened and that we

take steps to see that those who are responsible are punished, and

having worked in a maximum security prison before I came to this

institution, I am tired of white collar crime being treated differently than other kinds of crime in this country, and if crimes

have been committed, it is my fervent hope that those responsible

will see the inside of a jail cell. I yield back my time.

Mr. GREENWOOD. The Chair thanks the gentleman from Ohio

and recognizes the gentleman from North Carolina Mr. Burr for 3

minutes for the purposes of an opening statement.

Mr. BURR. Thank you, Mr. Chairman.

I don’t think anyone at this hearing is happy with the reasons

for why we are here today, but today in this exercise we must

faithfully discharge our duties to uncover that which has been covered up. We must begin to publicly uncover and inquire of the actions taken by Arthur Andersen in its work on behalf of the Enron

Corporation. Why did Andersen engage in what is alleged to be a

large-scale destruction of documents related to Enron’s financial

well-being?

We know from testimony given to our committees as early as August that Andersen had already convened a working group to review Enron’s third-quarter charges, charges in its October 16 press

release that revealed a loss of $618 million and a reduction in

shareholder equity of approximately $1.2 billion due to charges associated with various partnerships. We know that Ms. Temple was

concerned enough about misstatements in the third-quarter press

18

release, that she suggested to Mr. Duncan that portions of his

memo for company files be deleted so that it does not suggest that

Andersen concluded the release was misleading.

Why is this important? Because it appears that some at Andersen were seeking to avoid a similar outcome to what had happened

with their client Sunbeam in the middle of the last year. As it was

reported by The Wall Street Journal in November, according to the

SEC’s May settlement order with Sunbeam, Andersen auditors had

routinely dismissed so many violations of general accepted accounting procedures as immaterial, that they eventually piled up to

produce significant distortions in Sunbeam’s financial statements,

making the barely solvent consumer products maker look handsomely profitable. Sunbeam filed for Chapter 11 bankruptcy protection this past February 2001.

This article went on to say that under generally accepted accounting procedures, misstatements aren’t immaterial simply because they fall beneath the numerical threshold. According to an

SEC accounting bulletin, under certain circumstances, the SEC

says intentional immaterial misstatements are unlawful. One reason is that when immaterial statements are combined with other

misstatements, they can, according to the SEC bulletin, render the

financial statement taken as a whole to be materially misleading.

What I hope to come away from this hearing and this phase—

and I emphasize ‘‘this phase’’—of our investigation is were documents destroyed by Andersen that would have proven that an—

that they had made intentionally immaterial statements as related

to Enron? When did Andersen hire outside counsel to represent

them, and did the document destruction start, continue, or accelerate once they received that outside legal advice? Were Andersen

officials aware of an SEC investigation, but did little to stop the destruction of documents?

Mr. Chairman, the chore before us today will require some hard

work and heavy lifting. Before I go any further, I want to commend

the staffs on both sides of the aisle who gave up nights, weekends

and holidays to make sure that we were ready to start this investigation today. It has been said that hard work will reveal character of those involved in the task at hand. Some will turn up their

sleeves, some will turn up their nose, and some just won’t turn up

at all. I look forward to working with those who choose to turn up

their sleeves in this endeavor to uncover that which has been covered up, and I yield back.

Mr. GREENWOOD. The Chair thanks the gentleman from North

Carolina and recognizes for 3 minutes the gentlelady from Colorado

for the purpose of making an opening statement.

Ms. DEGETTE. Thank you, Mr. Chairman. Before I make my

statement, I would like to ask unanimous consent that all the full

committee members who are here but not being allowed to make

opening statements be allowed to submit their statements for the

record.

Mr. GREENWOOD. Without objection, the opening statements from

the full committees members present who are not members of the

subcommittee will be incorporated into the record.

Ms. DEGETTE. Thank you, Mr. Chairman.

19

Mr. Chairman, by now we are all painfully familiar with the

events that led to the collapse of Enron. When Enron reported a

significant financial loss more than a year ago, we soon learned

that it had inflated its earnings by straying from generally accepted accounting principles. Subsequently, the SEC opened investigations into Enron and later Arthur Andersen. This whole debacle

has shown Congress and the SEC that we will need to, among

other things, strengthen the laws which protect investors and build

stronger protections to prevent the inevitable conflict between companies that audit and provide other services to their clients.

Today, though, the issue is focused specifically on the destruction

of Enron-related documents by Arthur Andersen employees. This

panel will need to help us understand exactly what Andersen’s document destruction protocol is, which documents should be destroyed under it and the conditions that govern its use.

Specific actions were taken—that were taken by Andersen employees are also in need of scrutiny. Through press accounts and

through staff, we have learned that an internal memo was sent to

David Duncan, who is here today but apparently not going to testify, the head of Andersen’s Houston branch, from Nancy Temple,

a lawyer in the company’s Chicago headquarters. The memo reportedly detailed Andersen’s standard document destruction and retention protocol. Five days later Enron received a letter of inquiry

from the SEC, initiated after Enron reported significant changes to

its financial standing. According to press accounts, despite the SEC

inquiry into one of its clients, Andersen had begun to and continued to shred documents related to its business dealings with Enron

and did not make any change to that policy, even after it was—it

received a letter of inquiry from the SEC.

I frankly don’t want to leave this room today until I learn two

things. First, what exactly was the document preservation protocol

at Andersen in this instance, and what has been done in past similar instances as some of my colleagues have alluded to? Second, the

exact time line of who knew what when and the implications of this

employee knowledge on the destruction of documents.

The committee’s investigation has thus far discovered that implementation of Andersen’s document destruction protocol may have

been ambiguous. It was generally understood by Andersen employees that the policy was not applied uniformly, and no particular

manager on any level oversaw compliance with the policy. We need

to find out the implication of that matter.

We also need to find out whether senior members of Andersen

were aware of Enron’s potential accounting problems possibly in

August of 2001.

I will be asking the panelists a number of questions around these

issues. Mr. Chairman, I congratulate you in calling this hearing

today and look forward to learning the answers to these questions.

Mr. GREENWOOD. The Chair thanks the gentlelady from Colorado

and recognizes for 3 minutes for the purpose of an opening statement the gentleman from Kentucky Mr. Whitfield.

Mr. WHITFIELD. Mr. Chairman, thank you very much.

This is really a sad day for our country, and I know that there

isn’t anyone on this committee that is particularly excited about

this endeavor. This is the first of many hearings that will be held

20

on this subject, and our goal, of course, is to find out the truth. We

know for a fact that 4,000 some-odd people have lost jobs. We know

for a fact that stockholders from around the country have lost most

of their equity in this company. We know for a fact that employees—loyal employees of the company have had their pension plans

eliminated, the value of their 401(k)s eliminated. And we know for

a fact that Sherron Watkins in her letter to Mr. Lay back in August pointed out—this is quite sad, I think—that—it said, employees question our accounting proprietary consistently and constantly.

I have even heard one manager-level employee from the principal

investments group say, I know it would be devastating to all of us,

but I wish we would get caught. We are such a crooked company.

And then one of the real advocates for Enron, Mr. David Fleischer,

an analyst at Goldman Sachs, had told Mr. Lay at a financial analyst meeting, there is an appearance that you are hiding something. And he went on to say, they have engaged in a number of

transactions that one wonders about and that are hard to understand. They have not been as forthcoming in explaining them, but,

he said, I am still recommending the stock, because I don’t think

accountants and auditors would have allowed total shenanigans.

And in the absence of total shenanigans going on at this company,

there is tremendous value here.

So we want to get to the facts. We want to discover the truth.

And as we go forward, Congress is going to have to come up and

come forward with some solutions to prevent this type of activity

in the future, look at conflicts between one entity serving as a consultant and as an auditor, and try to determine how the Director

of the Division of Investment at the SEC in 1997 provided an exemption from the Foreign Investment Act of 1940 for Enron alone.

Do we need pension reform? Why did the board of directors of

Enron waive their ethical standards for corporate executives to

enter into partnerships with Enron for the purpose—or at least

what happened was hiding debt? All of these questions must be answered, and as I said, it is a sad day, and many of us do have constituents impacted by this. And when you think of the employees

of this company and their loyalty to this company being totally

wiped out while executives walked off with millions and millions

and millions of dollars, it really is a sad day, and I want to thank

the chairman for having this hearing.

Mr. GREENWOOD. The Chair thanks the gentleman from Kentucky and recognizes the gentleman from Louisiana, Mr. John.

Mr. JOHN. Mr. Chairman, thank you very much for holding this

hearing. This is a very important topic, and what I envision is

going to be a series of very in-depth, very lengthy and very serious

hearings over the next few months, several months, engaging the

full committee also, on what went wrong with the energy giant

Enron. The hearing today focuses on what I believe is a first appropriate step, and that, of course, is document shredding. I believe it

is really important for us to start here to understand and uncover

what exactly went wrong.

I think the work of this committee is very clear. First, it is to

get the testimony from individuals so that we can understand and

uncover the facts; second, determine if there were criminal activiVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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ties that were engaged in; and third, to seek out the appropriate—

appropriate, if necessary, legislative solutions affecting accounting,

managerial and corporate relationships so this tragedy will never

happen again in America.

I will have a more in-depth and comprehensive opening statement at the full committee hearing next week, which will be more

global in its reach, and I look forward to the testimony today from

the witnesses. I thank the chairman for his——

Chairman TAUZIN. Would the gentleman yield?

Mr. JOHN. Sure. Yes, I will yield to the chairman.

Chairman TAUZIN. The Chair feels compelled to clarify that with

the new announcements, disclosures of potential record destruction

at Enron Corporation itself, that the full committee hearing is

scheduled for February 6. If you will all put that on your calendar.

The investigators will use the time in between to examine thoroughly those new allegations of Enron destruction. I thank the gentleman for yielding.

Mr. JOHN. Thank you, and I yield back to the chairman.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from New Hampshire, Mr. Bass, for an opening statement.

Mr. BASS. Thank you very much, Mr. Chairman. And has been

stated before, the purpose of the hearing is to deal with the very

specific issue of shredding of documents. Hopefully the—this hearing will lead to broader issues that will be addressed by Mr.

Stearn’s subcommittee, perhaps the full committee, dealing with

issues of accounting practices and changes in the regulatory structure that govern the proper disclosure and honest, trustworthy disclosure of financial information in the corporate world.

As my friend from Kentucky said, this is going to be a—to a

great extent—a very sad process that we go through here for the

4,000 or so people whose lives have been shredded by the actions

of a few who may have acted in a certainly unethical, if not illegal,

manner in covering up what may be one of the biggest corporate

scandals in recent American history.

I hope as a result of this hearing, and hearings that will follow,

that we can to some measure restore a feeling of confidence in the

integrity of not only accounting practices, but in business reporting

practices which will have a salutary impact on the capital markets

in this country, because this is not a good time in this country to

have this kind of an issue arise.

We are economically fragile right now. The last thing we need to

have is to have investors lose confidence in the—in the nature and

structure of corporations and business and to have allegations,

such as the ones that will be discussed and investigated over the

next few weeks, prove to be true.

So I want to thank my colleagues for helping bring this matter

out and bring a resolution, because if we don’t, the implications are

going to be not only significant to the business world but to the

economy and this Nation and the world. I yield back.

Mr. GREENWOOD. The Chair thanks the gentleman from New

Hampshire and recognizes the gentleman from Illinois, Mr. Rush,

for an opening statement.

22

Mr. RUSH. Thank you, Mr. Chairman, for holding today’s hearing

on the destruction of Enron-related documents. Today, many thousands of Americans have awaked not knowing how they will survive today or tomorrow.

At the same time, several high-level executives are waking up

with their economic futures in top-notch shape. For them, the collapse of Enron may be little more than a financial speed bump.

Today’s hearing will be an important part in answering the questions asked by many Americans. That question is simply: Why was

corporate misconduct and malfeasance allowed to happen? Why

was Enron’s arrogance and avarice allowed to trample the future

of Enron’s employees?

Enron, which was once the seventh largest company in America,

has wreaked havoc on the lives of thousands of former employees

and stockholders. Furthermore, given the major role that Enron

played in the energy industry, the ripple effects will be felt

throughout our economy for some time to come. Other Americans

will pay for Enron’s corporate greed.

Simply put, this is indeed a financial catastrophe. One economist

stated it perfectly when he said the following, and I quote: You can

look at the system of concentric circles from management to directors and the audit committee to regulators and analysts and so

forth and so forth. This was like a nuclear meltdown where the

core was melted through all layers.

Today, as we begin to look at the first of many layers of that

meltdown, I am hopeful that we will be able to conduct a straightforward discussion. That discussion should allow us to move on

that core issue that asks: What deliberate, negligent, or reckless

actions taken by Enron itself led to the financial and personal ruin

of thousands of unsuspecting shareholders?

That said, I will remind the witnesses of the importance of today’s hearing, which is not about excuses, nor is it about

fingerpointing done in the hopes of getting off the hook. Instead,

this hearing is about those thousands of workers who were left to

perish in this financial meltdown while those at the controls ran

for safe cover. And ultimately this hearing is an important step in

making sure that the American public is shielded from this sort of

travesty in the future.

And, Mr. Chairman, last I want to say that I hope that my gut

suspicions are not accurate this morning, and I hope that although

the hearing is aimed at the actions, possible criminal actions of Arthur Andersen, I hope that this hearing is not about letting Enron

off the hook and distracting and diverting the attention of the actions of the Enron executives and using others an scapegoats for

their actions.

Thank you, and I yield back the balance of my time.

[The prepared statement of Hon. Bobby L. Rush follows:]

PREPARED STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF ILLINOIS

Today, thousands of Enron employees awoke not knowing how they will survive

today or tomorrow. At the same time, several high level executives awoke with their

economic futures in good condition. For them, the collapse of Enron may be little

more than a financial speed bump.

23

Today’s hearing will be an important part in beginning to answer the questions

asked by millions of Americans. Those questions are simply: Why was this corporate

misconduct and negligence allowed to occur? Why were Enron’s top-level managers

allowed to arrogantly and greedily trample on the future of their employees?

Enron, once the seventh largest company in America, has wreaked havoc on the

lives of thousands of their employees and stockholders. Furthermore, given the

major role that Enron played in the energy industry, the ripple effects of their collapse are will be felt throughout our economy for some time to come. Americans will

pay for Enron’s corporate greed. This is a financial catastrophe.

One economist stated it perfectly when he said the following: ‘‘You can look at the

Enron collapse as a system of concentric circles from management to directors, and

the audit committee to regulators. This was like a nuclear meltdown where the core

was melted through all layers.’’

As we begin to look at the first of many layers of that meltdown, I am hopeful

that we will be able to conduct a straight-forward discussion. I would remind the

witnesses of the importance of today’s hearing. It is not about excuses and finger

pointing done in the hopes of getting off the hook. It is about those thousands of

workers who were left to perish in this financial meltdown, while those at the controls ran for safe cover. The hearing is a critical first step in making sure that the

American public is forever shielded from this sort of travesty.

Mr. GREENWOOD. I thank the gentleman. Mr. Rush, if you want

to see us investigate the Enron Corporation, I suggest you fasten

your seatbelt.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. RICHARD BURR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NORTH CAROLINA

Mr. Chairman, I don’t think anyone at this hearing is happy with the reasons for

which we must be here today. But today, in this exercise—we must faithfully discharge our duties to uncover that which has been covered up.

We must begin to publicly uncover and inquire of the actions taken by Arthur Andersen in its work on behalf of the Enron Corporation.

Why did Andersen engage in what is alleged to be a large scale destruction of documents related to Enron’s financial well-being? We know from testimony given to

our Committee’s as early as August, that Andersen had already convened a working

group to review Enron’s Third Quarter charges, charges that in its Oct 16 press release revealed a loss of $618 MILLION and a reduction in shareholder equity of approximately $1.2 BILLION due to charges associated with various partnerships. We

know that Ms. Temple was concerned enough about misstatements in the Third

Quarter press release that she suggested to Mr. Duncan that portions of his memo

for company files be deleted so that it does not suggest that ‘‘[Andersen has] concluded the release is misleading.’’ Why is this important?

Because it appears that some at Andersen were seeking to avoid a similar outcome to what happened with their client Sunbeam in the middle of last year.

As it was reported by the Wall Street Journal in November, ‘‘according to the

SEC’s May settlement order with Sunbeam, Andersen auditors had routinely dismissed so many violations of Generally Accepted Accounting Procedures (GAAP) as

immaterial that they eventually piled up to produce significant distortions in Sunbeam’s financial statements, making the barely solvent consumer-products maker

look handsomely profitable. Sunbeam filed for Chapter 11 bankruptcy-court protection this past February (2001).’’

The article went on to say, ‘‘Under GAAP, misstatements aren’t immaterial simply because they fall beneath a numerical threshold, according to an SEC accounting bulletin. Under certain circumstances, the SEC says intentional immaterial

misstatements are unlawful. One reason is that when immaterial misstatements are

combined with other misstatements, they can (according to the SEC bulletin):

‘render the financial statements taken as a whole to be materially misleading.’ ’’

What I hope to come away with from this hearing and this phase of our investigation is:

• Were documents destroyed by Andersen that would have proved they had intentionally made immaterial statements as they related to Enron?

• When did Andersen hire outside counsel to represent them as it pertained to their

client Enron?

• Were Andersen officials aware of an SEC investigation yet did nothing to stop the

destruction of documents?

24

Mr. Chairman, the chore before will require some hard work and heavy lifting.

Before I go any further, I want to commend the staffs on both sides of the aisle who

sacrificed nights, weekends and holidays to get this investigation to where we are

today. It has been said that hard work will reveal the character of those involved

in the task at hand. Some will turn up their sleeves, some will turn up their noses,

and some just won’t turn up at all. I look forward to working with those who chose

to turn up their sleeves in this endeavor to uncover that which has been covered

up.

PREPARED STATEMENT OF HON. ROBERT EHRLICH, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MARYLAND

Thank you, Mr. Chairman. Mr. Chairman, the failure of any business is deeply

disappointing as investors are stripped of wealth and worker’s incomes, security,

and future dreams are altered. Employees and their families bear the brunt of this

failure with many experiencing a profound sense of loss, anger, and shame. As the

failure ripples through related enterprises, rocking businesses and communities—

disillusionment and loss is left in its wake. Unfortunately, the tempest of a failed

enterprise is in direct proportion to its size, and I applaud your conducting this inquiry of Enron, once our nation’s 7th largest company.

On December 2, 2001, energy-giant Enron shocked the energy and financial communities by filing for Chapter 11 bankruptcy. Enron is the largest corporation in

American history to file for bankruptcy. In addition to investor losses, the sudden

and dramatic fall in Enron’s stock price has stripped the retirement accounts of

many current and retired Enron employees, whose savings were largely based on

Enron stock.

Mr. Chairman, my colleagues and I support the committee’s efforts to discover

whether or not Enron engaged in illegal business practices. We want to understand

why executives received large bonuses and compensation during Enron’s financial

decline while other employees were prevented from selling their stock and lost their

entire life savings. We want to understand how such a large corporation was able

to hide its debt and collapse without any warning from responsible regulatory agencies and auditors. There are many questions to be answered: Did Enron’s use of a

large number of partnerships contribute to its collapse? Was there a failure on the

performance of federal regulators? Did federal regulators have authority to adequately oversee the complex commodity trading and financial transactions—the

foundation of Enron’s rapid growth? Through your guidance, these and many other

questions will be answered.

Further, I am troubled by the performance of one of our country’s most preeminent accounting firms and auditors. Strong, diligent, and effective accounting

and auditing practices are the foundation of capitalism and fundamental to maintaining investor and lender confidence in our capital markets. The Enron collapse

has brought a crisis of confidence in the accounting profession and changes are required to regain the public’s trust. Deceptive accounting and auditing practices must

not go unchecked.

Mr. Chairman, I applaud your efforts to review accounting standards, practices,

and services and their effects in the Enron collapse. If there are flaws in the regulatory system, then the laws must be changed to guarantee that a debacle of this

magnitude will never happen again. I agree with President Bush’s State of the

Union statement that through stricter accounting standards and tougher disclosure

requirements, corporate America must be made more accountable to employees and

shareholders and held to the highest standards of conduct. This must be an era of

corporate responsibility.

The American people know that deliberate destruction of evidence by an employee

in an ongoing investigation brings its own State and Federal criminal and civil penalties as does failure to comply with SEC regulations and directives. Americans

know that our court system will resolve the many lawsuits seeking justice and compensation. Illegal and duplicitous actions should not and cannot be tolerated. Americans know that some may attempt to use this failure and business scandal that has

hurt so many as a tool for petty politics and opinion manipulation. We owe those

who have worked hard, played by the rules, and have lost so much a strong, bipartisan investigation, or risk victimizing them a second time.

Mr. Chairman, your efforts to promote dependable, affordable, and environmentally-sound production and distribution of energy are well known. Opponents

may try to confuse deregulation with illegal and duplicitous actions. I continue to

believe that the competitive market place, protected from potential abuse of power

through proper oversight and legal protections, is the foundation for a strong econVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 E:\HEARINGS\77569 pfrm09 PsN: 77569
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omy, the basis for national security, and provides the best products and services to

our citizens. I agree with President Bush that it is critical, particular in the energy

market, to provide Americans the right of choice with regard to products and services.

Finally, this committee’s investigation into Enron’s business practices will prevent

future business collapses of this nature, determine the effectiveness of Federal oversight and regulatory agencies, and make clear whether changes to Federal law are

necessary to protect employees and shareholders. We must and will get to the bottom of Enron’s failure and work to ensure it never happens again.

Thank you Mr. Chairman.

PREPARED STATEMENT OF HON. PAUL E. GILLMOR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

Thank you Mr. Chairman, for giving us the opportunity to explore the recent

events with regard to the destruction of Enron-related documents by Andersen personnel. I am also glad to see the witnesses from Andersen and look forward to hearing their testimony.

Over the past few years, like many of the members here, I have distributed a

questionnaire to my constituents in an effort seek further input regarding the issues

of day. Of note, one of my questions inquires whether members of a household invested in stocks or mutual funds. Here lies my motivation and concern. Of those

that responded to this year’s survey, 83% answered ‘‘yes.’’ With the number of private shareholders on the rise, it is important that as we listen to Andersen’s document retention and destruction policies carefully, keeping in mind the actions of

those in corporate management. More importantly, their actions should never come

at the expense of the shareholder. I look forward to further congressional oversight

regarding this issue.

PREPARED STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MASSACHUSETTS

Thank you, Mr. Chairman, for extending to me the courtesy of participating in

today’s hearing.

I think it is outrageous that the same executives who may be responsible for the

destruction of workers’ pensions—and the destruction of documents that might

prove their guilt—are currently protected by Congress when defrauded worker’s ac- tually try to recover their life savings. But, sadly, it is true. Why? Because in 1995,

Arthur Anderson and the other big accounting firms succeeded in lobbying Congress

to strictly limit their future liability for securities fraud. That bill passed over the

President’s veto as part of the Republican Contract with America. And today, we

are seeing the grim results—Arthur Anderson can no longer be held jointly and severally liable when a court has found them guilty of securities fraud. I believe that

this ill-advised law has directly contributed to a rising tide of accounting failures,

culminating in the Enron-Arthur Anderson fiasco. The types of internal checks and

balances that a healthy concern about litigation risk used to create within each accounting firm has been undermined. The many honest and decent people who want

to do the right thing get overruled, and the increasing revenues coming from consulting and non-audit businesses put growing pressure to sign off on the ‘‘cooked

books’’ of major clients.

Yesterday, I introduced legislation aimed helping to address this problem. This

bill would, among other things, require auditors to retain copies of all documents

generated during the course of an audit for a period of four years and establish

criminal penalties of up to ten years imprisonment for auditors that knowingly and

willfully destroy such documents. The bill also would reform the liability standards

applicable to accountants in securities fraud cases and provide an exemption from

the ‘‘Catch 22’’ discovery stay that allows accounting firms to escape accountability

for their actions. I look forward to working with Members on this and other reforms.

Clearly, we have a system that is very broken, and we need to work together to fix

it.

Today’s hearing is focused on the disturbing reports that employees of Arthur Anderson have destroyed documents in connection with the Enron debacle. I think it’s

appalling that Anderson CEO Joseph Berardino has declined the Subcommittee’s invitation to testify on this matter, when he was somehow able to make an appearance on Meet the Press last Sunday. I have also read that Mr. Berardino has agreed

to appear before the House Financial Services Committee on February 4th. If Mr.

Berardino can appear to answer questions on national television and before other

26

Committees, it seems to me that he should be able to appear before this Subcommittee so that we can get to the bottom of why his firm destroyed documents

being sought by the SEC, by the Justice Department, and by defrauded workers and

investors.

Now, I have many questions about the underlying transactions and investments

whose accounting treatment helped to bring Enron to bankruptcy, but I understand

that this is not the subject of today’s hearing. I would merely hope, Mr. Chairman,

that we will have a chance to thoroughly examine Enron’s investments in

broadband, its energy trading operations, and its derivatives and other structured

financings in the detail needed to understand just what happened here and what

lessons we can learn from this massive fraud and misbehavior. That will require

more than a single hearing of all of the principals to do properly.

Thanks again, Mr. Chairman, for allowing me to participate in today’s hearing.

I look forward to the testimony.

Mr. GREENWOOD. The Chair will now call the first panel. Mr.

Duncan, will you please come forward.

Please be seated right there. Thank you, sir.

Good morning, Mr. Duncan.

Mr. DUNCAN. Good morning.

Mr. GREENWOOD. Mr. Duncan is here with us today under subpoena. To date, Mr. Duncan has cooperated with this committee in

our search for the facts by submitting to an interview last week

with our committee investigator that lasted more than 4 hours. Yet

we received a letter from his counsel yesterday stating that Mr.

Duncan authorized his counsel to advise the committee that he

will, quote, rely on his constitutional right not to testify, close

quote.

I believe that this privilege should be personally exercised before

the Members, and that is why we have requested Mr. Duncan’s appearance here today, and request that he reconsider.

Mr. Duncan, you are aware that the committee is holding an investigative hearing, and, in doing so, we have the practice of taking

testimony under oath. Do you have objection to testifying under

oath?

Mr. DUNCAN. No, sir.

Mr. GREENWOOD. Thank you. The Chair also advises you that

under the rules of the House and the rules of the committee, you

are entitled to be advised by counsel. Do you desire to be advised

by counsel during your testimony today?

Mr. DUNCAN. Yes, sir.

Mr. GREENWOOD. Okay. In that case, would you please rise and

raise your right hand and I will swear you in.

[Witness sworn.]

Mr. GREENWOOD. Thank you, Mr. Duncan. You are now under

oath and you may give a 5-minute summary of your written testimony if you choose to.

TESTIMONY OF DAVID DUNCAN, FORMER ANDERSEN

PARTNER-IN-CHARGE OF ENRON ENGAGEMENT

Mr. DUNCAN. I have no summary, sir.

Mr. GREENWOOD. Okay.

The Chair will recognize himself for questioning. Mr. Duncan,

Enron robbed the bank. Arthur Andersen provided the getaway

car, and they say that you were at the wheel.

I have a specific question for you, Mr. Duncan. You were fired

by Anderson last week for orchestrating an expedited effort among

27

the Andersen-Enron engagement team to destroy thousands of

paper documents and electronic files relating to the Enron matter

after learning of an inquiry by the Securities and Exchange Commission into Enron’s complex financial transactions.

Did you give an order to destroy documents in an attempt to subvert governmental investigations into Enron’s financial collapse,

and, if so, did you do so at the direction or suggestion of anyone

at Anderson or at Enron?

Mr. DUNCAN. Mr. Chairman, I would like to answer the committee’s questions, but on the advice of my counsel I respectfully decline to answer the question based on the protection afforded me

under the Constitution of the United States.

Mr. GREENWOOD. Well, let me be clear, Mr. Duncan. Are you refusing to answer the question on the basis of the protections afforded to you under the fifth amendment to the United States Constitution?

Mr. DUNCAN. Again, on the advice of my counsel, I respectfully

decline to answer the question based on the protection afforded me

under the United States Constitution.

Mr. GREENWOOD. Will you invoke your fifth amendment rights in

response to all of our questions here today?

Mr. DUNCAN. Respectfully, that will be my response to all of your

questions.

Mr. GREENWOOD. I am disappointed to hear that, but it is therefore the Chair’s intention to dismiss the witness.

Mr. Duncan, we thank you for your attendance today and your

respect for this committee’s process. You are dismissed and perhaps we will see you on another occasion.

Mr. DUNCAN. Yes, sir.

Mr. GREENWOOD. I continue on my time.

Mr. DINGELL. Mr. Chairman, may I raise a point of inquiry at

this time?

Mr. GREENWOOD. The gentleman is recognized.

Mr. DINGELL. I assume the witness is being excused but may be

recalled at a later time; is that correct?

Mr. GREENWOOD. That is correct.

Mr. DINGELL. And that the witness remains subject to the process of the committee, and that if the committee’s need is such, that

we will be recalling him; is that correct?

Mr. GREENWOOD. That is correct.

Mr. DINGELL. Very well. I thank you, Mr. Chairman.

Mr. GREENWOOD. Does the ranking member of the subcommittee

wish to be recognized?

Mr. DEUTSCH. Mr. Chair, I think also, just in terms of clarification, that we have the ability to grant immunity, but at this time

we have chosen not to, based upon our working with the Justice

Department as well as the SEC.

Mr. GREENWOOD. Mr. Duncan’s attorney has repeatedly made it

clear that Mr. Duncan would have testified this morning had the

committee been willing to grant immunity to him. We have chosen

not to do that. I think that would be improper, certainly at this

time, in view of the Justice Department’s investigation.

Mr. DEUTSCH. I want to make it clear that that is a bipartisan

agreement in that respect that the investigation is continuing.

28

Chairman TAUZIN. Would the gentleman yield? I also wanted to

say clearly on the record that our joint bipartisan team of investigators is working on a daily basis in consultation with Justice Department officials. The decisions we make regarding granting any

right of immunity to testify will be made in terms of that consultative proceeding with the Justice Department.

I thank the chairman.

Mr. GREENWOOD. The Chair thanks the gentleman.

Continuing on my time, I think it is very important to lay out

for the subcommittee, our panel, and our audience our apparent

understanding of Mr. Duncan’s recollection of relevant events

based on the committee counsel’s interview of Mr. Duncan last

week.

It is my understanding that Mr. Duncan said that during the

September and October time period, he participated in frequent

meetings and teleconferences with a group of senior-level Andersen

partners in Houston and Chicago to discuss matters relating to the

Enron account. That group included Ms. Nancy Temple from the

legal group and Mr. Michael Odom, the audit and practice director,

both of whom are testifying today.

The consultation group which was created in late August or early

September was fluid in membership and was formed in response to

growing concerns over the accounting for Enron special purpose entities.

Specifically, Mr. Duncan said that the group was formed at the

suggestion of Mr. Odom and himself in response to, one, Sherron

Watkins’ allegations of accounting improprieties on the Enron Raptor and LJM transactions; two, the $1 billion accounting error

discovered in August by Enron and Andersen with respect to the

accounting for the Raptor entities; and, three, the rapidly declining

stock price of the Enron merchant assets transferred to the Raptor

partnerships which made it look like there would be a significant

write-down by Enron.

During these conference calls, prior to October 12, 2001, Mr.

Duncan recalls receiving advice from Ms. Temple with respect to

the proper documentation of Andersen’s evolving position with respect to the correct accounting for the Raptor transactions.

Also prior to receiving Ms. Temple’s October 12 e-mail regarding

compliance with Andersen’s documentation retention policy, Mr.

Duncan recalls Ms. Temple on one or two of these three group conference calls asking him, quote, ‘‘How are you on compliance with

the document retention policy on Enron?’’ he said that his response

to her was, ‘‘At best, irregular.’’

Mr. Duncan then received Ms. Temple’s October 12 e-mail forwarded from Mr. Odom with the note ‘‘more help.’’ He did not know

what Mr. Odom meant by that phrase, but he viewed Ms. Temple’s

e-mail as a follow-up to the question she had posed to him orally

about compliance with the retention policy, and as advice from his

attorney to ensure that the entire Enron audit engagement team

was in compliance with that policy.

He added that he had never before during his lengthy tenure at

Andersen been asked about compliance with the retention policy,

nor had he ever received such an e-mail about ensuring compliance

with that policy from anyone in Andersen’s legal group.

29

Mr. Duncan does not recall the precise date, but sometime after

October 12, 2001, Mr. Duncan met with his top Enron audit partners, Mr. Tom Bauer, Ms. Deborah Cash, and Mr. Roger Willard,

to discuss the advice that he had received from Ms. Temple. According to Mr. Duncan, the meeting participants concluded that

they should call a meeting of all of the Enron audit managers to

discuss timely compliance with the retention policy.

Mr. Duncan does not recall when this meeting occurred, but does

not dispute that his secretary sent out an e-mail on October 23,

2001, calling an urgent meeting of the Enron managers for later

that same day.

Just days earlier, on either Friday, October 19, or Saturday, October 20, Mr. Duncan had first learned of the SEC informal inquiry

of Enron. He recalled that he had discussions with the Andersen

Consultation Group about the SEC development over the weekend,

including Ms. Temple. He also recalled that on October 22, he and

other Andersen engagement team members met with Enron chief

accounting officer, Rick Causey, to discuss the SEC inquiry.

Duncan said that Causey requested Andersen’s assistance in creating documents to explain the related party transactions to the

SEC. Mr. Duncan said that at the meeting he called with all of the

Andersen audit managers on the Enron account, whenever it may

have occurred, he advised them of the importance of compliance

with the document retention policy, and handed out copies of the

policy to the participants.

Mr. Duncan said that he observed individuals on the engagement

team actively complying with the firm’s document policies by

shredding documents, and that the activity continued up until November 9 when he received a voice-mail from Ms. Temple ordering

the preservation of all Enron-related documents.

Mr. Duncan also said that he destroyed some of his own Enronrelated documents in an effort to comply with Andersen’s document

retention and destruction policies.

Again, that is my understanding of Mr. Duncan’s interview with

committee staff. Mr. Deutsch, would you agree that I have characterized our current understanding of Mr. Duncan’s recollection of

relevant events accurately?

Mr. DEUTSCH. I would.

Mr. GREENWOOD. Thank you. With that, I would call the second

panel of witnesses to the table.

Mr. DINGELL. Mr. Chairman, while the witnesses are coming forward, I would like to request to proceed out of order for about 1

minute.

Mr. GREENWOOD. Without objection, the gentleman, Mr. Dingell,

will be recognized to speak out of order for 1 minute.

Mr. DINGELL. I assure you with thanks, Mr. Chairman, you have

nothing to fear from this request.

I have the pleasure to introduce an old friend to this committee

who is known and loved by us all, Mr. Jack Valenti who is in the

room.

And I have also the pleasure to introduce a new friend of the

committee, somebody that you have been watching, I think with

great enjoyment, in one of the most popular of the shows, The Sopranos. That is Ms. Lorraine Bracco, who is here present with us

30

this morning as a part of an effort we are making to bring forth

information with regard to the inadequate treatment of women

managers in the marketplace and discrimination against them.

So we thank her for that, and I am pleased to welcome her. And

I have, Mr. Chairman, stayed under my 1 minute.

Chairman TAUZIN. Will the gentleman yield quickly? Just to

point out, we may need your character’s services before this hearing is over.

Ms. BRACCO. I am available.

Mr. GREENWOOD. Welcome. The Chair calls the second panel, Mr.

Dorsey L. Baskin, Jr., managing director, Professional Standards

Group, Andersen; Mr. Andrews, the global managing partner; Ms.

Nancy Temple, attorney, Andersen; and Mr. Michael C. Odom,

audit partner at Andersen.

Good morning. The Chair welcomes our next panel of witnesses.

You are aware that the committee is holding an investigative hearing and that when doing so, we have the practice of taking testimony under oath.

Do you have any objections to testifying under oath? Seeing no

such objection, the Chair then also advises you that under the

rules of the House and the rules of the committee, you are entitled

to be advised by counsel.

Do any of you desire to be advised by counsel during your testimony today? Mr. Baskin you—state your counsel’s name for the

record, Mr. Baskin.

Mr. BASKIN. Mark Gitenstein.

Mr. GREENWOOD. Mr. Andrews?

Mr. ANDREWS. Mark Gitenstein and Stan Brand.

Mr. GREENWOOD. Ms. Temple?

Ms. TEMPLE. Yes. Mark Hansen, Reid Figel, and Silvija Strikis.

Mr. GREENWOOD. You know the name of your attorney. Very

good. Mr. Odom.

Mr. ODOM. Peter Flemming.

Mr. GREENWOOD. Okay. In that case, would you please rise and

raise your right hands so I can swear you in?

[Witnesses sworn.]

Mr. GREENWOOD. Thank you. The Chair advises you that you are

now under oath, and would recognize Mr. Andrews for 5 minutes

to make an opening statement, Mr. Andrews?

Mr. ANDREWS. Actually, Mr. Baskin is making the opening statement.

Mr. GREENWOOD. Mr. Baskin, then you are recognized for 5 minutes for your opening statement.

TESTIMONY OF C.E. ANDREWS, SENIOR EXECUTIVE, ANDERSEN LLP; MICHAEL C. ODOM, AUDIT PARTNER, ANDERSEN

LLP; DORSEY L. BASKIN, JR., MANAGING DIRECTOR, PROFESSIONAL STANDARDS GROUP, ANDERSEN LLP; AND

NANCY TEMPLE, ATTORNEY, ANDERSEN LLP

Mr. BASKIN. Thank you. Chairman Tauzin, Congressman Dingell,

Chairman Greenwood, Congressman Deutsch, members of the committee, my name is Dorsey Lee Baskin, Jr. Since 1999 I have been

managing director of Andersen’s Assurance Professional Standards

Group, which has firm-wide responsibility for providing guidance

31

on auditing standards, including professional standards relating to

the preservation of audit work papers and client files.

I have been at Andersen for almost 25 years since receiving my

MBA from Texas A&M University in 1977. I am here with my partner, C. E. Andrews, who is managing partner for Andersen’s global

audit practice. He and I will both answer the committee’s questions.

I would like to make three essential points at the outset of our

testimony. First, as our CEO has said, this is indeed a tragedy on

many levels. Second, the committee and the broader public should

know that Andersen came forward voluntarily and disclosed the destruction of documents by Andersen personnel. However improper

that destruction was, Andersen did not hide from its obligations to

do what it could to take corrective action. We promptly alerted all

investigative authorities, including this committee.

Although the firm was well aware of the potentially devastating

impact this disclosure could have on our reputation, we did the

right thing. We certainly are not proud of the document destruction, but we are proud of our decision to step forward and accept

responsibility.

Third, it bears emphasis that Andersen has cooperated fully and

unreservedly with all of the ongoing investigations into the destruction of Enron-related documents. We are determined to get to the

bottom of what happened. We have publicly acknowledged and will

continue to acknowledge mistakes that we have made. We have

tried and will continue to try to answer every question that is put

to us. And we will take whatever decisive action is necessary to restore public confidence in the firm.

I have to tell you in all candor that we are limited in what we

can say today about the destruction of documents by Andersen personnel working on the Enron engagement. Our investigation into

that destruction is far from complete. We have not yet had the opportunity to review all of the many relevant documents or to hear

from all of the people who have relevant information.

But, having said that, this is what I can tell you about Andersen’s retention and destruction of documents. To begin with, it is

the usual routine and wholly legitimate practice of auditors to preserve their final working papers while disposing of drafts, personal

notes, and other materials that are not necessary to support the

audit report.

So far as I am aware, this is the policy of all of the large accounting firms. This policy toward document disposal reflects longstanding and sound audit practice. It is designed to assure that the

audit work papers, which are the principal materials reflecting and

documenting the conclusions of the audit, unambiguously reflect

the judgments that actually were reached.

This understanding of proper audit practice was reflected in the

Andersen document retention policy in effect last fall, which provided that documents other than work papers ordinarily should be

disposed of when no longer needed, but that such documents

should be retained when litigation has commenced or is threatened.

Of course, precisely when that occurs often will require the application of informed judgment to the particular circumstances of a

given case, and that may well be a point at which reasonable peoVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
32

ple can differ. As for the destruction of Enron-related documents,

we know that on October 23, just 6 days after the SEC requested

information from Enron, David Duncan, Andersen’s lead partner on

the Enron engagement, called an urgent meeting of the Enron engagement team, in which he organized an expedited effort to shred,

or otherwise dispose of, Enron-related documents.

This effort was undertaken without any consultation with others

in the firm, or, so far as we are aware, with legal counsel. Over

the course of the next several days, a very substantial volume of

documents and e-mails were disposed of by the Enron engagement

team. This activity appears to have stopped shortly after Mr. Duncan’s assistant sent an e-mail to other secretaries on November 9,

the day after Andersen received a subpoena from the SEC telling

them no more shredding.

Once this activity came to light, Andersen’s response was immediate. Andersen notified the Department of Justice, the SEC, and

all relevant congressional committees. At the same time, the firm

suspended its records management policy and asked former Senator Danforth to conduct an immediate and comprehensive review.

On January 15, approximately 2 weeks after our CEO learned

about the document destruction, Andersen dismissed Mr. Duncan.

The firm also placed three of our partners from the Enron engagement on administrative leave, pending completion of the investigation into their responsibility for these events.

The firm relieved four partners in its Houston office of their

management responsibilities, and the firm indicated that it will

take disciplinary action against any Andersen personnel who are

found to have acted improperly.

I should address the question why Andersen took the forceful action it did regarding Mr. Duncan. In our view, Mr. Duncan’s actions reflected a failure of judgment that is simply unacceptable in

a person who has major responsibilities at our firm. He was the

lead engagement partner for a significant client, exercising very

substantial responsibility within the firm, yet our investigation indicated that he directed the purposeful destruction of a very substantial volume of documents, just as the government investigation

was beginning.

This is the kind of conduct that Andersen cannot tolerate. When

Andersen CEO Joe Berardino testified before Congress almost 6

weeks ago, he observed that all of us here today, and many others

who are not here, have a responsibility to seek out and evaluate

the facts and take needed action. We have tried to fulfill that responsibility.

We uncovered the document destruction. Our firm’s management

brought it to the attention of the governmental authorities. We already have started to implement decisive disciplinary and remedial

action. We are continuing our investigation, resolved to take all

steps that are necessary to restore public confidence in the integrity of our firm. Thank you.

[The prepared statement of C.E. Andrews and Dorsey L. Baskin,

Jr. follows:]

33

PREPARED STATEMENT OF C.E. ANDREWS, GLOBAL MANAGING PARTNER—ASSURANCE

AND BUSINESS ADVISORY, ANDERSEN, AND DORSEY L. BASKIN, JR., MANAGING DI- RECTOR, ASSURANCE PROFESSIONAL STANDARDS GROUP, ANDERSEN

Chairman Tauzin, Congressman Dingell, Chairman Greenwood, Congressman

Deutsch, Members of the Committee.

C.E. Andrews is managing partner for Andersen’s global audit practice. Dorsey L.

Baskin, Jr. is Managing Director of Andersen’s Assurance Professional Standards

Group, which has firm-wide responsibility for providing guidance on auditing standards, including professional standards relating to the preservation of audit work papers and client files.

We would like to make two essential points at the outset of our testimony. First,

this Committee and the broader public should know that Andersen came forward

voluntarily and disclosed the destruction of documents by Andersen personnel. However improper that destruction was, Andersen did not hide from its obligation to do

what it could to take corrective action; we promptly alerted all investigative authorities, including this Committee. Although the firm was well aware of the potentially

devastating impact this disclosure could have on our reputation, we did the right

thing. We certainly are not proud of the document destruction—but we are proud

of our decision to step forward and accept responsibility.

Second, it bears emphasis that Andersen has cooperated fully and unreservedly

with all of the ongoing investigations into the destruction of Enron-related documents. We are determined to get to the bottom of what happened. And we will take

whatever decisive action is necessary to restore public confidence in the firm.

The Committee is holding this hearing at an extraordinary time. The circumstances surrounding the collapse of Enron are now being investigated by myriad

committees and subcommittees of Congress, including this Committee; the House

Financial Services Subcommittee; the Senate Commerce Committee; the Senate

Governmental Affairs Committee; and the Senate Permanent Subcommittee on Investigations.

In addition, of course, investigations are being conducted by the Securities and

Exchange Commission; the U.S. Department of Justice; and the U.S. Department

of Labor.

And not least, Andersen is conducting its own inquiry into all of the circumstances of the Enron audit, including the destruction of documents by Andersen

personnel. This is not a face-saving exercise on our part. It is absolutely essential

to Andersen’s continued success that there be a thorough, entirely credible determination of what happened and what went wrong. We know that our reputation is

our single most important asset—and the one on which our firm’s existence is premised. We therefore are determined to get to the bottom of what happened, to publicly acknowledge and correct any errors that we made, and to take all actions that

are necessary to ensure that such mistakes do not recur in the future.

The proof of our commitment to a thorough and transparent response to the

events at Enron is visible in the steps that we already have taken. Andersen’s CEO,

Joe Berardino, testified before the a House committee in December and acknowledged that Andersen auditors made an error in judgment regarding the Enron

audit. As we’ll explain in more detail later, we likewise have acknowledged that the

destruction of documents by the Enron engagement team was wrong, and we have

taken forceful steps in response.

Our commitment also is manifest in the full cooperation that we have given to

all of the official inquiries into Enron’s collapse. While others whose assistance has

been sought by investigators have not cooperated and were nowhere to be seen at

previous congressional hearings, we have answered every question put to us and appeared whenever requested. Although this is a very painful time for our firm and

the questions are sometimes difficult to answer, Joe Berardino and C.E. Andrews,

each testified before congressional committees last month. Mr. Berardino has addressed issues raised by the press, and he and Andersen’s other top executives have

tried to respond fully and honestly to the concerns both of our clients and of the

tens of thousands of Andersen partners and employees who had no connection at

all to the Enron audit.

We have, moreover, gone the extra mile in cooperating with the governmental investigations:

• We have made diligent efforts to provide all relevant materials to investigative

bodies; to accommodate this Committee, for example, we produced a substantial

volume of material on a significantly expedited basis.

• We gave the Committee the names of Andersen personnel who have knowledge

about events relating to Enron, including document destruction, and, to the extent possible, encouraged these individuals to cooperate with the Committee’s

34

requests for interviews. We did not object to the testimony of any Andersen personnel with direct knowledge relevant to the inquiry, including Ms. Nancy Temple. • We have provided briefings to congressional staff on Enron accounting issues and,

to the extent we are able, on matters relating to the destruction of documents. • We have invested incalculable man hours responding to governmental requests for

documents and information.

Finally, to assure that we resolve all issues relating to the destruction of documents in a manner that is beyond reproach, we retained former Sen. John Danforth

and his law firm to review Andersen’s document retention policies and, ultimately,

to ensure that Andersen takes all appropriate disciplinary action against personnel

involved in improper document destruction.

Our investigation into the destruction of documents by Andersen personnel is far

from complete. We nevertheless will endeavor to be as helpful and forthcoming as

possible—although we must add the caveat that there may well be questions that

neither we, nor anyone else at Andersen, will be able to answer at this time to the

Committee’s satisfaction.

This is what we can tell you about Andersen’s retention and destruction of documents.

To begin with, it is the usual, routine, and wholly legitimate practice of auditors

to preserve their final work papers while disposing of drafts, personal notes, and

other materials that are not necessary to support the audit report. So far as we are

aware, this is the policy of all large audit firms.

This policy towards document disposal reflects sound audit practice. It is designed

to assure that the audit work papers—which are the principal materials reflecting

and documenting the conclusions of the audit—unambiguously reflect the judgments

that actually were reached. To this end, auditors routinely dispose of preliminary

or draft documents that might create confusion about the auditor’s analysis or conclusions. It is the audit work papers, rather than preliminary materials, that are

the real evidence of how the audit proceeded.

Generally Accepted Auditing Standards, commonly referred to by their initials as

GAAS, provide guidance on the purpose and nature of documentation retained by

auditors. The applicable general standard, Section 339 of the codification of audit

standards, provides that auditors should keep for a period of time their working papers that support their reports.

The standard provides that the purpose of working papers is to: (a) provide the

principal support for the audit report, including the reference in the report to compliance with GAAS; and (b) aid the auditor in the conduct and supervision of the

audit. Work papers consist of many different types of documents, including schedules and details of account balances; memoranda relating to business and financial

reporting risks and management controls; work programs that direct the staff in the

procedures and tests to be performed, and that may document the results thereof;

documentation of procedures and tests such as confirmations of accounts receivable;

records of counts of inventory; results of tests of the operation of controls as the

audit progresses; conclusions reached as the result of tests; a copy of the entity’s

financial statements signed by management to evidence its responsibility for the

final presentation; memoranda related to any accounting and audit issues that arose

during the audit, including conclusions reached; representation letters from management; and a copy of the final audit report.

In addition to these period-specific documents, auditors generally keep continuing

or ‘‘evergreen’’ files that contain documents of use to audits for more than one year.

Examples of these documents would be copies of loan agreements, charters, organization charts, and so on. Auditors also keep client-relationship files that contain

records of billing for fees and other administrative matters. The client-relationship

files are not considered to be part of the work papers because they do not contain

audit evidence relating to the audit report.

According to the section 339 of GAAS, many factors affect the auditors judgment

about the quantity, type, and content of the work papers for a particular engagement, including: (a) the nature of the engagement (b) the nature of the auditors report; (c) the nature of the financial statements, schedules, or other information on

which the auditor is reporting; (d) the nature and condition of the client’s records;

(e) the assessed level of control risk; and (f) the needs in the particular circumstances for supervision and review of the work.

The January 2002 revision of section 339 of GAAS adds to the standard that audit

documentation should be sufficient to: (a) enable members of the engagement team

with supervision and review responsibilities to understand the nature, timing, extent and results of auditing procedures performed and the evidence obtained; (b) indicate the engagement team member(s) who performed and reviewed the work; and

35

(c) show that the accounting records agree or reconcile with the financial statements

or other information being reported on.

Section 339 of GAAS provides that the auditor should adopt reasonable procedures for safeguarding work papers and should retain them for a period sufficient

to meet the needs of the auditor’s practice and to satisfy any pertinent legal requirements of records retention.

Typically the work papers for the previous year’s audit are checked out at the beginning of the next audit by the engagement team and used as a source of information during the next audit. Hereafter, the work papers tend to sit in storage for

many years.

This understanding of proper audit practice was reflected in the Andersen document retention policy in effect last fall, which provided that documents other than

work papers ordinarily should be disposed of when no longer needed—but that such

documents should be retained when litigation has commenced or is threatened. Precisely when that occurs often will require the application of informed judgment to

the particular circumstances of a given case, and that may well be a point on which

reasonable people can differ. It also may be a point that looks quite different in

hindsight than it did to people making decisions at the time.

Looking at this policy now, in light of recent events and with the benefit of hindsight, we have to say that it is not a model of clarity—although our guess is that,

if the document retention policies of other large businesses were subjected to the

same close scrutiny, they likely also would reveal ambiguities and questions about

their application to particular cases.

As we mentioned, we are still investigating the destruction of Enron-related documents by Andersen personnel, and there is much still to learn. But we can say this

much about what we know about the destruction of Enron-related documents. On

October 17 the SEC requested information from Enron about its financial accounting and reporting. Several days later, on October 23, David Duncan, Andersen’s lead

partner on the Enron engagement, called an urgent meeting of the Enron engagement team at which he organized an expedited effort to shred or otherwise dispose

of Enron-related documents. This effort was undertaken without any consultation

with others in the firm or, so far as we are aware, with legal counsel.

Over the course of the next several days, a very substantial volume of documents

and emails—involving many of the Enron-related materials that ultimately were destroyed were disposed of by the Enron engagement team, including Mr. Duncan. So

far as we have been able to determine to date, however, no audit work papers were

destroyed.

This activity appears to have stopped shortly after Mr. Duncan’s assistant sent

an e-mail to other secretaries on November 9—the day after Andersen received a

subpoena from the SEC—telling them ‘‘no more shredding.’’ Enron-related documents also were destroyed by others at the firm, although the

volume and circumstances of their activities appear to have been quite different

from those of Mr. Duncan. We are continuing our investigation into that aspect of

these events.

On Friday, January 4—shortly after the firm’s internal inquiry informed Andersen’s CEO about the document destruction—Andersen voluntarily notified the Department of Justice and the SEC. On January 7, Andersen met with Justice Department and SEC attorneys and briefed them on what we knew. On January 10, Andersen also disclosed the destruction to all relevant congressional committees and

to the public. At the same time, the firm suspended its records management policy,

asking Sen. Danforth to conduct an immediate and comprehensive review of that

policy and to recommend improvements.

On January 15, approximately two weeks after our CEO learned about the document destruction, Andersen dismissed Mr. Duncan, the lead engagement partner.

The firm also placed three other partners from the Enron engagement on administrative leave pending completion of the investigation into their responsibility for

these events. The firm relieved four partners in its Houston office of their management responsibilities. And the firm indicated that it will take disciplinary action

against any Andersen personnel who are found to have acted improperly. Anyone

at Andersen who purposely destroyed work papers, or who destroyed Enron-related

documents after having been informed of the Nov. 8 subpoena to Andersen, will be

dismissed; discipline for other improper conduct will depend on the nature and severity of the acts involved.

Finally, as we have mentioned, Andersen retained Sen. Danforth and his firm to

ensure that all appropriate steps are taken to deal internally with misconduct by

Andersen personnel.

We should address the question why Andersen took the forceful action it did regarding Mr. Duncan. In our view, Mr. Duncan’s actions reflected a failure of judgVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 E:\HEARINGS\77569 pfrm09 PsN: 77569
36

ment that is simply unacceptable in a person who has major responsibilities at our

firm. He was the lead engagement partner for a significant client, exercising very

substantial responsibility within the firm. Yet our investigation indicated that he

directed the purposeful destruction of a very substantial volume of documents—and

in doing so, he gave every appearance of destroying these materials in anticipation

of a government request for documents. This is the kind of conduct that Andersen

cannot tolerate.

The case of Mr. Duncan was clear enough to allow us to draw conclusions about

his responsibility at an early stage of the inquiry. That is not true of other Andersen

personnel who were involved with the destruction of documents. Our investigation

continues; persons who are found to have acted inappropriately, whatever their position in the firm, will be dealt with accordingly.

Let me conclude by noting that when Joe Berardino testified almost six weeks

ago, he ended his remarks by stating that ‘‘[a] day does not go by without new information being made available and I would observe that all of us here today—and

many others who are not here—have a responsibility to seek out and evaluate the

facts and take needed action.’’ We have tried to fulfill that responsibility. We uncovered the document destruction; our firm’s management brought it to the attention

of the governmental authorities; we already have started to implement decisive disciplinary and remedial action; and we are continuing our investigation, resolved to

take all steps that are necessary to restore public confidence in the integrity of our

firm.

This is, of course, a very painful and difficult period for Andersen. But Andersen’s

great strength is its 85,000 employees in 84 countries around the world; its 28,000

Andersen Personnel in the United States contribute to the economic life of virtually

State in the Union. We are determined to respond to this test openly and with complete candor, and to face up honestly to our responsibilities to our clients and to

the public.

Thank you.

Mr. GREENWOOD. The Chair thanks the gentleman.

Ms. Temple, do you have an opening statement?

Ms. TEMPLE. I do not, Mr. Chairman.

Mr. GREENWOOD. Mr. Odom, do you have an opening statement?

Mr. ODOM. No, sir.

Mr. GREENWOOD. Mr. Odom, I understand from your attorney

that you have a letter addressed to me that you would like to have

incorporated into the record?

Mr. ODOM. Yes, sir.

Mr. GREENWOOD. Okay. Without objection, that letter will be incorporated into the record.

The Chair would note for the witnesses and for the members that

each of you should have a binder that has—two binders that have

in it the documents to which we will refer during the course of the

hearing, and we will refer to the documents by tab number so that

you can refer to them to assist you in responding to the questions.

And I would suggest at this point you might want to turn to Tab

28.

Mr. BURR. Mr. Chairman, do we also have a copy of Mr. Odom’s

letter?

Mr. GREENWOOD. Yes. The staff will copy and circulate Mr.

Odom’s letter.

[The material referred to follows:]

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Mr. GREENWOOD. The Chair recognizes himself for 5 minutes for

inquiry. And let me address my first question to Mr. Baskin and/

or Mr. Andrews for response.

I would like to read for you a quote from a Georgetown law professor who is an expert on corporate legal ethics. Mr. Milton Regan

from the Washington Post last Sunday says this. And if you look

at Tab 28 in your binder, it says that as soon as an accounting firm

knows that a company it audits is under government investigation,

the firm’s general counsel or compliance officer would typically

send a notice reminding employees of the need to preserve documents related to the inquiry and that, ‘‘requirement of preserving

documents would override any internal document retention policy.’’ Mr. Lynn Turner, the former top accountant for the SEC and a

longtime member of the Profession in Accounting Firms sent me a

letter to the same effect, saying that an SEC inquiry into a client

would normally prompt a letter from the auditor’s counsel to its

employees, directing them to preserve related records. I would like

to make this letter part of the record.

[The letter follows:]

January 24, 2002

The Honorable JAMES C. GREENWOOD

Chairman, Subcommittee on Oversight and Investigations

Committee on Energy and Commerce

U.S. House of Representatives

Washington, D.C. 20515-6115

DEAR CHAIRMAN GREENWOOD: For almost twenty years, I was associated with the

international accounting firm, Coopers & Lybrand, (now PricewaterhouseCoopers).

I served in various capacities in the firm including a partner, member of the national accounting and auditing office and as the partner responsible for the National

High Technology audit practice. More recently I served as Chief Accountant of the

Securities and Exchange Commission. I am currently an accounting professor on the

faculty of the College of Business of Colorado State University.

It has been my experience in practice, when an accounting firm becomes aware

an investigation or litigation will occur with respect to the performance of an audit,

the communication to the audit team is both in writing and verbal and clear and

concise with respect to document retention. The audit team is informed that any

documents in possession of the firm, its partners or employees are to be maintained

and no documents should be destroyed, altered or otherwise affected.

I would be pleased to provide testimony to this Committee at some future date

to assist the Committee in its work related to the Enron matter and respond to any

further questions you might have.

Sincerely,

LYNN E. TURNER

Mr. GREENWOOD. Finally, last Sunday on Meet the Press, your

CEO and managing partner, Mr. Berardino said essentially the

same thing. Let me show you his quotes which should be in Tab

23 of your binder.

He says that your policy states, ‘‘exactly that,’’ meaning that

upon the SEC inquiry all shredding should have stopped. He even

went further, saying that if there is a, ‘‘reasonable anticipation of

an investigation,’’ all destruction should stop.

So I guess the simple question is: Why didn’t anyone at Andersen

notify its employees that an SEC inquiry into Enron financial and

accounting issues had begun and that normal document destruction

policies were suspended? Why did Andersen’s counsel wait nearly

3 weeks to do so?

Mr. ANDREWS. Well, Mr. Chairman, in terms of the timing of

that particular period of time and what is going on, and as to why

117

our legal counsel did not do that, I can’t address specifically the

legal counsel response. But let me at least explain the situation as

we see it, as we understand it.

First, we clearly recognize that audit work papers should never

be destroyed. That is completely unacceptable. We recognize that

nothing can be destroyed once a subpoena is received. That is completely unacceptable. And we also recognize that judgment therefore needs to be applied in a situation, to apply when any kind of

documents cannot be destroyed.

When we were in this period that you are referring to, in this

late October period, there was a lot going on as it related to the

company. At that point, as you indicate, the company had just released its third quarter. It had been notified that it was the recipient of an SEC investigation, a lot of activity was taking place.

Our responsibility and our policy requires the engagement partner, who in this case was Mr. Duncan, to assume and accept responsibility for managing our policies. As you know, as the record

states, on October 23, Mr. Duncan called a meeting to review our

policies as it pertains to work papers and documents and other related materials. At the conclusion of that meeting, it appears that

it led to a vast destruction of documents as a result of that.

Mr. GREENWOOD. Mr. Andrews, let me interrupt you for a second. My understanding of your company’s position is that on the

23rd, Mr. Duncan then set off this process, this initiation to destroy

documents. But what we can’t understand, what I would like to

know is why in God’s name, on October 23, didn’t the chief counsel

for your company, the top brass at Andersen, immediately send out

word to everyone in the company, particularly those involved in the

Enron case, to not touch documents, not shred a document? Why

didn’t that come down from the top immediately?

Mr. ANDREWS. With regard to that question, Mr. Chairman, as

it is stated in our policy, the responsibility for that rests with the

engagement partner, a very seasoned, experienced individual. And

we rely on the engagement partner to make that judgment, to

make the judgment of what to do, as well as when to seek counsel.

Without the knowledge, without our knowledge, without the knowledge of the legal counsel, that meeting was called, that meeting

was held, and they proceeded to destroy documents, without consultation, without inquiry as to whether it was proper or improper.

And we find that situation appalling. We did not——

Mr. GREENWOOD. And all of Mr. Duncan’s superiors in the company, including Mr. Berardino, and knowing this meltdown was

happening at Enron, knowing that this SEC investigation was on,

sat silently, just assuming that Mr. Duncan would do the right

thing? They gave him no direction whatsoever?

Mr. ANDREWS. Mr. Chairman, again, Mr. Duncan had been advised of our policies in the memo on October 12. We expect our engagement partners to understand our policies and apply them, and

we were not aware of the meeting that took place on October 23,

to the best of my knowledge.

So he directed the action. We find that action totally unacceptable. That is why when we began our investigation, which is in

process, and we learned of it, we took the action that we have

taken to date. But the investigation is in process and not comVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00121 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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pleted. We took the action aggressively, because it is a situation we

will not tolerate. It is not the way Andersen personnel are trained

to perform, and it is completely unacceptable. So it is totally out

of bounds with good judgment in that situation. And we took action

as a result of that.

Mr. GREENWOOD. Let me turn to Ms. Temple.

Since I don’t have any other members here right now, I will continue with the questioning. We have a memo from you, Ms. Temple, that is dated, I believe, November 10. Tab 20 in your notebook.

And that memo is very explicit. It is very clear that you took action

on that date, in the form of that memo, to make it crystal clear

that no one was to destroy documents.

Can you explain to us why it took you until November 10 to issue

a statement with that clarity, when a month earlier you knew that

the question of retention and destruction of documents was going

to be critical to investigations and to litigation?

Ms. TEMPLE. Yes, Mr. Chairman. I will tell you the circumstances concerning the November 10 memo and the facts as I

understood them in the previous time period. On November 10, the

memo was sent—it was drafted by our outside counsel, a law

firm—Davis, Polk & Wardwell.

Mr. GREENWOOD. When was that firm retained?

Ms. TEMPLE. I did not personally retain that law firm. I know I

spoke to a partner at that law firm on October 16.

Mr. GREENWOOD. Is your testimony that you do not know when

they were retained?

Ms. TEMPLE. I don’t recall the exact date of the retention. I know

I spoke to a partner at that law firm on October 16.

Mr. GREENWOOD. You may proceed.

Ms. TEMPLE. It is the legal group’s practice and protocol, when

Arthur Andersen receives a subpoena or a request for documents,

to send a written notification reminder to the members of the engagement team, and we asked our outside counsel to assist us in

that process.

To the best of my recollection, the firm received a subpoena from

the Securities and Exchange Commission the end of the business

day on November 8, and a voice-mail was distributed to the audit

engagement team notifying them of that the following business

day. And once this e-mail was drafted, it was circulated to the engagement team.

Now, moving back in timeframe to the previous period that you

talked about, the firm does have a written policy that provides

guidance. It is self-enforcing, and we trust our partners to exercise

their good judgment and to consult with either the legal group or

the practice directors, as appropriate.

Mr. GREENWOOD. Let me interrupt you for a second. I asked Ms.

Temple when Davis, Polk was retained for this purpose. And her

response is that she didn’t know. Mr. Baskin, Mr. Andrews, do you

know when this firm was retained?

I want to remind you that I asked you last night to be prepared

to answer that question this morning.

Mr. ANDREWS. Mr. Chairman, the firm was retained on October

9 and commenced work with us on October 16.

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Mr. GREENWOOD. Okay. And what was the purpose for retaining

that firm on October 9?

Mr. ANDREWS. Well as—if we just—for a moment, what was

going on during—at that particular period of time, around that October 9 time——

Mr. GREENWOOD. Are they handling the potential litigation for

the firm now?

Mr. ANDREWS. Are they handling it now? Yes, they are. What

was going on at that particular time was that we were involved—

the company was closing its third quarter. They were about to

reach conclusions on the third quarter. There were a lot of financial

reporting issues occurring during that period that were obviously

unusual and were concerning. So we engaged them to help us with

the financial reporting issues and with possible litigation.

Mr. GREENWOOD. On October 9, when you retained this firm, you

did so because Andersen considered it likely that you were going

to confront litigation?

Mr. ANDREWS. No, Mr. Chairman, that is not what I said. We engaged them to help us with that third quarter closing as it related

to financial reporting issues and possible litigation and within the

accounting literature, if you will, the term ‘‘possible’’ is used frequently but does not mean probable. We had no reason at that particular point in time to expect litigation, no.

Mr. GREENWOOD. Even given the Sherron Watkins memo that

you were aware of at that time, you didn’t think that it was likely

that you were going to face litigation? You hired the firm that is

now handling your litigation, but on October 9, you didn’t hire

them for that purpose?

Mr. ANDREWS. On October 9 we made the decision, the principal

reason that we were hiring the firm was to help with the complex

issues that were going on in the third quarter. There were a number of accounting issues. There were disclosure issues. And there

were issues, as you referred to, the Ms. Watkins memo. There were

a number of items going on in that third quarter that it would be

normal in a situation like that, I believe in my experience, to

have—we engaged legal counsel to advise us on things in many

other situations.

Mr. GREENWOOD. Let me ask you, Ms. Temple, when did you decide that it was likely that Andersen was going to face litigation

over this matter?

Ms. TEMPLE. I don’t recall making a particular determination

that Andersen was likely to face litigation or being asked to make

that determination. At this time, looking back in retrospect, I can

see all of the events that eventually did occur that we did not anticipate at the time. And, as Mr. Andrews stated, litigation is a

possibility in this profession.

Mr. GREENWOOD. I believe you told our investigators that it

wasn’t until sometime in November that you thought that it was

likely that there would be litigation?

Ms. TEMPLE. Once it came to my attention that the company intended to restate prior financial statement reporting periods, I definitely considered that the firm would likely be sued at that point.

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Mr. GREENWOOD. When is the first time that Davis, Polk gave

the company any advice whatsoever, or counsel whatsoever, with

regard to document retention and destruction?

Ms. TEMPLE. I believe in my conversations on October 16, I discussed the documentation and retention issues that had arisen as

of that date with Davis, Polk.

Mr. GREENWOOD. Mr. Baskin or Mr. Andrews, or Ms. Temple,

you may want to answer this question. The document in Tab 29 in

your binder is a copy of an Enron announcement to its employees

and others on the Enron worldwide e-mail list, which I believe includes Andersen, on October 25, 2001, telling them to preserve

records relating to the related party transactions, including the accounting of those transactions.

Did Andersen learn about this action by Enron, which, by the

way, also seems rather late given that it is 8 days after Enron

learned of the SEC inquiry, and, if so, why didn’t Andersen act

right then to order its employees to do the same?

Mr. ANDREWS. This is the first time that I have read this memo.

But as it pertains to our actions, again we believe that it was the

engagement partner’s responsibility in this situation, given what

was occurring in that late October period—which is when the date

of this memo—that there was enough information available that, in

that partner’s judgment, the instructions and oversight of that

partner would in fact cause us not to destroy documents, and certainly you would not convene a meeting and give instructions, if

you will, if that apparently is what happened, to destroy documents.

So we would agree that during this period, it would be appropriate to, at a minimum, seek counsel before doing such an exercise. And destruction of documents in that period is wrong. We

have admitted that. It is wrong. And once we learned of that, once

we learned of that in our investigation, we took firm action. That

is not Andersen. That is not what we encourage our employees to

do. It is inappropriate.

Chairman TAUZIN. The chairman of the subcommittee has had to

go to the floor to make a vote and will return shortly. His time has

expired, but we will explore this question further in detail as we

go forward.

The Chair is pleased to recognize the ranking member of the subcommittee, Mr. Deutsch, for a round of questions.

Mr. DEUTSCH. I had a chance to read your testimony, but not to

listen, because we are trying to save time in terms of people’s comments.

Mr. Andrews, if you can give me a sense of has anything like

this, in your knowledge, ever occurred before in a ‘‘Big 5’’ accounting firm, with the destruction of documents with the time line that

we are here.

Mr. ANDREWS. I want to make sure I understand.

Mr. DEUTSCH. Basically the time line. You are aware of an investigation and documents were destroyed? I mean, I accept the fact

that documents should be destroyed after an audit. But I guess the

disturbing issue is just the time line, that apparently people did

know that there was an SEC investigation and then the documents

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were still destroyed, even though they knew that there was an investigation.

I mean, that seems to me the heart of the issue. And then the

question becomes, you know—I mean, why were they destroyed,

then? Because that really seems like where there is a conflict.

Whether it is illegal or not, we are not going to determine today.

But factually, that does seem, if this occurred—would you question

whether that occurred?

Mr. ANDREWS. Whether do you—— Mr. DEUTSCH. From the timing, that it occurred after—at least

employees of Andersen were aware of an SEC investigation?

Mr. ANDREWS. Congressman, if I may, let me talk about the time

line, what occurred, and what our conclusions are related to that

in this stage of our investigation, and recognize—my qualification

is that we are only partially through our own investigation. We

took action at a date in that investigation when we felt we had conclusive information to take some action. But we are not completed

with the investigation, as is the SEC, as is the committee investigating this, as is the Department of Justice. So it is in process.

Now, what happened during that period and what was going on,

I believe I am agreeing with your statement in the sense that once

the company had been notified of the SEC investigation, once the

company had was a recipient of a lawsuit, once the company was

clearly on high alert—and we were aware of that; I agree we were

all on high notice at that point. That needs to be a very careful period of time.

And what in fact happened apparently is the next day, after receipt of the SEC letter, October 23, Mr. Duncan had a meeting of

the engagement team, which then led to a massive destruction, a

rush, an expedited destruction of documents. I agree. That is totally inappropriate. We do not condone that. That is not what the

firm’s policy would encourage to do.

Mr. DEUTSCH. Can I just inject the fact—so the time line that

you are saying is even after Andersen itself received notice, not

public notice, not Enron receiving notice of the SEC, but you are

testifying that Andersen actually received notice and then the destruction continued?

Mr. ANDREWS. Let me clarify that. We were aware of the notice

that the company had received.

Mr. DEUTSCH. Not Andersen?

Mr. ANDREWS. Correct.

Mr. DEUTSCH. There is some issue, because your regulations apparently talk about notice to Enron. That again seems to be gaming the system. A notice to Andersen itself that, you know, you are

not in—my understanding is your internal regulations or procedures state that you are not obligated to—that you are not obligated not to destroy documents until you are, as Andersen, aware

of an investigation.

Again, let me tell you that that perspective that I have is just,

you know, looking for loopholes that are not just appropriate, the

same way that Enron was looking for loopholes. If that—that distinction, I think is worth noting. If you can respond to that.

Mr. ANDREWS. Yes, Congressman, let me respond. Let me cover

a couple of points. First of all, if the policy is unclear, that obviVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00125 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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ously is a problem. What we have done with the policy, once we

learned of this, we have suspended that policy, put in place an interim policy, and we have engaged and hired former Senator Danforth to construct a policy that is as clear as possible.

But let me back up and cover the point of the policy that existed

at that time and why this action would or would not be appropriate.

Mr. DEUTSCH. Let me also tell you, 5 minutes goes very fast, and

so I just want to follow up on two specific questions. I am told specifically by our counsel that Ms. Temple—that the position? In

Enron did not have a subpoena yet, and, based upon outside counsel, you were not required to put out a memo on document retention. So that was apparently your internal policy.

First of all, why was it? But then—you know, I mean, it is—is

Mr. Duncan telling you, or are you able to tell us that he was following company policy? That is, that he didn’t do anything wrong

is his position; that he didn’t do anything wrong at this point.

Mr. ANDREWS. Congressman, I cannot say more strongly, Mr.

Duncan was not following company policy. Mr. Duncan broke company policy.

Mr. DEUTSCH. Is he saying that he is following company policy?

Is his position that he was following company policy?

Mr. ANDREWS. Congressman, I can’t respond for Mr. Duncan.

Chairman TAUZIN. The gentleman’s time has expired. The Chair

recognizes himself for a round of questions. First of all, I want to

turn to the week of October 9. You have testified October 9 was the

date that Arthur Andersen hired counsel, outside counsel, right?

And the outside counsel firm was Davis, Polk & Wardwell of New

York, right? Is that correct, sir?

Mr. ANDREWS. Yes, that is correct.

Chairman TAUZIN. My understanding is that is a litigation team,

right?

Mr. ANDREWS. Davis, Polk is a reputable firm. I am sure they do

litigation and other things. But we hired them for purposes to help

us with the financial reporting and possible litigation.

Chairman TAUZIN. And possible litigation, right? October 9.

I want to turn to you, Ms. Temple, real quickly. Sometime before

the week of October 12, in your interviews with us you informed

us that there was a conference call about the Enron engagement

team’s compliance with the document retention policy.

Mr. Duncan says that it was you who raised the question about

the retention policy. You had some other recollections of that conversation. Give us your recollections of what happened in that conference call. And what date was that?

Ms. TEMPLE. Sure. Let me give you the context of my role in this

matter. I was asked, beginning on September 28, 2001, to participate in a conference call. I understood that the firm was addressing

one accounting issue that had risen at that point in time. In between that time and October 12, I provided legal advice, including,

after consultation with my supervisor and others, about specific

documentation and retention issues.

Chairman TAUZIN. Ms. Temple, in that conversation that occurred right about the time that the firm was hiring other litigaVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00126 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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tion counsel—you are the litigation attorney for the firm, is that

not correct?

Ms. TEMPLE. My background is in litigation, correct.

Chairman TAUZIN. But they just hired an outside litigation firm

to advise them on possible litigation about the same time there is

a conference call and there is a discussion about the retention policy. And obviously the memo is sent out, following it, regarding

that policy that includes the information about destruction of documents as well.

You said something to our investigators about conversations in

that conference call referencing changing memos and deleting information from past memos; substituting a memo to the file for an

old memo with a new memo. Is that accurate? Was that discussion

held in that conference call?

Ms. TEMPLE. The advice I gave was different from that, Mr.

Chairman. The advice I gave was——

Chairman TAUZIN. What were the questions being asked that you

had to give advice?

Ms. TEMPLE. The team was discussing a draft of a memo about

a particular accounting issue on asset impairment. The advice that

my supervisor and I gave initially was that memo, which was being

currently drafted, needed to be dated——

Chairman TAUZIN. What did they want to do that you told them

they couldn’t do? What did they ask you to do?

Ms. TEMPLE. I don’t recall, with respect to that particular legal

advice, that there was a question raised. But we pointed out to the

team——

Chairman TAUZIN. Was there not a request or discussion of substituting a new memo for an old memo, backdating a memo to the

file?

Ms. TEMPLE. No, there was a not a question about backdating

that particular memo. But the date——

Chairman TAUZIN. Was there a question about substituting it

and deleting information from the memo?

Ms. TEMPLE. There was a question in that current memo that

was raised: Can we delete a sentence acknowledging that the firm

had given incorrect accounting advice in the first quarter of 2001?

And I said absolutely not.

Chairman TAUZIN. That is what I want to know. Essentially you

said don’t do that?

Ms. TEMPLE. Right.

Chairman TAUZIN. Is it customary that in those kind of discussions, when the firm finds itself in error, that anyone would suggest substituting memos or deleting information that was in memos

already in the file? Was that unusual conversation?

Ms. TEMPLE. I expect the engagement partners to raise questions

about documentation and seek advice, which they were doing,

though other legal advice that I gave on documentation was the—

the memos for any prior periods, first quarter 2001, year end 2000,

could not be changed.

Chairman TAUZIN. You are telling them to make no changes. I

understand that. I am asking you, was it customary? Was this unusual for members of the firm to be talking to you about changing

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documents, altering documents, substituting documents that were

on file already with regards to Enron operation?

Ms. TEMPLE. At the time, based on my recollection, I understood

that there were good faith questions that were being asked about

how to properly document the firm’s——

Chairman TAUZIN. Was it a good faith question to change a

memo that is already in the file with a new memo?

Ms. TEMPLE. I received the question and consulted with my

supervisor——

Chairman TAUZIN. You said, don’t do it.

Ms. TEMPLE. I gave the advice. To the best of my knowledge, the

advice was followed.

Chairman TAUZIN. Were you shocked that they would raise such

a question? Were you alarmed? Were you disturbed? Did it bother

you, as litigation counsel for the firm, that any member would even

suggest altering the record, altering documents, substituting

memos to the file?

Ms. TEMPLE. I don’t recall everything going on in my mind. I recall making sure and giving advice to make sure that the written

record was complete and accurate and truthful. And I do recall seeing that my advice was followed.

Chairman TAUZIN. And my time is up, but you do recall also that

October 16 memo, that you did discuss with them changing that

memo so that your name is not included because you might be a

potential witness? Is that correct?

Ms. TEMPLE. I do recall giving legal advice, after consultation

with others, including outside legal counsel Davis, Polk, that the

audit partner should document the recommendations and communications he had with the client about the client—Enron’s draft

press release. And I did, after consulting with outside legal counsel—it is our standard practice in the legal group to advise the engagement team not to write down and discuss in their memos legal

advice that the legal group might give, because it may be a waiver

down the road of attorney-client privilege.

Chairman TAUZIN. Thank you. The Chair recognizes the

gentlelady, Ms. DeGette, for a round of questions.

Ms. DEGETTE. Thank you, Mr. Chairman.

Ms. Temple, I think that it would be helpful if you would take

the notebook in front of you and turn to document No. 27 before

we get started. Now, Ms. Temple you have been at Arthur Andersen a couple of years; is that right?

Ms. TEMPLE. I started at Arthur Andersen in July of 2000.

Ms. DEGETTE. Before that you were a litigation partner at a law

firm, I believe?

Ms. TEMPLE. Yes.

Ms. DEGETTE. Okay. And I assume you are familiar with Arthur

Andersen’s policy on document retention and destruction?

Ms. TEMPLE. Yes.

Ms. DEGETTE. That is the document that I showed you, document No. 27, right?

Ms. TEMPLE. Yes.

Ms. DEGETTE. If you can tell me, very briefly, under what circumstances you believe documents should be retained? What—

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when is it? What is the trigger under which documents need to be

retained?

Ms. TEMPLE. There are several provisions in the policy that address retention.

Ms. DEGETTE. In fact, there is an exhibit to document No. 27

here, Exhibit 1, that says examples of situations to be reported.

And that is a list of examples of situations where if you see that

coming, then you treat that as threatened legal action under section 2.5 of the litigation procedures, and you retain them; is that

right?

Ms. TEMPLE. Yes. There is a list of examples to be reported to

the legal group, that calls for notification. I don’t believe—— Ms. DEGETTE. That would trigger, then, a notification such as

the one that you made, I think, on October 12 in your e-mail, right?

It is not just threatened litigation, is it? There are other things

that would trigger Arthur Andersen to recommend retention of documents?

Ms. TEMPLE. The policy does require retention of all related materials if there is threatened litigation or—— Ms. DEGETTE. Or other situation, right? And one of those situations would be oral indications from management or owners that

the firm was somehow responsible for the failure of operations or

the failure to detect fraud, right? That is the—that is the third one

on the list of examples of situations to be reported, right?

Ms. TEMPLE. Right. This list of examples is from the policy statement No. 780, which requires notification to the legal group of

those examples.

Ms. DEGETTE. Right. So now there was a memo that was written

on August 15, 2001, from Sherron Watkins, an Enron vice-president, alleging improper accounting and all kinds of other problems.

Was the legal department aware of that?

Ms. TEMPLE. I don’t recall if I was aware of that particular document. I was aware of circumstances, about allegations by an employee of Enron, and the fact that Vincent & Elkins had conducted

an investigation and concluded and reported positively to the board

the week of October 8.

Ms. DEGETTE. So you are aware in August an employee had

made these allegations, and then Vincent & Elkins had done an investigation also in August; is that right?

Ms. TEMPLE. Not exactly. Before October 12, I was aware that

Vincent & Elkins had been engaged and completed and reported

orally to the board that the results of their investigation were positive. And the engagement team also assured the practice directors

who were being consulted at that time and myself that they had

reviewed the information about the allegations, and that the allegations were, to the extent that they had any information in them

in reference to transactions, involved transactions that the audit

team had carefully reviewed in its prior work.

Ms. DEGETTE. So you thought that because Vincent & Elkins had

said there was no problem, that that did not trigger any kind of

requirement; is that correct? Yes or no, please.

Ms. TEMPLE. No, that is not what I would think at the time.

Ms. DEGETTE. Now, what caused you to send that memo on October 12? Did you do that on a regular basis?

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Ms. TEMPLE. There were several factors that caused me to send

the memo on October 12.

Ms. DEGETTE. Let me back up for a minute. How many times in

your 2 years, roughly, at Andersen did you send memos like this

to remind people of the document retention and destruction policy?

Ms. TEMPLE. I don’t recall the number of times.

Ms. DEGETTE. Had you done it before?

Ms. TEMPLE. I believe I had referred people to the firm’s policies

on document retention and destruction.

Ms. DEGETTE. How many times before?

Ms. TEMPLE. I don’t recall the number of times.

Ms. DEGETTE. One time? Five times? Ten times?

Ms. TEMPLE. To the best of my recollection, at least one other occasion.

Ms. DEGETTE. Was that in relation to Enron, or was that in relation to another client?

Ms. TEMPLE. No, that was not in relation to Enron.

Chairman TAUZIN. The gentlelady’s time has expired. I would

ask that the gentlelady have 1 additional minute and would ask

her to yield, if she will.

Ms. DEGETTE. Before I do that, Mr. Chairman, I have many,

many more questions. I would hope you would have a second round

of questioning today. The chairman of the subcommittee is nodding, and I thank him.

And with that, I’d be happy to yield.

Chairman TAUZIN. I thank the gentlelady.

I just want to clarify your testimony to the gentlelady’s questions. You indicated that Vinson & Elkins issued a positive report.

I want to quote from that report: ‘‘there is a serious risk of adverse

publicity and litigation. It also appears because of the inquiries and

issues raised by Ms. Watkins, Arthur Andersen will want additional assurances that if anyone had no agreement with LJM, that

LJM would not lose money,’’ et cetera. Is that a positive report?

Ms. TEMPLE. As I recall the outcome of the report as reported to

me——

Chairman TAUZIN. You have a copy of this—I believe we’ve submitted it. You have a copy of this letter, don’t you, from Vinson &

Elkins? You saw it yourself, didn’t you?

Ms. TEMPLE. After the week of October 12, I did receive a copy.

Chairman TAUZIN. Here’s the point, Ms. Temple. We’re trying to

get the facts here, but if you will characterize a report that indicates a decline in the value of Enron stock and a serious risk of

adverse publicity and litigation as a positive report from the attorneys, we’re going to have trouble with your testimony today.

Ms. TEMPLE. Later on, when I did receive a copy of the report

and sent a copy to outside counsel, I did note the comments that

you’re referencing, but I also noted that the law firm reported that

there was nothing further to follow up on at that point in time; and

the law firm was representing Enron Corporation, not Arthur Andersen. And I understood and recall at the time thinking that there

might be a challenge to the business judgment decisions of Enron

to enter into certain trade—— Chairman TAUZIN. Did you know at the time that Vinson & Elkins had signed off on these agreements as a counsel for the firm

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that may have been a conflict of interest in them commenting on

them now?

Ms. TEMPLE. I don’t recall the circumstances.

Chairman TAUZIN. You are not aware of that?

Ms. TEMPLE. I don’t recall at this time.

Chairman TAUZIN. I thank the gentlelady.

The Chair recognizes the gentleman, Mr. Stearns, for a round of

questions, and the chairman of the subcommittee will be in the

chair. Mr. Bilirakis is recognized for—— Mr. STEARNS. That’s okay. Let Mr. Bilirakis go.

Mr. BILIRAKIS. Well, we’re both from Florida.

Either Mr. Baskin or Mr. Andrews, in your January 15 of this

year press release, Tab 22, your firm stated that it did not believe

that any work papers had been destroyed; and I ask you the question, how were you able to come to that conclusion, and are you

still confident with that?

That was just a few days ago, I might add. I guess we realize

that.

Mr. ANDREWS. Let me respond to that and why the press release

says that, Congressman.

Our investigation is extensive, and this is very complex and will

take an extended period of time. We are not finished with our investigation, what we are doing, Davis, Polk, our counsel, is conducting the investigation, and we actually have gone a second level

and hired former Senator Danforth to come in and review the results of our best investigation. So we are in process, and it is far

from finished, as is your investigation, as well as the SEC’s.

So what we did and what happened on January 15, at that point

in time, that investigation being conducted by Davis, Polk had determined enough information that we believe warranted the action

we took. The point that I want to make is, that is just an interim

step, the interim step, because our investigation is far from complete and we intend to complete the investigation and take the appropriate action——

Mr. BILIRAKIS. Mr. Andrews, with all due respect, you’re talking

about the action you took warranted the action you took. The question is, you had come to the conclusion that none of the work papers had been destroyed at that point in time, as of January 15.

Is that still your conclusion?

Mr. ANDREWS. Congressman, at this point in time, there were—

let me define for a moment ‘‘work paper.’’ Audit work papers are

the permanent record of the audit. At the point in time that we

took the action on January 15, we were not aware, and I am not

aware today, of the destruction of any audit work papers. But my

caution, my only caution, is that our investigation is in process,

and until we complete the investigation, obviously I cannot say

that that is the conclusion until the investigation is done.

Mr. BILIRAKIS. So even today you’re not acknowledging that any

work papers were destroyed? So we’re going through this trying to

determine why they were destroyed and whether they were destroyed legally and that sort of thing, but you’re not acknowledging

that they have even been destroyed?

Mr. ANDREWS. Let me clarify. There are different types of documents that exist in an audit process. One is—one example would

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be the permanent audit work papers, when you complete the audit.

So, for instance, for fiscal 2000, we completed the fiscal 2000 audit,

and there’s a permanent set of work papers that is developed and

retained as a result of that.

Mr. BILIRAKIS. And those are permanent and they are never destroyed. Mr. Baskin stated that earlier.

Mr. ANDREWS. They are destroyed after a statute period, which

is 6 years in the United States, but they would not be destroyed.

So when we took the action on the 15th, it was not because audit

work papers had been destroyed. What it was a result of is the extensive destruction of other documents, e-mails and other papers

that were not part of a permanent set of audit work papers, that

we became aware of as a result of Mr. Duncan’s meeting and actions subsequent to October 23. We think regardless of the policy,

at best that was an extreme error in judgment that we as an organization don’t support, don’t condone and don’t encourage and will

not stand for.

Mr. BILIRAKIS. Mr. Andrews, you said that earlier. Now, all right,

so you do acknowledge, apparently from what I understand, the destruction of e-mails, those sorts of documents, but not the permanent or the final audit documents.

So can those be reproduced? Those that you have—— Mr. ANDREWS. The items that have been destroyed?

Mr. BILIRAKIS. Yes.

Mr. ANDREWS. Let me explain what we’re doing and this is one

of the reasons I think that the investigation takes an extensive period of time.

When we became aware of this, again we asked our legal counsel

to begin the process to intensively investigate this, which means to

interview any and everybody associated with it, to get an understanding of what took place in terms of the destruction and, most

importantly perhaps to do everything possible to reconstruct those

records. And, for example, electronic communications, we have

been able to recover a significant number of those, not all of those,

and we’re continuing to work to do that. So we embarked on the

process to try to recover everything that is destroyed.

Now, obviously documents, hard-copy documents that are not in

an electronic form, that have been shredded, we cannot recover

those. Electronic documents, we’re taking every effort to recover

those, and that process continues. Now, we have recovered many

of them, but I don’t think we’ll be able to recover them all.

Mr. BILIRAKIS. Mr. Andrews, what I’m trying to get at is, you

heard my opening statement about lack of credibility and that sort

of thing. The documents that were used by your firm to determine

that—to basically—I’m going to use the word ‘‘hide’’ and not; I don’t

mean that necessarily as bad as its sounds—to hide the truth regarding Enron, et cetera, the misstatements, the voodoo accounting, if you will, that I consider voodoo and the chairman referred

to; those documents were a part of your audit, your work papers,

right?

Mr. ANDREWS. Congressman, documents that were part of a completed audit process that were determined to be the necessary documents that support the conclusions would be part of the permanent audit work papers.

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Mr. BILIRAKIS. And those have not been destroyed?

Mr. ANDREWS. Again, to the best of any knowledge at this point,

we have not determined that any audit work papers, i.e., the permanent audit documentation, we have not determined that they

have been destroyed; but the investigation is in process and continuing.

Mr. BILIRAKIS. Well, my entire 5 minutes has been used up here,

and I’m not sure that I’ve gotten an answer.

All right, thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentleman from Florida

and recognizes the gentleman from Louisiana, Mr. John, for his

questions.

Mr. JOHN. Thank you, Mr. Chairman. My comments revolve

around where the chairman of the committee was going with his

opening comments about the time lines and maybe even the company policy of Andersen and how they structure their team. Your

comment to the chairman’s question about when Mr. Duncan had

this meeting on October 23, that neither you or legal counsel knew

about this meeting or that he was ordering the destruction of all

these documents. Is that correct?

Mr. BASKIN. Yes, sir. I think that is what I said in my opening

statement.

Mr. JOHN. And obviously Arthur Andersen being a very large corporation has lots of clients worldwide. Is the model where Mr. Duncan is the team leader, the engagement team leader, and whereby

you put all your faith in an individual to handle a client, is that

consistent with other clients in the way that you do business?

Mr. BASKIN. Congressman, yes, I think that is. We place a great

deal of responsibility in the hands of our audit partners, and it

takes a long time to become an audit partner, and then that is why

we have the high level of responsibility left in their hands.

Mr. JOHN. Okay. So you have other members of your team and

partners as you call them, that head other of your clients. Do they

meet on a weekly or daily basis to talk about the way—not particularly about their clients, but the way that they have to go about

following Arthur Andersen’s policies such as the retention and destruction policy?

Mr. BASKIN. Well, first of all, we have to understand that our engagements range in size from very small audits that need only perhaps a couple of hundred hours to complete to very, very large audits that involve hundreds of people and thousands and thousands

of hours. So the extent of time the partner spends with the staff

and what they do varies a great deal, depending upon how extensive the engagement is. On a large engagement like Enron, there

are many partners who are involved with one as the engagement

leadership responsibility.

As far as communicating policies, we have many ways of doing

that, and we rely a great deal on training. We have an internal

Web site which provides access to our policies. We distribute our

policies through CDs and DVD ROMs that people can put in their

computers.

Mr. JOHN. Well, I guess I’m not satisfied, and I don’t think the

chairman was satisfied or any members have been satisfied with

your answer to—from the 18 days, from October 23 of when this

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meeting occurred and documents started to be destroyed, till—what

is it?—November 9 when Ms. Temple sends Mr. Duncan a voice

mail and told him to preserve all those documents. It is perplexing

to me that no one in the highest management of Arthur Andersen

had any indication of this meeting or what was going on and didn’t

step up to the plate and say, we on October 20—I’m sorry, October

22, the SEC has had an informal inquiry. This is not good. This

is not consistent with any professional accounting practices, and I

would like for you to comment on that, because I think there is an

18-day problem that I’m not satisfied with, and we need to get

down to who knew and why and why wasn’t it stopped until that

point in time.

Mr. ANDREWS. Congressman, in terms of that period of time and

what transpired in that period of time, as I tried to indicate earlier,

I agree that the action that took place on October 23 and the subsequent elimination of e-mails and destruction of documents is an

action that is totally inappropriate, and I believe the responsibility,

as our policy states, lies with the engagement partner to have the

judgment to know how to exercise within that time period, given

the things that were occurring. And that judgment may be the

judgment to not destroy documents. It may be the judgment to seek

consultation to determine what should be done. What took place

was a conclusion to eliminate e-mails, to destroy significant

amounts of documents without consultation, to the best of my

knowledge, with others, and that activity is totally inappropriate,

and we do not condone that, and we do not believe our personnel

would do those sorts of things. That’s what we find was inappropriate, and that’s why we’ve taken what action we’ve taken to date

and we’ll continue to review the situation and take appropriate action against anyone else.

Mr. JOHN. I’m out of time, but I need to end on this comment.

And I respect and I understand—and that is the position you

should take—but why 18 days? That is a long period of time. If

there was a meeting about the destruction of documents taking

place, it just seems to me that someone else knew that this meeting took place and someone higher up in management should have

invoked that policy before November 9, 2001. That’s just me, and

I’m out of time.

Mr. GREENWOOD. The Chair thanks the gentleman, and recognizes for inquiry the gentleman from Florida, Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman. Ms. Temple, the questions I’m going to ask you, I’d just like a yes or no answer. If you’d

be so kind. On August 15 Sharon Watkins wrote a—she was vice

president of Enron, a former employee of Arthur Andersen. She

wrote a memo to the President Kenneth Lay of Enron, in which she

said she was incredibly nervous that we will implode in a wave of

accounting scandals. Did you know of this memo before October 23?

Just yes or no.

Ms. TEMPLE. To the best of my recollection, I don’t——

Mr. STEARNS. Just yes or no.

Ms. TEMPLE. [continuing] recall seeing a letter from Ms. Watkins.

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Mr. STEARNS. So you’re saying no you did not know about Sharon

Watkins’ letter on October 23? You knew nothing about it? Is that

your answer, that, no—— Ms. TEMPLE. I was aware that she had made allegations. I don’t

recall if I saw a document.

Mr. STEARNS. So you’re saying yes you knew of her allegations.

Is that correct?

Ms. TEMPLE. I was informed that she had made allegations, yes.

I don’t recall if I saw a document.

Mr. STEARNS. So the answer to my question is, yes, you knew

about it. Is that correct? Yes, you knew about—— Ms. TEMPLE. I was aware that she had made allegations. I don’t

recall if I saw the document.

Mr. STEARNS. Okay. Now, on October 15, Vinson & Elkins was

hired to look at this memo, and they indicated that there are serious risks of adverse publicity and litigation. Did you know about

the Vinson & Elkins final conclusions before October 23? Yes or no.

Did you know about this study before October 23?

Ms. TEMPLE. Yes. I believe I received a copy of that report before

October 23.

Mr. STEARNS. So you knew about Sharon Watkins. You knew

about this one. Okay the questions I have I’d like you to answer

just yes or no relative to October 23. Did you know that Enron had

taken $1 billion charge due to an accounting error on the Raptor

transaction? Yes or no. October 23. By October 23 did you know

that Enron had taken a billion dollar charge due to an accounting

error on the Raptor transaction?

Ms. TEMPLE. To the best of my recollection, no—I knew that they

had taken charges, but I did not—— Mr. STEARNS. That is a yes.

Ms. TEMPLE. [continuing] know about a billion dollar charge at

that time.

Mr. STEARNS. You knew that—okay. Second, that the SEC had

begun an informal inquiry into Enron related to a party transaction. Did you know that the SEC had begun an informal inquiry

before October 23?

Ms. TEMPLE. By October 23, I knew that, yes.

Mr. STEARNS. Yes. Okay. That your own Houston and Chicago offices were disagreeing about the proper accounting and what in

fact Andersen had signed off on with respect to one series of Enron

transactions? Yes or no.

Ms. TEMPLE. Yes.

Mr. STEARNS. That a class action lawsuit had been filed against

Enron with respect to these transactions, as well as other shareholder suits? Yes or no.

Ms. TEMPLE. To the best of my recollection, I recall an announcement on the 23 of a class action shareholder lawsuit——

Mr. STEARNS. So that is a yes?

Ms. TEMPLE. [continuing] against Enron. Yes.

Mr. STEARNS. That Andersen was assisting Enron in its response

to the SEC, did you know that?

Ms. TEMPLE. Yes. On October 23, I have notes of a call with the

engagement partner and senior management where the engagement partner reported to us that——

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Mr. STEARNS. So that is a yes?

Ms. TEMPLE. [continuing] the team was assisting. Yes.

Mr. STEARNS. Okay. In light of your comments and your retention policy statements earlier, why did you wait until the November 9 to tell the Enron audit team to stop destroying documents,

in light of all these yeses you said earlier?

Ms. TEMPLE. On October 23, according to my notes, Mr. Duncan

reported to us the AA was trying to gather all documents

regarding——

Mr. STEARNS. Can I interrupt you, Ms. Temple? The question is

based upon all this prior information, Sherron Watkins, the Vinson

& Elkins study, all of the previous things: You knew about the

Raptor write-offs, you said, oh, I didn’t know a billion dollars, but

I knew about the Raptor transaction. You knew that the SEC had

started an inquiry. Based upon all of that, why did you wait till

November 9 to tell the Enron audit team?

Ms. TEMPLE. According to my notes on October 23 Mr. Duncan

assured us that the team was trying to gather all documents——

Mr. STEARNS. I don’t think you’ve answered the question, in all

due—what—let me ask you this. What did you believe that Mr.

Duncan’s representation—no. Why did you believe that Mr. Duncan’s representation that he was gathering the relevant documentation on these transactions, which clearly for purposes of internal review as to the substance and completeness of the audit

trail meant that he was also gathering up everyone else’s notes, emails, voice mails, drafts and other nonwork paper documents for

purposes of preservation for litigation? Was that your job, was that

his job, or was that your job?

Ms. TEMPLE. The engagement partner’s primary responsibility

for document retention—and he assured us, according to my notes,

that they were gathering all documents regarding transactions

from around the world. That was the assurance that the documents

were being gathered and preserved.

Mr. STEARNS. Don’t you think Mr. Duncan was gathering work

papers?

Ms. TEMPLE. According to my notes, he said all documents.

Ms. DEGETTE. Would the gentleman yield?

Mr. STEARNS. I’d be glad to yield.

Ms. DEGETTE. Do your notes indicate that the documents were

gathered and preserved or simply gathered?

Ms. TEMPLE. The notes state, AA trying to gather all docs, re

transactions, from around the world. I understood that to be gathering the relevant documentation about all of the transactions from

all around the world to have it in one place to have it available.

Ms. DEGETTE. Now, do you recall discussing——

Mr. GREENWOOD. The time of the gentleman from Florida has expired.

Ms. DEGETTE. I’d ask unanimous consent to grant the gentleman

1 additional minute so I can ask a follow-up question. Thank you.

Mr. GREENWOOD. We will be doing a second round. The

gentlelady will be granted an additional minute.

Mr. STEARNS. Mr. Chairman, I ask unanimous consent to ask for

an additional 1 minute, and it’s not just for me, but I think we are

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on to a line of reasoning, that at this point if we leave it, we lose

an opportunity for this committee—this subcommittee. So——

Mr. GREENWOOD. Fair enough. Without objection, the gentleman

from Florida will be granted an additional 2 minutes, some of

which he may yield to the gentlelady from Colorado if he so chooses.

Mr. STEARNS. I’ll yield to the gentlelady from Colorado, and also

I understand the chairman here also has a question. So I yield part

of my time to you.

Ms. DEGETTE. Thank you so much for your comity.

Do you recall a conversation with Mr. Duncan in which he assured you he was gathering the documents to preserve them? Do

you recall specifically having that conversation, according to your

notes?

Ms. TEMPLE. I don’t recall the specific words, but I do recall that

we had a group conference call on October 23, and I have these

notes from that call.

Ms. DEGETTE. And the notes don’t say anything about preservation, do they?

Ms. DEGETTE. The notes——

Ms. DEGETTE. Yes or no?

Ms. TEMPLE. The notes do not have the word ‘‘preservation’’ in

them.

Ms. DEGETTE. And on October 12 you had just sent a memo to

Mr. Duncan and his group, advising them of the Arthur Andersen

document retention and destruction policy which involved destroying all of the notes and backup documents and so on, correct?

Ms. TEMPLE. No. Actually, I sent a reference to the policy to the

practice director in Houston.

Ms. DEGETTE. So you never sent that to Mr. Duncan?

Ms. TEMPLE. I did not send it personally to Mr. Duncan.

Ms. DEGETTE. Mr. Odom had that, correct? Mr. Odom, did you

have that?

Ms. TEMPLE. The Houston practice director, based on several

factors——

Ms. DEGETTE. Just——

Ms. TEMPLE. [continuing] at that time——

Ms. DEGETTE. In this October 23 phone call, you don’t recall specifically and your notes do not reflect you telling Mr. Duncan to retain records, do they? Yes or no.

Ms. TEMPLE. I don’t see that——

Ms. DEGETTE. Yes or no, ma’am.

Ms. TEMPLE. [continuing] in my notes, no.

Ms. DEGETTE. Thank you.

I yield back.

Chairman TAUZIN. Would the gentleman yield?

Mr. STEARNS. I’ll be glad to yield to the chairman.

Chairman TAUZIN. I’ll be real quick.

Ms. Temple, if you received this e-mail from Mr. Duncan, indicating he was collecting all of these documents, and assumed that

he was preserving them, why did you feel it necessary on November 9 to leave a voice mail with Mr. Duncan, directing him to preserve those documents because of the receipt of the SEC subpoena?

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If he was preserving them already, why on Earth did you feel it

necessary to advise him to preserve them on November 9?

Ms. TEMPLE. It is our firm practice to notify the engagement

team when the legal group receives a subpoena. I believe it had

been received in the general counsel’s office, and I promptly notified the engagement partner and reminded about the need to—at

this point in time, we’ll have to collect the documents for production.

Chairman TAUZIN. Well, but you understand why common sense

gets a little lost here. If you’re in a position where you know that

the retention policy also means destruction, you knew that, didn’t

you?

Ms. TEMPLE. There are aspects of the destruction guidelines in

that policy, yes.

Chairman TAUZIN. So you know that the retention policy, as long

as it’s operating, permits Mr. Duncan and however many people he

has working for him to destroy documents? You get a memo from

him saying, I’m gathering them all up; and you tell us today that

you assumed that meant that he was gathering them up to preserve them for litigation, not to destroy them.

Why would you even bother to say, by the way, on November 9,

quit destroying documents? If you just got an SEC subpoena, why

would you do that?

Ms. TEMPLE. The legal group notifies the engagement partner

and engagement team when subpoenas are served. It was received

by the legal group, and I felt it was appropriate to follow the firm

protocol to notify the engagement partner.

Chairman TAUZIN. Now, but you see we also have the memo on

November 10, and I’m going to read to you from it. It says, the first

thing we must do in preparing to respond to these subpoenas and

lawsuits is to take all necessary steps to preserve all of the documents and other materials that we may have relating to claims

that are being filed.

Now, if that was already being done, if you had received a notice

from Mr. Duncan that he’s gathering them all up to preserve them,

that was your conclusion, why would you say that the first thing

we have to do now, now that the subpoena has arrived, is start preserving these things?

Do you see, common sense, Ms. Temple—common sense tells me

that destruction was going on up until this time when the subpoena arrived and that until you said ‘‘preserve them,’’ they may

well have been gathered up for destruction, and that somebody

should have known that. And was that somebody you?

Ms. TEMPLE. I never counseled any destruction or shredding of

documents. And I only wish that someone had raised the question

so that we could have consulted and addressed the situation.

Chairman TAUZIN. I thank the gentleman.

Mr. STEARNS. Mr. Chairman, I know my time is out. The question I had is for Mr. Baskin and Mr. Andrews.

Did you ever call Mr. Duncan in and say, Mr. Duncan, we’re

thinking about letting you go; we’re thinking about getting your

version of the story first before we let you go? Did you give him

that courtesy to say, Mr. Duncan, tell us your version before we

make our version? And why didn’t you bring him in and just ask

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him questions like that, so that we could better understand your

actions?

Mr. ANDREWS. Congressman, as we have our legal counsel Davis,

Polk doing the investigation for us, it’s my understanding that they

have had multiple interviews with Mr. Duncan on this subject,

both prior to his being dismissed. So we did in fact do what you’re

suggesting, and it was a very appropriate step in the process of investigating it.

Mr. STEARNS. And did he tell you he was ordered to destroy these

documents?

Mr. ANDREWS. My understanding—repeat the question, please.

Mr. STEARNS. Did he tell you, he was told he was to destroy

these documents?

Mr. ANDREWS. My understanding of his interview and responses

he gave is that he acknowledged—or discussed, presented, if you

will—what took place on October 23, the meeting and the subsequent activity of destroying documents; and also indicated that he

did not seek advice or counsel and was not instructed by someone

to do so.

Mr. STEARNS. Did he admit to you that he told other people to

destroy documents?

Mr. ANDREWS. I did not do the interview, so I can’t respond specifically. My understanding of what took place was, they held a

team meeting. He was the senior partner in that—— Mr. STEARNS. Mr. Andrews, is a copy of that interview or any

notes on that available?

Mr. ANDREWS. No, sir. I do not have copies of notes, and I don’t

know if there was documentation from the meeting.

Mr. GREENWOOD. The time of the gentleman from Florida has expired.

Let me clarify your response, Mr. Andrews. You just testified

that you are not aware as to the existence of any documentation

of the interviews of this law firm with Mr. Duncan?

Mr. ANDREWS. What I’m saying is that our law firm is conducting

the investigation, and the information I have is as a result of what

they have, what they have told me from that investigation.

To clarify, I do not have a written report on an investigation. The

information is in process, and will be completed appropriately; and

the appropriate results——

Mr. GREENWOOD. In the course of that information, did anyone

from Andersen come forward and say, while these interviews are

going on, or subsequently, that they directed Mr. Duncan to destroy documents? Or that Duncan directed them? Excuse me.

Did anyone indicate that Duncan directed them to destroy documents?

Mr. ANDREWS. Congressman, I’m not sure exactly what instructions Mr. Duncan gave. What I have been told, and it’s my understanding that a team—Mr. Duncan led a team meeting in which

instructions were given to apply policy No. 760, which is the one

in question; and that subsequent activity resulting from that meeting led to the destruction of documents, the documents we’re talking about, not work papers, to the best of my knowledge at this

time in the investigation, but e-mail and other forms of documentation that existed.

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Mr. GREENWOOD. All right, Mr. Andrews, I’m going to ask you

to make available to this committee today all of the documentation

that may exist that documents the interviews with Mr. Duncan

prior to leading up to his firing.

Would you make those documents available for us?

Mr. ANDREWS. Congressman, I’d have to consult with our counsel

on that. It’s our intention to complete the investigation and completely share the conclusions of that investigation.

Mr. GREENWOOD. Well, this committee will need these documents

and will subpoena them if necessary.

The time of the gentleman from Florida expired a long time ago,

and the gentleman from Illinois, Mr. Rush, is recognized.

Mr. RUSH. Thank you, Mr. Chairman.

Ms. Temple, according to the notes that we have, you—and according to the Martindale-Hubbell Legal Directory, you graduated

from Harvard Law School with honors. Is that right?

Ms. TEMPLE. Yes, sir.

Mr. RUSH. And you were a partner at the law firm of Sidley &

Austin before joining Arthur Andersen’s legal department; is that

right?

Ms. TEMPLE. Yes, sir.

Mr. RUSH. Can you explain to us, give us some kind of an idea

what you were—what type of work you were doing at Sidley &

Austin? I know you were—your specialty is civil litigation, professional malpractice and securities litigation, but can you give us a

further indication of the type of work that you were performing at

Sidley & Austin?

Ms. TEMPLE. Yes. I worked primarily on litigation, commercial

litigation, did some accountants liability litigation, represented a

law firm in another professional circumstance, and did other general commercial litigation for both plaintiffs and defendants.

Mr. RUSH. So it would be correct for us to assume that you were

well versed on ethical considerations as it relates to document retention?

Ms. TEMPLE. I was aware of document retention issues in a litigation context, yes.

Mr. RUSH. Okay. And when did you start at Arthur Andersen?

Ms. TEMPLE. In July of 2000.

Mr. RUSH. July of 2000. And what was your work at Arthur Andersen? Prior to being assigned to the Enron clientele and cases,

what was your work?

Ms. TEMPLE. My work was on a variety of matters and in addition to the Enron matter, continues to follow up a variety of matters. Members in the legal group, we work on managing with outside counsel litigation against the firm. We counsel business people

from time to time on various contracts, other legal issues, practice

issues. And we also help the firm comply with subpoenas.

Mr. RUSH. So you consider yourself a top-notch lawyer; is that

correct?

Ms. TEMPLE. I don’t know. I probably like others to think so.

Mr. RUSH. Okay. All right.

Let me ask you, you were assigned on September 28, 2001, to

Enron on the Enron-related matters. Is that correct?

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Ms. TEMPLE. I was asked to participate in a conference call with

some of the business people, including the engagement team, shortly before the call occurred on September 28.

Mr. RUSH. Okay. So were you actually assigned to—from your

superiors at Arthur Andersen to Enron-related matters?

Ms. TEMPLE. At the time that’s not how it was described to me.

I was just asked to participate on this conference call with my supervisor, and as time progressed, I continued to consult with the

business people on this matter relating to Enron.

Mr. RUSH. Okay.

So did you transition into being the No. 1 person as it relates to

the document retention matters and the policies and that type

thing? Did Arthur Andersen rely on you as a part of its legal department to inform others about retention matters as it related to

Enron and other—any other kind of corporation?

Ms. TEMPLE. The way I perceived my role, advising as a legal adviser relating to Enron, was to be able to participate in conference

calls as the engagement team and other business people discussed

the accounting issue, and to answer questions that arose. I consulted—my supervisor participated at times in some of those conference calls, and I consulted with him and, later on, with outside

counsel.

Mr. RUSH. On October 12, you informed Mr. Duncan of—in a way

that was—that raised some eyebrows and some questions. You sent

an e-mail—no—to Mr. Odom, stating that it might be useful for

him to remind the Enron engagement team about—about Andersen’s document retention and destruction policy to ensure compliance with the policy.

Now, what drove you? What motivated you to inform Mr.—or

send this e-mail to Mr. Odom?

Ms. TEMPLE. There were several factors. Leading up to October

12, a few questions had been raised in the conference calls I participated in about how to appropriately document several different

matters: one, a current draft of a memo describing the firm’s conclusion about the right accounting method, how to date that document; two, whether we should acknowledge in writing in the current document the fact that the firm had now concluded that the

prior accounting advice in the first quarter was correct; three, it

also came to our attention that the memos, until the first quarter

2001, it did not fully reflect and accurately reflect the nature of the

consultation that the engagement team had had at that time with

some of the national accounting experts, and so gave advice to document the current memos dated currently, make sure they are

complete and accurate and include all facts and conclusions, and

also make sure that no prior papers or any prior reporting period

is changed or deleted and that the national experts should create

a document dated today that made very clear the nature of the

facts that they recalled about their consultation for the prior period

so there would be a clear written record of their version of the

facts.

Given these questions that had arisen—and I had consulted with

my supervisor about providing advice, and others. In part of that

consultation we referred to the documentation, retention and deVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00141 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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struction policy for guidance in giving our advice; and I thought it

was useful—— Mr. RUSH. Ms. Temple—— Ms. TEMPLE. [continuing] given the confusion, to make sure that

we were compliant.

Mr. RUSH. What I’m trying to home in on, focus on, is your stating that—your words stating that it might be useful for him on October 12, it might be useful for him to remind.

Why weren’t you more direct? Why weren’t you more forceful on

October 12?

Ms. TEMPLE. The way our system works in our firm is that the

engagement partner has primary responsibility for the engagement

and documentation, retention and compliance with policies; they

can consult with the practice directors. And I did not have the detailed information about potential other issues that were being addressed by the engagement team. I thought perhaps the local practice director who’s available for consultation with the audit team

might have a better idea as to whether it would be useful.

Mr. RUSH. What changed as of November 9?

Ms. TEMPLE. I’m sorry, sir?

Mr. RUSH. Where you were more forceful, what changed?

Ms. TEMPLE. November 9—if you’re referring to the November 10

e-mail and that timeframe, the firm had received the subpoena

from the Securities and Exchange Commission asking to produce

all documents, so we sent that—— Mr. GREENWOOD. The time of the gentleman from Illinois has expired.

The Chair recognizes the gentleman from North Carolina, Mr.

Burr.

Mr. BURR. Thank you, Mr. Chairman.

Mr. Odom, I feel like you’ve been neglected, and I’ll try to—— Mr. ODOM. My feelings are not hurt.

Mr. BURR. I didn’t think they would be.

Mr. Odom, you play a crucial role in this, if for no other reason

than there are many meetings that individuals have speculated on

what the content was that you were involved in; and you were

aware of Sherron Watkins’ September—or excuse me, August concerns that she raised not only to Andersen, but also to Ken Lay directly, weren’t you?

Mr. ODOM. Yes, sir.

Mr. BURR. And those were conveyed to you, if not directly,

through a memo from Mr. Hecker, James Hecker from Andersen,

through a memo to you and to the file?

Mr. ODOM. I was copied on Mr. Hecker’s memo, yes, sir.

Mr. BURR. Is it usual that concerns like that might not be shared

within the legal team in Andersen?

Mr. ODOM. Concerns like?

Mr. BURR. The concerns that Ms. Watkins raised, should they or

were they shared with anybody within the legal team at Andersen?

Mr. ODOM. Once Mr. Hecker got the call, the next morning we

contacted firm-wide legal to inform them of the nature of the call

Mr. Hecker had gotten the night before.

Mr. BURR. Now, Ms. Temple, are you in firm-wide legal?

Ms. TEMPLE. Yes, I am.

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Mr. BURR. And for some reason you’re not aware of the accusations at that time when you got involved in the Enron—I think you

said on September 28?

Ms. TEMPLE. I believe another lawyer was consulted at that time,

but it did come to my attention, general allegations, before October

12.

Mr. BURR. But on September 28 when you became a part of the

Enron team for Andersen, you didn’t know any of these accusations

as part of the firm-wide legal team that Ms. Watkins had raised?

Ms. TEMPLE. I did not know about those allegations on September 28. About 5 minutes before the conference call occurred, I

was asked to participate by my supervisor, who also participated,

and the topic of discussion was a specific accounting issue that did

not——

Mr. BURR. When did you become aware of the investigation that

Vinson & Elkins was currently engaged in by Enron to look at

these questions?

Ms. TEMPLE. To the best of my recollection, I believe it was during the week of October 8.

Mr. BURR. Mr. Odom, is there anything that you’ve read that has

been credited to Mr. Duncan, either in his formal statements that

he’s made or in his answers to questions by this committee that

you find to be false?

Mr. ODOM. I have no knowledge of any false statements.

Mr. BURR. Is there any point that you thought David Duncan

had diverted from, anything other than what he was instructed by

individuals within Andersen, as it related to document retention?

Mr. ODOM. I don’t know what Mr. Duncan did with respect to

document retention. So I really can’t answer that question.

Mr. BURR. Was there any point where Mr. Duncan asked you, or

anybody that you might have been knowledgeable of, to destroy

documents that were pertinent and should have been protected?

Mr. ODOM. No, sir.

Mr. BURR. Ms. Temple, what was your understanding of why Andersen hired Davis, Polk?

Ms. TEMPLE. To the best of my recollection, I understood that

Davis, Polk was hired as an additional resource for the legal group

to consult with on ongoing issues.

Mr. BURR. Was the legal group consulted on the hiring of Davis,

Polk?

Ms. TEMPLE. I did not participate in that decision. I was informed by my supervisor——

Mr. BURR. How many other representatives from the legal team

were involved intricately in the Enron team at that time, and

which ones were consulted about the hiring of Davis, Polk?

Ms. TEMPLE. I don’t know who was consulted about the hiring.

I do know that my supervisor told me that the decision had been

made to retain Davis, Polk.

Mr. BURR. And when was your first contact with individuals at

Davis, Polk?

Ms. TEMPLE. To the best of my recollection, October 16.

Mr. BURR. Did Davis, Polk have any input into your October 12

memo as it related to document retention?

Ms. TEMPLE. As far as I recall, no.

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Mr. BURR. Were there any individuals other than you that had

input into your October 12 e-mail on document retention?

Ms. TEMPLE. I don’t recall reviewing a draft of the e-mail, but I

do recall discussing the document retention issues.

Mr. BURR. Was there an initiative that you started on your own

or was it suggested to you to put out this e-mail?

Ms. TEMPLE. No one suggested to me to put out the e-mail.

Mr. BURR. Did you ever have a conversation relative to that email, prior to its distribution, with your direct supervisor?

Ms. TEMPLE. I don’t recall discussing the particular e-mail. I recall discussing the document retention policy and the legal advice

we should give on documentation and retention.

Mr. BURR. On 10/12 when you distributed that e-mail on document retention, were you aware at that time of the preliminary

findings that would be reported on 10/15 from Vinson & Elkins as

it related to their investigation on a—stimulated by Enron?

Ms. TEMPLE. The facts that had been reported to me by the engagement team were that Vinson & Elkins had given an oral report

to the board that there was nothing further that Enron needed to

do as a result of their investigation.

Mr. BURR. So you were aware of what the conclusion of their investigation was?

Ms. TEMPLE. That was what was reported to me, yes.

Mr. BURR. Did that in any way, shape or form shape your decision about the fact to send an e-mail about document retention on

October 12?

Ms. TEMPLE. I don’t recall all the things going on in my mind at

that particular time. I do recall that I was motivated by the fact

that questions had been raised about appropriate documentation

and retention of prior period papers—— Mr. BURR. Were there any meetings within the legal team that

talked about the Vinson & Elkins findings that would be reported

publicly, prior to their report publicly?

Ms. TEMPLE. I recall generally keeping my supervisor up to date

on events as they occurred. I don’t recall any specific discussion of

the Vinson & Elkins report.

Mr. BURR. On October 16 you made a request for—from Mr.

Odom, Gorgal & Golsby, to delete your name from a press statement. What was the reason for that?

Ms. TEMPLE. Actually, it was a request to delete a reference to

my name and legal advice that had been provided in an internal

Arthur Andersen memo that was to go into the audit work paper

file; and the reasons for that were to avoid potential argument

later on that the attorney-client privilege had been waived, and I

made that recommendation after consulting with our outside counsel on that point.

Mr. GREENWOOD. The time of the gentleman from North Carolina

has expired.

Mr. BURR. If the chairman would indulge me for one additional

question.

Mr. GREENWOOD. Without objection, the gentleman from North

Carolina will be granted an additional minute.

Mr. BURR. Can you share with us the exchange with your outside

counsel and specifically the date that that took place?

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Ms. TEMPLE. I believe I had a discussion on October 16 about appropriate documentation and how it would be good practice not to

disclose in writing legal advice obtained from the legal group so

that one cannot argue later that there was a waiver of the attorney-client privilege.

Mr. BURR. Did you counsel with him because you suspected that

there would be litigation in this case?

Ms. TEMPLE. No. I sought counsel about appropriate documentation. The firm receives hundreds of subpoenas a year, and if there’s

documentation that’s going in the work paper file, we, as a standard practice, don’t like to have the auditors document and describe

the legal advice, because it might be waived.

Mr. BURR. I would take for granted that the decision to hire outside counsel is not something that happens weekly at Andersen or

many other companies. Clearly, somebody believed that a litigation

team was needed. That decision was made on October 9, which

makes at least this committee very interested in the meetings that

took place, the decisions that one arrived at.

Clearly, after that October 9 date, decisions were made by you

and you alone as you have stated, to remind individuals of the— of the document retention policy. Decisions were made to delete the

legal staff’s names from documents for fear that attorney-client

privilege would be breached. It leads one to believe that there was

a great understanding that some type of litigation was, if not imminent, certainly in the future.

You’re a lawyer. You’re a seasoned person. At what point did you

feel that litigation was in fact a reality?

Ms. TEMPLE. To the best of my memory, I don’t recall making a

definite decision that, yes, we’re definitely going to be sued

here—— Mr. BURR. You got a pretty good sign when they hired outside

counsel, didn’t you?

Mr. GREENWOOD. The time of the gentleman has long expired.

Ms. TEMPLE. I knew there was a possibility, yes.

Mr. GREENWOOD. The Chair recognizes the gentleman from Kentucky for 5 minutes.

Mr. WHITFIELD. Ms. Temple, you indicated to a number of people

that your memo of October 12 regarding the retention policy was

precipitated by the fact that there had been some incorrect accounting advice given regarding the first quarter of Enron’s financial statements; and in fact, that they were not adequately reflected and so forth. Is that correct?

Ms. TEMPLE. There had not been a conclusion that the first quarter financial statements were accurate. It was incorrect accounting

advice, and to my understanding, the firm was working diligently

to determine what the appropriate accounting advice should be.

Mr. WHITFIELD. But there was incorrect accounting advice given,

correct?

Ms. TEMPLE. That was my understanding.

Mr. WHITFIELD. Okay. Now, prior to October 12, did you have

any conference calls relating to that issue with Mr. Odom or Mr.

Duncan prior to issuing that October 12 memo?

Ms. TEMPLE. As I recall, I believe there were a couple group conference calls where the engagement team was consulting with

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other practice directors within their organization about this accounting issue, and I believe—I don’t recall all of the participants,

but I believe Mr. Duncan and Mr. Odom participated.

Mr. WHITFIELD. Is that right, Mr. Odom? Did you participate in

some conference calls with her prior to October 12 about that

issue?

Mr. ODOM. Yes, sir.

Mr. WHITFIELD. And is it true that you recall someone in those

calls asking the engagement team how they were with respect to

compliance with the retention policy?

Mr. ODOM. I believe I recall the question of—I don’t think we

called it necessarily the ‘‘retention policy.’’ We called it our ‘‘document policy,’’ whatever the—— Mr. WHITFIELD. Our document—yeah. So that was mentioned.

And did you take any action as a result of that?

Mr. ODOM. I may in fact have gone through and seen if I had

old drafts in my office that were not part of the current work, and

I may have also looked at some old e-mails that I’d been delinquent

in deleting. I do not maintain Enron files.

Mr. WHITFIELD. So you may have, or you did?

Mr. ODOM. I believe I did, but I couldn’t swear to it.

Mr. WHITFIELD. Okay. So even prior to that, you at least went

through some of your files and deleted some of them?

Mr. ODOM. I believe I did, yes, sir.

Mr. WHITFIELD. So her e-mail on the 12th, how did you interpret

that e-mail? Did you interpret that she was suggesting that documents be destroyed or removed?

Mr. ODOM. I took it that she was reminding—we needed to remind the engagement team as to what our policies were.

Mr. WHITFIELD. Okay. Now, on October 15, Mr. Duncan wrote in

his file that he was quite concerned that a press release from

Enron talking about their financial statement was going to include

nonrecurring charges; and he was quite concerned about nonrecurring, using that terminology, because he said he felt like that

was misleading—that that would be misleading to the public.

And he also said that he was going to talk to Mr. Rick Causey.

Who is Rick Causey?

Mr. ODOM. You’re asking me?

Mr. WHITFIELD. Yeah.

Mr. ODOM. Mr. Causey is the chief accounting officer at Enron.

Mr. WHITFIELD. So, trying to read Mr. Duncan’s mind here, it

seems to me that since you all were having conference calls about

inadequate advice given on the Enron account in the first quarter,

and now in a press release they’re saying we have these losses because of nonrecurring charges, and he thinks that that is not accurate.

And then he goes on to say that Mr. Causey basically came back

and said, well, don’t be concerned about it or don’t worry about it

or something to that effect. Are you aware of that?

Mr. ODOM. What tab are you in, sir, so I can read it?

Mr. WHITFIELD. Tab—I think it’s 7. He says that—the release

was issued early Tuesday, October 16, which essentially was the

original—anyway, Rick said, I’ve raised the issue internally and

that the press release had been thoroughly reviewed by our legal

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team, and so despite Mr. Duncan’s concern that it was misleading,

the internal legal team review decided evidently to let it go. Is that

your—— Mr. ODOM. I believe that’s correct.

Mr. WHITFIELD. Then Nancy Temple wrote a memo to Mr. Duncan on the 16th, which is 1 day after his memo in which he’s concerned about this misleading recurring charges statement, and she

says, Dave, ‘‘Here are a few suggested comments.’’ I recommend deleting reference to consultation with the legal group and deleting

my name on the memo. I also suggest deleting language that might

suggest we have concluded the release is misleading.

Why did you write that memo, Ms. Temple?

Ms. TEMPLE. I wrote that after reviewing the draft and consulting with our outside legal counsel. First—— Mr. WHITFIELD. Outside. Which outside?

Ms. TEMPLE. Davis, Polk, the comment regarding referencing

legal advice. Again, it’s standard practice and consistent with the

advice from outside counsel that the auditors should not describe

the nature of the legal advice in their audit documentation, because it might be arguably a waiver of attorney-client privilege

later on; and Davis, Polk agreed with that, and—— Mr. WHITFIELD. If Mr. Duncan was concerned about misleading

the public with this nonrecurring charge, why did you suggest deleting that? Because it might suggest we have concluded the release is a mistake?

Ms. TEMPLE. There’s only one sentence they suggested deleting

for two reasons, because it was inaccurate factually and—— Mr. WHITFIELD. It was inaccurate factually? How was it inaccurate?

Ms. TEMPLE. The sentence refers to enforcement actions undertaken against companies by the SEC in a case where they believe

the presentation was materially misleading. I have been aware of

only one enforcement action, and the circumstances were different

than the case involving Enron. I had not reviewed an entire draft

press release of Enron, but I knew that Mr. Duncan and others

within Andersen had, and provided comments, but under the professional standards, the press release is the responsibility of the

company, not of the auditor. The auditor was trying to be helpful,

and it was my understanding, based on the discussions with people

within Andersen, that Andersen had not concluded that the press

release was misleading.

Mr. WHITFIELD. But the person in charge of the Enron account

was quite concerned about it. And yet subsequently, as it turns out,

he probably was correct. It was misleading.

Mr. GREENWOOD. The time of the gentleman has expired.

Mr. WHITFIELD. Very last question.

In this memo you went further to say, ‘‘I would consult further

within the legal group as to whether we should do anything more

to protect ourselves from potential Section 10A issues.’’ What are

10A issues?

Ms. TEMPLE. That is a reference to a provision in the Federal securities laws that imposes certain obligations on auditors in certain

circumstances. And as an extra precaution, I sent these documents

to Davis, Polk and asked them to review them to see if they had

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any suggested advice for additional steps that Arthur Andersen

should take in these circumstances. And the advice was, no, we

were doing the right thing.

Mr. GREENWOOD. The time of the gentleman from Kentucky has

expired.

The Chair recognizes the gentleman from Texas, Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman. And I appreciate the

courtesy of the Chair in allowing me—obviously this is not the first

time I have asked to be waited on with the oversight and investigation on other issues. I appreciate the courtesies in the past and

particularly today.

Representing a district in Houston, you can imagine the nationwide publicity when you see this current week’s Newsweek about

burned and greedy execs, and clueless accountants left Enron

bankrupt and little guys in the lurch, how it affected investors

around the country.

But when you are from Houston and you have a district that not

only had employees but also people who placed their trust in Enron

for 16 years, and also in Arthur Andersen who is an 88-year-old

company or partnership, in that trust.

Enron was such an integral part of our community, obviously

employing, you know, thousands of people and individuals investing in it, but our arts community, our medical community, even our

baseball stadium has their name currently. And you can see the

frustration.

And that is why I guess there are 11 committees in Congress

looking at it. And the Justice Department.

Of course, I am mildly disappointed. It seemed like this week not

only Arthur Andersen’s shredding of documents, but Enron doing

it up until the civil lawyers found out, and hopefully the Justice

Department would be more aggressive as the criminal prosecution

I think it would be—much more than the civil lawyers who are filing the lawsuits. But maybe that has gotten their attention.

Let me ask some questions, though, and follow up on all of my

colleagues who have done really good in trying to bring out some

of the facts of what happened leading up to Ms. Temple’s memo.

October 9 was when the firm decided to retain outside counsel.

Mr. Baskin, would that——

Mr. ANDREWS. That is correct.

Mr. GREEN. How long did it take? Did you interview other firms,

or were there—was the decision made to retain outside counsel

prior to October 9?

Mr. ANDREWS. Congressman, I wasn’t directly involved in hiring

outside counsel. My understanding is we—we engaged them on October 9, and that they commenced work around October 1.

Mr. GREEN. But, the decision was made to retain outside counsel

prior to October 9. Do you have any idea of the timeframe on the

decision looking at Arthur Andersen for that?

Mr. ANDREWS. My understanding is we made the decision and

engaged them on October 9.

Mr. GREEN. So it was a decision and so you hired them. So there

weren’t any other firms that were considered?

Mr. ANDREWS. I don’t know.

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Mr. GREEN. Okay. And you have no idea when the search began

for another outside counsel? I assume that Arthur Andersen has a

lot of outside counsel that they have the opportunities to retain.

Mr. ANDREWS. Congressman, that is right. We do have any number of other firms engaged on various other matters.

Mr. GREEN. And I guess, to sum up all of the questions, people

are wondering, and I am glad that the testimony brought out today

that Ms. Watkins, who is a former Arthur Andersen—was she a

partner in Arthur Andersen before she moved to Enron?

Mr. ODOM. No, sir, she was not.

Mr. GREEN. But she was an employee of Arthur Andersen and

then moved to Enron?

Mr. ODOM. I believe that is correct. Well, actually she left Arthur

Andersen some years ago and went somewhere else before she

went to Enron, is my understanding.

Mr. GREEN. And she sent—not only in her current job, but she

talked to Mr. Hecker. On testimony you just said that you were

aware of Mr. Hecker’s memo to file around the time that he did it

in August 21?

Mr. ODOM. Yes, sir.

Mr. GREEN. Did that make it up just past the Gulf Coast Region

of Arthur Andersen?

Mr. ODOM. Yes, sir.

Mr. GREEN. So I guess, as a lawyer, then Arthur Andersen had

somewhat constructive notice, even though the subpoena didn’t get

there until November, that there was possible litigation and maybe

even criminal activity?

Mr. ODOM. I am not a lawyer, Mr. Green.

Mr. GREEN. That is why you have legal counsel from—with Arthur Andersen, but also the ability to hire outside counsel.

But on August 21, the memo to the—to the Arthur AndersenEnron audit team, to the file and to you, and so the partnership

was aware of the concerns of Ms. Watkins in late August—August

21, 22?

Mr. ODOM. Yes, sir.

Mr. GREEN. And so the decision then from August 21 to October

9, was—you know, 7 weeks to do that—to decide on hiring outside

counsel, but the constructive notice on that was there was potential

litigation; and I also—as a lawyer, I understand that there is always potential litigation, particularly when are you dealing with a

company like this.

And why would there be the necessity for sending a memo on October 12, reiterating Arthur Andersen’s policies, when constructive

notice may have been given in August, but actually you didn’t respond until the subpoena, on not destroying possible evidence?

Ms. Temple, was there some other reason for the October 12— because, granted, you may not have had knowledge, but Arthur Andersen as a partnership had knowledge in late August, and yet in

October, after the stock continued to go down, and the company

was imploding, there was notice to the local office.

Ms. TEMPLE. I can tell you, sir, the facts, as best I recall them,

leading up to October 12.

I did learn that this employee had made allegations. I also

learned that the legal group within Arthur Andersen had been conVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00149 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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sulted. I consulted and conferred with that lawyer. I learned that

Arthur Andersen encouraged this employee to raise the allegations

within the highest levels of the Enron organization, and that the

Arthur Andersen engagement team had assured the legal group

and others that they had followed up on the allegations by addressing them with the general counsel of Enron and learned that Enron

had engaged an outside law firm to conduct an independent investigation.

I learned that the auditors had obtained information about the

nature of the allegations, reviewed that information, and reported

to senior people within the firm and the legal group that they had

reviewed carefully during their audit work the accounting for

transactions referenced in the allegations, and that they followed

up and learned that the law firm had reported that the company

did not need to take any further action.

So those were the circumstances.

Mr. GREEN. That was the middle of October?

Ms. TEMPLE. That I knew of by October 12.

Mr. GREEN. Okay. So before October 12 you were aware of Ms.

Watkin’s memo?

Ms. TEMPLE. I don’t recall if I saw the memo that Ms. Watkin’s

wrote. I do recall knowing that she had made allegations.

Mr. GREEN. And you don’t have a timeframe before you sent the

memorandum on the—reiterating Arthur Andersen’s policy on the

destruction of documents?

Ms. TEMPLE. To the best of my recollection, I learned about all

of the facts that I just described during the week of October 8.

Mr. GREENWOOD. The time of the gentleman from Texas has expired.

The Chair recognizes the gentleman from California, Mr. Waxman for 5 minutes.

Mr. WAXMAN. Thank you very much, Mr. Chairman.

One of the great mysteries surrounding the collapse of Enron is

the identity of the secret partners with whom Enron engaged in

various complicated and undisclosed financial transactions. These

partnerships allowed Enron to move debt off its balance sheet. No

one knows for sure how many partnerships there were, but some

press reports have said there could have been hundreds or even

thousands of them. These secret partnerships appeared to be extraordinarily lucrative for the partners.

As the Washington Post recently reported, the secret partnerships were set up in a way that guaranteed that the secret partners would not be at risk if the ventures failed. Andrew Fastow,

the former Enron official who participated in some of the partnerships, reportedly made $30 million from his role in these partnerships.

I am concerned that the document destruction that went on at

Arthur Andersen and at Enron may affect our ability to learn who

these secret partners were. In fact, it is possible that the document

destruction may be intended to cover up the details of these partnerships, including the identity of these secret partners.

We know from the press accounts that some of the documents

shredded by Enron have the names of the secret partnerships such

as Jedi clearly visible on them. I would like to ask whether any one

147

of you at the table knew that Arthur Andersen knew of the identity

of the secret partners.

Mr. Andrews? Mr. Odom?

Mr. ODOM. I will try. On the LJM 2 transactions, which are the

large funds that Mr. Fastow raised, there exists a private placement memorandum, I think it is 144A—is that—am I saying that

right?

144A. It is a private placement memorandum, which I think exists, that I believe has the names of the people who subscribed to

that partnership.

Mr. WAXMAN. Is that document intact or has it been shredded?

Mr. ODOM. That is an Enron document.

Mr. WAXMAN. Do you know if any of the documents destroyed at

Andersen related to these secret partnerships?

Mr. ODOM. I have no knowledge.

Mr. WAXMAN. Do you know whether any of the documents destroyed at Enron related to those secret partnerships at Enron?

Mr. ODOM. I have no knowledge.

Mr. WAXMAN. I am assuming that if anybody else at the

table—— Mr. ANDREWS. No, I have no knowledge of the Enron activities.

Mr. WAXMAN. How about of the Arthur Andersen activities?

Mr. ANDREWS. As the documents that I have discussed, Congressman, that we believe were destroyed were not permanent

audit work papers, but memos and documents, paper documents

and e-mails, in this—that were destroyed in that late October period, the ones that we can recover, which were some of the electronic documents, we will obviously, when the investigation is

done, know the content of those and be able to obviously answer

that question.

Documents that were shredded or destroyed, we cannot address

what was in those items or in those papers, as they were shredded.

But we are making every effort to recover every document that was

destroyed in our organization. As we said, we certainly do not condone that and will make every attempt to recover it so that the

record is there to investigate for us, for you, for the SEC, and for

the Department of Justice.

Mr. WAXMAN. Well, there are many Members of Congress who

would like to know about who those secret partners were. Can any

of you give us information or direction about how to get this information, aside from what you have already indicated? Whom should

we call before the committee? What documents should we subpoena

to learn the identity?

Mr. ANDREWS. Well, Congressman, I think the investigations are

pursuing, whether it be the SEC, the Department of Justice, or

Congress or ourselves, looking at all information that is available.

Now, most of the documentation, the original documentation

around partnerships or any other source documentation like that

would first and foremost be the documentation of the company. We,

as auditors, do not create the documentation. We review those

records. So the best source of the information that you are referring

to, of course, would be at the company itself.

Now, when we do our audit, we do review items within that

audit. To the extent we need documentation to support the audit,

148

we do retain those in our audit work papers. We are and will continue to make our documentation that we have, including everything we recover, available to all appropriate investigating bodies.

So anything that we have will be available appropriately for the investigation, including anything we can recover from the e-mails

that were destroyed in that—or eliminated in that late October period.

Mr. GREENWOOD. The time of the gentleman from California has

expired.

Mr. WAXMAN. If I can ask this one point: Will you be submitting

to this committee that information when you have it?

Mr. ANDREWS. Congressman, we will cooperate fully with this

committee, as I think we have to date. When we complete our investigation, we will certainly share with you the conclusions of our

investigation, including the subsequent oversight of that by former

Senator Danforth.

Mr. GREENWOOD. The Chair recognizes the gentleman from Massachusetts, Mr. Markey.

Chairman TAUZIN. Before the Chair does that, can I clarify something? Just 30 seconds.

I want to inform the gentleman and all members that our original request for documents from Enron covers the requests for

knowledge about the partnerships. And that document request is

in the process of being complied with. So we don’t have it all yet,

but we obviously are going to share it with all members and staff

when we have it.

Mr. GREENWOOD. The Chair yields 5 minutes to the gentleman

from Massachusetts, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

Ms. Temple, when you sent the October 12 memo, you were really sending it because you were concerned that Andersen might be

sued, either by the SEC or by Enron investors, weren’t you?

Ms. TEMPLE. No, I don’t recall that being in my mind at the time.

I was concerned about making sure that we had accurate and complete documentation.

Mr. MARKEY. Mr. Joseph Berardino on Meet the Press on Sunday

said the policy of Andersen is not to shred documents, not to eliminate documents, if you have a reasonable basis to anticipate an investigation. By October 12 you already know there is a reasonable

expectation that there will be litigation.

Now, Mr. Odom, I see that on October 12 you forwarded Ms.

Temple’s e-mail on to David Duncan, the Andersen partner in

charge of the Enron account, with the notation, ‘‘more help.’’

Now, can you tell us just what did you mean when you referred

to this memorandum as ‘‘more help’’? How is an order to start

shredding helpful to you, especially on October 12?

Mr. ODOM. I was actually being facetious, Congressman Markey.

What I was referring to is the fact that all of us knew where our

document retention policy was, yet we had gotten a note attached

to it, with a doc link attached to it. So it was really just a reminder. But it was not something that was——

Mr. MARKEY. On October 12, ‘‘more help’’ is just being facetious?

Mr. ODOM. Yes.

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Mr. MARKEY. Now, Ms. Temple, now just 4 days after you sent

the ‘‘12, 2001, start shredding the documents’’ memorandum to Mr.

Odom, I see that you sent an October 16 e-mail to David Duncan

commenting on a draft memo he had prepared, expressing concerns

about a press release that Enron had put out regarding third quarter 2001 results. In this e-mail you recommended deleting any reference to consultation with the legal group and deleting your name

from the memo.

You have acknowledged that you were concerned that being mentioned in this memo could result in your being named as a witness

in future litigation. If so, following Mr. Berardino’s statement, why

didn’t you direct Mr. Duncan to stop the shredding?

Ms. TEMPLE. Congressman Markey, I did not instruct Mr. Duncan to shred documents. In my October 16 e-mail, I did not anticipate being a witness in any particular proceeding with respect to

Enron.

This is standard advice provided by the legal group.

Mr. MARKEY. You said there is no ‘‘particular,’’ but Mr. Berardino

is saying if there is a ‘‘reasonable’’ basis to anticipate an investigation. At this point, don’t you have a reasonable expectation?

Ms. TEMPLE. As I recall, it was a possibility. But I don’t recall

any discussion of any reasonable anticipation of litigation or making that conclusion.

Mr. MARKEY. So you were also concerned that Mr. Duncan’s draft

would be read as a suggestion that Andersen viewed the Enron

press release as being misleading to investors, weren’t you? And if

so, why didn’t you order the shredding to stop if that was your concern?

Ms. TEMPLE. Congressman, I was not aware of any shredding activities. Based on my discussions with Mr. Duncan and others and

our outside counsel——

Mr. MARKEY. Your memo was interpreted, as you know, as a

shredding order. That is what began immediately at Andersen in

Houston.

Ms. TEMPLE. I don’t know what actually happened, what the

facts are.

Mr. MARKEY. So you were also worried that Andersen would be

required to comply with the financial fraud reporting requirements

of Section 10A of the Securities Exchange Act, the Wyden-DingellMarkey amendment that requires accountants to immediately report evidence of financial fraud to senior management, the board;

and if they take no action within 5 days, to report the fraud to the

SEC. You make that clear.

If so, why didn’t you order the shredding to stop?

Ms. TEMPLE. Congressman, there was no conclusion that there

was any financial fraud. In fact, there was a conclusion that there

was no misleading statement. After consultation with others in the

firm and Davis, Polk, I was being careful in asking Davis, Polk to

look at all angles and all issues and advise us. And the conclusion

was there were no further steps to take.

Mr. MARKEY. Well, let’s move to October 17. On October 17, the

SEC opens an informal inquiry into Enron’s dealings, and over the

next several days numerous lawsuits are filed against Enron. The

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document shredding continues all through this period to November

9.

Why didn’t you order the shredding to stop then?

Ms. TEMPLE. I was not aware of any shredding activity.

Mr. MARKEY. You had sent a memo on October 12. You knew

that that was something that could reasonably be interpreted as a

shredding order.

Ms. TEMPLE. I intended by October 12 reference to the firm’s documentation retention policy to focus on the documentation issues

that had arisen in the retention counseling advice I had provided

leading up to the 12. I specifically told the engagement team to retain the relevant documents.

Mr. GREENWOOD. The time of the gentleman from Massachusetts

has expired. Without objection, the gentleman will be granted an

additional minute.

Mr. MARKEY. Is it your legal opinion that Andersen is free to

shred documents relating to its work with Enron until such time

as it actually receives a subpoena from the SEC or is formally

named as a defendant in a class action lawsuit by Enron’s employees or other investors?

Ms. TEMPLE. I have not reached that legal opinion.

Mr. MARKEY. Was that your view at that time? That is the important thing.

Ms. TEMPLE. I was not asked to reach a legal opinion at any particular time. And I was unaware of any shredding activity.

Mr. GREENWOOD. The time of the gentleman from Massachusetts

has expired.

The Chair recognizes the gentleman from New York, Mr. Engel,

for 5 minutes.

Mr. ENGEL. Thank you very much, Mr. Chairman.

I am very concerned about the conflicts of interest that have to

exist when an auditor also serves as a consultant. To be blunt, a

lucrative consulting contract depends on a company’s financial

health. And in this case I am forced to wonder if Andersen was

willing to turn a blind eye to questionable accounting practices and

partnerships so as to maintain its other contracts with Enron.

Some of the financial transactions that Andersen blessed in its

role as auditor are, at face value, reckless and unwarranted. Obviously, Andersen failed in its role as auditor to provide investors

with proper information. This all brings to mind the question of

ethics.

According to the American Institute of Certified Public Accountant’s Code of Professional Conduct, ‘‘Integrity requires a member to

be, among other things, honest and candid within the constraints

of client confidentiality. Service and the public trust should not be

subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion;

it cannot accommodate deceit or subordination of principle.’’

What we now find before us indicates to me that many, many

people at Enron and Andersen failed to uphold basic principles of

honesty and integrity, and with so many unprincipled choices, far

many more people were hurt as a result.

It is evident to everyone now that Enron’s become one of the

greatest business scandals in our Nation’s history, and obviously,

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if the scandal is as dark, portions—billions of dollars of investment

retirement have been lost due to the dirty dealings of a few greedy

people. And as a Congressman, I look forward to changing our Nation’s laws so as to prevent this type of abuse from ever happening

again.

A lot of my colleagues have asked specific questions. I wanted to

ask some general ones. I would like—let me start with Mr. Baskin

and say, does providing consulting and auditing services set one on

a path that will cause professional ethics to be challenged? Is it not

a conflict of interest to provide consulting and auditing services at

the same time?

Mr. BASKIN. Congressman, I do not believe that that is inherently an ethical problem for auditors.

Mr. ENGEL. Well, let me ask you, as managing director of the

professional standards group of Andersen—you can be considered

the conscience of the company—what is the Andersen code of professional standards, and has it lived up to these standards based

on everything we now know?

Mr. BASKIN. Our code of professional standards in the United

States is the AICPA standards that you read from.

Mr. ENGEL. Does Andersen require its members to be—its accountants to be members of the American Institute of Certified

Public Accountants?

Mr. BASKIN. I believe we require our audit partners and others

who need to be members to be members, yes.

Mr. ENGEL. Okay. So you are obviously aware that the AICPA

has an extensive code of professional ethics?

Mr. BASKIN. Yes, sir.

Mr. ENGEL. Then obviously it had to have been obvious to you

that that code was being violated; was it not?

Mr. BASKIN. I was not directly involved in the Enron engagement, and so it was not obvious to me, no. I was not aware of it.

Mr. ENGEL. Are you aware that violating these standards and

subsequent expulsion is cause for a company to fire an employee?

Mr. BASKIN. I am sorry. Could you repeat the question?

Mr. ENGEL. Well, violating these American Institute of Certified

Public Accountant Standards would be reason to fire an employee?

Mr. BASKIN. I think that certainly would be something that we

would have to consider, yes.

Mr. ENGEL. Would you not logically say that the destruction of

financial documents after a Federal investigation has been

launched would be a violation of that code?

That is not even grey; it is certainly, to me, black and white.

Mr. BASKIN. Congressman, I would want to know the facts about

who was investigating, what part of the SEC was doing the investigating, what were they looking into. Was it financial statements

or was it some other aspect of their reporting? But before I would

conclude that we had crossed some threshold—I don’t think that

simply because someone in the SEC is investigating is sufficient.

They communicate with our clients quite often, and on a continuous basis.

Mr. ANDREWS. Congressman, could I address your question?

First, with regard to your reference to the AICPA Professional

Code of Conduct, we as an organization fully subscribe to that, as

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well as to any of the other SEC-related independence guidelines

that we as an organization have to comply with. We totally concur

with that. We believe in this engagement we have complied with

those rules.

The issue related to document destruction, we didn’t look at that

from an AICPA Code of Conduct standpoint, we looked at it as an

incredible, gross error in judgment at a minimum, and certainly

probably a violation of our policy; and that is why we would take

that action.

But we fully subscribe to the requirements of the AICPA Code

of Conduct, as well as the SEC rules and regulations around those

subjects, as well.

Mr. ENGEL. Well, let me ask you——

Mr. GREENWOOD. The time of the gentleman from New York has

expired. The Chair will do his usual granting of 1 additional

minute.

Mr. ENGEL. Can an accountant be personally sued for malpractice as doctors and lawyers can be? And should not accountants

be held legally responsible for negligence?

Mr. ANDREWS. Congressman, accountants can be and are sued,

as the firm is. So both individually and as a firm we are accountable.

Mr. GREENWOOD. The time of the gentleman from New York has

expired.

Chairman TAUZIN. Would the gentleman—he had a little time. I

want to clarify something for the record if the gentleman will allow

me. Will the gentleman yield?

Mr. ENGEL. Certainly.

Chairman TAUZIN. Let me make something clear on the record

for all of those attending these sessions, either in person or by television.

Someone made a statement earlier that we had passed a law in

1995 relieving the accounting profession of litigation liability. That

is not correct. Under that act accountants are responsible proportionately for nonknowledgeable violations. And when they are in

knowledge of something negligent, they are liable fully, in joint and

several liability with their client. That is current law. That has

never been repealed. It has not been repealed in the 1995 act.

Second, the 1995 act did not relieve accountants of liability for

making intentionally wrong statements. All the act did was codify

a court decision, a Federal appellate court decision, relative to forward-looking information, we think the company is going to do

well, but here are the things that could hurt it if it doesn’t do well,

that kind of stuff.

Third, the act that was discussed earlier did not change, nor

touch nor repeal nor alter the Supreme Court decision on aiding

and abetting; it had nothing to do with it. It retained accountant’s

liability when they are negligent knowingly, fully and completely,

and when they are not knowingly, they are proportionately liable

with their clients. That is the current state of the law.

I thank the gentleman for yielding.

Mr. ENGEL. Thank you for clarifying that. I think it is an important clarification.

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Mr. GREENWOOD. The Chair thanks the gentleman. And the

Chair will recognize himself, and we will begin a second round of

questions for those members who wish to participate.

It has been the position of Arthur Andersen all along that the

buck basically began and stopped with Mr. Duncan, that he was

not directed by superiors to destroy documents or to command others to destroy documents. Now, is that correct?

That is your position that is—I understand Mr. Berardino has

testified to. That is what your press releases have said. That is

what you have all said today in your testimony.

Mr. ANDREWS. Congressman, I would like to clarify that.

What I have said and what I believe the firm has said at this

point is that we are engaged in an extensive investigation of what

happened. We are part of the way through that. At this point in

time, we had enough information to take the action we took on Mr.

Duncan, based on the gross errors in judgment.

That investigation continues. And I assure you that wherever

that investigation leads, to whomever it leads, we will take appropriate action.

So our investigation is in process and certainly far from finished.

We don’t mean to suggest that should it lead elsewhere, we in any

way would resist taking it in that direction.

Mr. GREENWOOD. Very well. Early on, I think perhaps September, Arthur Andersen created the Core Consultation Team. I

believe many of you, Mr. Andrews served on that, Ms. Temple

served on that, Mr. Odom served on that; is that correct?

Mr. ANDREWS. Congressman, no, I was not part of the Core Consultation Team.

Mr. GREENWOOD. You invited—for instance, the memo of October

23 that came out from Mina M. Trujillo, regarding a conference call

from the Core Consultation Team, was copied to you, Mr. Andrews.

Did you participate in that conference call?

Mr. ANDREWS. Congressman, I did not participate in that conference call.

Mr. GREENWOOD. You did not participate in the consultation of

the consultation group? You were not a party to the discussion?

Mr. ANDREWS. I am familiar with the Consultation Team. Yes,

I did have conversations at times with the Consultation Team. I

was not party to that call.

Mr. GREENWOOD. Why was the Consultation Team created?

Mr. ANDREWS. The Consultation Team was created because, as

we said, had indicated, during the third quarter there were a number of activities going on in terms of transactions and other things

that have been discussed.

And that Consultation Team—there was a—there was, because

of the nature of the activities, the degree of things being considered, the complexity of the things being considered, that was created. And it is our policy and our culture to encourage consultation.

And so that would be appropriate.

Mr. GREENWOOD. You had senior members, you had people from

Chicago on this team, Rich Corgel was on this team, he was Practice Risk Management Group Director, a superior position to Mr.

Duncan certainly and to Mr. Odom; is that correct?

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Mr. ANDREWS. Mr. Corgel is what we call U.S.—he is in charge

of our U.S. Practice Director role. Mr. Odom is a Practice Director

as part of the Corgel team.

Mr. GREENWOOD. Let me get to this. What I want to know is,

when you had these discussions and there was a conference call

that was scheduled for 4 on October 23, on the agenda was ‘‘status

of documentation,’’ and that is Tab 13.

This document that I am referring to, Tab 13, I would like you

to take a look at that. And there is a long list of agenda: ‘‘SEC,

third-party actions, legal representation, status of documentation,

response to SEC.’’

Mr. Odom, are you looking at this document?

Mr. ODOM. Yes, sir.

Mr. GREENWOOD. Now, in this conference call, I have included

Mr. Duncan, but also included senior management from both Houston and Chicago.

Was there discussion at all about the document retention issues?

Because, what Ms.—’’status of documentation’’ is listed in this as

an agenda item. And Ms. Temple is saying that was there to talk

about the need to collect data from around the world to analyze

Enron’s decisionmaking, and this was not about a discussion of documentation that ought to be retained or destroyed. Is that your testimony?

You are saying—you have testified, Ms. Temple, that that was

the—that the ‘‘status of documentation’’ is on that list for the purpose of—that was there so you could discuss the need to retain documents. Is that your recollection? That is why that was on there?

Ms. TEMPLE. My recollection was that—an inquiry as to the status of the ongoing current work by the engagement team in the

third quarter and the issues that the team was trying to deal with

as they arose.

And my notes from that conference call indicate that the engagement partner reported that Arthur Andersen was trying to gather

all of the documents regarding the transactions from around the

world.

But I believe——

Mr. GREENWOOD. And was that for purposes of litigation or for

purposes of preservation?

Ms. TEMPLE. I believe that was for purposes of getting all of the

relevant information together, to understand the facts and to preserve the facts.

Mr. GREENWOOD. Okay. Is that your recollection, as well, Mr.

Odom?

Mr. ODOM. Yes, sir. I believe it is my recollection.

I would also like to clarify that the initial core team of the people

to whom the memo was sent to, and the cc’s were people who were

invited to participate in this first call, and I did participate in this

call. I did not participate in all of the core calls after that, although

I did in some.

Mr. GREENWOOD. Let me ask you this question.

Mr. Berardino in his press release gave the reasons why Mr.

Duncan was fired. He said he was fired because he ordered the destruction of documents.

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Who told you, who told your team, who told your attorneys that

Mr. Duncan ordered the destruction of documents? Did Mr. Duncan

tell you that?

Mr. ANDREWS. Mr. Chairman, that information related to that

conclusion, and that is in Mr. Berardino’s memo or press release

of January 15 as the result of the investigation work we had done

to that point in time.

Mr. GREENWOOD. Who said Mr. Duncan ordered the destruction

of documents? Was it Mr. Duncan or was it someone who was destroying documents at Mr. Duncan’s command?

Mr. ANDREWS. My understanding is that it was a result of information from all of those interviews, including interviews with Mr.

Duncan, review of the information that we had on that, as well as

others.

Mr. GREENWOOD. Mr. Duncan acknowledged that he destroyed

documents contrary to Andersen’s policy or that he ordered others

to destroy documents contrary to Andersen’s policy?

Mr. ANDREWS. I did not directly interview Mr. Duncan. I don’t

want to suggest that he made the statement that it was contrary

to Andersen’s policy.

What Mr. Duncan did was conduct the meeting on October 23

and give instructions—and provide instructions to comply with the

policy.

Mr. GREENWOOD. How do you know that? Did he say that he did

that? Did others in the firm say that he did that?

Mr. ANDREWS. Mr. Chairman, my information is as a result of

the information shared with me as a result of the investigation

that we have going on, which included interviews with Mr. Duncan

and others, as well as review of documents that have been recovered.

Mr. GREENWOOD. Did Mr. Duncan create this initiative to comply

with policy or in opposition to the policy?

Mr. ANDREWS. Mr. Chairman, Mr. Duncan would have to answer

that question.

Mr. GREENWOOD. So no one in Arthur Andersen has ever said,

Mr. Duncan told me to destroy documents?

Are you aware of any employee who said, Mr. Duncan told me

to destroy documents?

Mr. ANDREWS. I do not know the answer to that. Again, once the

investigation is completed——

Mr. GREENWOOD. But you have said—the Arthur Andersen press

release asserts that Mr. Duncan conducted himself in, using poor

judgment, violation of policy.

My question is, how did Arthur Andersen come to that conclusion

when you have not indicated that either he admitted it, he came

forth and said, You know what I did? I broke the rules. I don’t

know what got into me. I started telling people to destroy documents. And you have not said, and by the way, these are the employees who destroyed the documents pursuant to Mr. Duncan’s directions, and that is why we fired the guy.

Mr. ANDREWS. Let me clarify. Mr. Duncan conducted a meeting

that——

Mr. GREENWOOD. Let me just clarify before you clarify.

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The Andersen press release says, ‘‘Although the firm is still

working to collect all of the facts, it has learned that at the direction of the lead partner, an expedited effort to destroy documents

in Houston was undertaken.’’ So how did you learn that?

Mr. ANDREWS. We have learned that as a result of interviews

with Mr. Duncan and others.

Mr. GREENWOOD. So Mr. Duncan said, I led an expedited effort

to destroy documents?

Mr. ANDREWS. No, that is not what I am saying, Mr. Chairman.

What I am saying is that he conducted a meeting with a group

of the engagement team with the policy—— Mr. GREENWOOD. How do you know that? How do you know that

he did that?

Mr. ANDREWS. Through the interviews that we have conducted.

Mr. GREENWOOD. With whom?

Mr. ANDREWS. With our investigators.

Mr. GREENWOOD. No. Whom did the investigators query?

Mr. ANDREWS. Mr. Duncan, as well as others.

Mr. GREENWOOD. And who are the others?

Mr. ANDREWS. I don’t have the information on the others.

Mr. GREENWOOD. We will need to know who those others are.

Mr. ANDREWS. But what I want to make clear is, as a result of

that meeting, after that meeting, an extensive document destruction and e-mail removal process resulted. So clearly, to us, the results of that meeting led to that activity, and Mr. Duncan was

engaged—— Mr. GREENWOOD. We know that that expedited effort didn’t occur

because of telepathy. So therefore either Mr. Duncan said, It is

time to expeditiously, and contrary to our policy, start destroying

documents; or he didn’t.

And he doesn’t admit that apparently. He has not said I—he

didn’t come to your investigations and say, you know what? Mea

culpa, I told these people to destroy documents contrary to our policy. It was a rush. It was expedited.

Nor have you indicated to us at any time that his underlings

came and said, Boy, this is what we were told. We were told to

hurry up and rush and destroy documents.

He didn’t tell our investigators that he did this.

Mr. ANDREWS. I am not here to defend a policy. What I have said

is that the activity that resulted from that meeting, large quantities of destruction of documents, is at best an incredible error in

judgment and totally inappropriate and not consistent with what

we would intend to take place or what this firm stands for.

Mr. GREENWOOD. Why do you think Mr. Duncan went about

this?

You fired him. Pretty strong action. What does the company

think motivated Mr. Duncan to go forward with this expedited rush

to destroy documents, putting his job on the line, I would assume

putting at risk all of those under him who were engaged in destroying documents in an expedited, rushed fashion, contrary to your

policy. Why would he do that?

Mr. ANDREWS. Mr. Chairman, I don’t know. And I hope by the

time the investigation is done——

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Mr. GREENWOOD. Nobody asked him why he did that? Before you

fired him, nobody said, Why did you do this? What got into your

head?

Mr. ANDREWS. I am sure our investigators had inquired along

many different lines. But what—— Mr. GREENWOOD. You are sure of that?

Mr. ANDREWS. I am clear they interviewed him, yes. They have

interviewed him on multiple times.

Mr. GREENWOOD. Before you came to testify about all of this, did

you ask your investigators what the heck he said?

Mr. ANDREWS. My understanding is that he said that he conducted the meeting, he shared the policy, or discussed the policy,

with the people at the meeting, and the resulting actions—— Mr. GREENWOOD. He passed out the policy and said, Here is the

policy?

Mr. ANDREWS. I don’t know exactly how he passed it out or if he

passed it out. But he discussed the policy.

Mr. GREENWOOD. They just took the policy that had been sitting

around for years and said, We’d better get to work here?

Mr. ANDREWS. Mr. Chairman, I don’t know how he conducted

himself at the meeting because I wasn’t present.

Mr. GREENWOOD. My time has expired.

The Chair recognizes the gentleman from Florida, Mr. Deutsch.

Mr. DEUTSCH. Thank you, Mr. Chairman. And I think we actually, absolutely know more than we did before the meeting started,

not as much as I think any of us want to know.

I want to shift focus a little bit, because I think this is going to

probably be the last round, and at least give each of you an opportunity to touch on this. And it goes back to my original opening

statement of the sort of big-picture issue, which is really regulatory

safeguards.

The whole premise of what we believe happened is that Enron

was gaming the public accounting system. At least that is a very

likely sort of scenario, that they, through these partnerships and

through offshore issues, were putting losses in those areas that, effectively, their balance sheets did not reflect; and analysts, Wall

Street analysts or for that matter any investor trying to understand what was going on with Enron, was not able to do.

From any of your perspectives, from the public accounting side—

you know, again this is sort of more the big-picture issue as opposed to some of the details that we have dealt with. But from that

perspective, can you offer suggestions to us that—is the system

broken?

If you recall, most of—I think all of you were here for my opening statement. Are there other Enrons out there? Are there other

companies that are doing effectively exactly the same thing that

Enron is doing? And for that matter, all of them have big five accounting firms, and the big five accounting firms—again, not the

issue of destruction of documents, but the issue of reporting under

present, you know, accounting rules, clearly is a skirting of the

rules, clearly is a gaming of the system.

Now, again I am not ready to say that that gaming was illegal.

It was awful. It was terrible. I was about to say when my colleague

was talking about maximum security prison, that might be too

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good a condition for some of those people. But the reality is, in

terms of that issue, which was really the big issue, do any of you

have any comments that you would like to make on that?

I know it is not why you were asked to come here, but you have

a lot more experience in the public accounting world than I do.

Mr. ANDREWS. Well, Congressman, let me comment on it.

I think the intent and objective of financial statements and other

disclosures should be to inform users of those statements in a way

that there is clarity to that information, so they can make informed

decisions, whether for investment reasons or for others. So I totally

concur with that.

And I believe we do need to improve that process for that clarity

to be at the level it should be. Because the investor, or whoever

uses financial statements, needs to be able to understand them for

their purpose.

Mr. DEUTSCH. Is it a fair thing to say that no one could really

look at your reports, Andersen’s reports, about Enron and really

understand what was going on in Enron?

Mr. ANDREWS. Congressman, our responsibility with Enron as—

they are Enron’s financial——

Mr. DEUTSCH. I am not saying you did anything wrong. Because

there are some very, very smart people—this is also a company

that didn’t pay taxes for 6 years at the same time people are making billions of dollars off of tax, so gaming the system.

And again the whole thing we have talked about, you know, even

to the last day of gaming the system, of changing the pension manager to lock people in for an additional 60 days.

In a sense, it is our job to prevent this. And I don’t know how—

you know, we can’t stop all crooks, especially white collar crooks.

But our job is to do the best we possible can.

You can respond.

Mr. ANDREWS. Well, Enron was a very complex company. There

is no question that their financial statements and related disclosures are complicated. Many have said that they are difficult to understand.

So, again, to the test of do you have the clarity that some are

requesting in those financial statements, from that vantage point

can an investor understand everything?

But very sophisticated investors had those financial statements.

They have a responsibility to understand them as well. The company and ourselves have a responsibility to make sure those financials are materially presented—fairly presented in conforming with

generally accepted accounting principles.

But as you observed, many have commented on the perplexity.

But this is a very complex company.

Mr. DEUTSCH. But again we kind of look at the other sides. But

at this point we have no one—I am not aware—for instance, the

bond rating companies basically didn’t downgrade on a continuous

basis. The company imploded.

At the same time—and, you know, you talk about people being

able to read it. These are the most sophisticated people in the

world trying to look at the statements that you provide them, and

they don’t know what is going on. It is not the employee with the

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$500,000 401(k); it is literally the best analysts in the world

couldn’t understand what was going on with your statements.

And again I am not ready to say you did anything wrong. But

the other issue is, if Enron did it, how do I know that there are

not other companies out there that are doing the same sort of

things, and that from a financial market basis—I mean, one of the

incredible success stories is the transparency that you as an institution, Arthur Andersen, along with your colleagues in the accounting profession, provide.

I mean, the system works. I mean, we have had unprecedented

strength in our economy for one of these reasons. We have access

to capital unprecedented in the history of the world for your successes. And what I am saying is that, you know, it failed incredibly

here.

And, you know, is it going to happen again? Is it going to happen

this week? Is it going to happen next week? Next month? For one

company? For two companies? For three companies? Because obviously there were individuals who made a lot of money gaming the

system.

I mean, who walked home, as Congressman Rush pointed out— I mean, there are a lot of people who are sitting on tens, hundreds

of millions of dollars because of their involvement with Enron.

Mr. ANDREWS. Congressman, I can’t comment on the other companies obviously.

But, first of all, as to financial statements, Enron was a business

failure. I don’t think the financial statements caused the business

failure.

Mr. DEUTSCH. Right. And I agree, businesses do fail. But people

in public markets, let me just say—my time has expired, but just

a last question.

In the case of the efforts that Enron used, the partnerships and

the offshore partnerships and the offshore investments, in terms of

shifting the debt that we are now aware of, that have now been

disclosed, if Arthur Andersen was in another company today and

those same things were going on—this has nothing to do with the

destruction of documents—what would your statement be?

What would you be saying in your public accounting report about

that company today, knowing what we know about Enron? Would

it be the same? Would you be issuing the same report?

And again, this is really the heart of the issue. I mean, you

know, if that same situation is going on today, is Andersen saying

everything is fine with the company?

And you have these internal debates, but ultimately, hey, they

are really sharp, they really know the rules, we are not supposed

to report those partnerships because they are off book. I mean,

let’s—we don’t have to. And everyone sort of winks at each other

knowing what is going on.

Again, I have to be—you know, you have very, very smart people

involved. And you know the people at Andersen, the partners who

are in charge of Enron, knew exactly what they were doing. They

knew exactly what Enron was doing in terms of this shifting. I am

100 percent convinced of that.

Now, did they violate the law? Probably not. Did they violate accounting practices? I don’t know. Did they, you know, did they enVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00163 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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gage in something which created a disaster for untold people in so

many ways? Absolutely.

And I guess my question is, you know, are you reevaluating it

now? Are the other—you know, four firms reevaluating it? Because

what would you do now? What would you do today with Enron in

terms of your transparency, to tell the market, to tell the world

what is going on in that company? Would it be the same report?

Mr. ANDREWS. Well, the financial statements need to have appropriate application of the principles and the appropriate disclosure.

And I think the Enron situation has certainly heightened attention

to that. And actually the SEC and others have already taken some

actions to recommend enhanced disclosures, particularly in the

management discussion and analysis around risk factors and other

items. That reaction, I believe, is in direct reaction to the situation

with the Enron engagement.

So there is strong encouragement to make sure that the risks are

appropriately presented and disclosed, either in the financial statements or other parts of the 10-K or annual report of the company.

So, to your question, I think many of us, and we have said this,

that the financial reporting model can be improved so that it is better; disclosure can be improved in many ways.

And so I think we definitely would subscribe to that, yes. And

I think progress has already started. I think the profession is looking at that. The SEC is looking at that, as is Congress. So I think

there will be improvements. I think out of any situation like this,

let’s hope that we all learn and changes occur to improve in whatever direction is appropriate. I would agree that financial disclosures would be one.

Mr. GREENWOOD. The time of the gentleman from Florida has expired. The Chair recognizes the chairman of the full committee, Mr.

Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman.

Before I begin this line of questions, I want to go back, Ms. Temple, to a question Mr. Markey asked about your interpretation of

obstruction of justice and the requirements of retention of documents when, in fact, a proceeding is started. And I want to put you

all on notice about that point, because I don’t want to lead you into

answers that might put any of you at risk unless want to be there.

But my understanding, Ms. Temple, is that obstruction of justice

can apply even before a proceeding is commenced when documents

are destroyed with the intent to make them unavailable to a proceeding that is likely to be commenced, in order to make sure that

those documents are not available for that proceeding and that

those documents would, in fact, be relevant to that proceeding.

Now, I don’t know if I’ve got it exactly right, but that is pretty

much my understanding of obstruction of justice. And I wanted to

say that before I ask you all of these questions.

I want you all to respond yes or no if you can. I want to take

you through a timetable now of SEC activities in this matter.

Beginning with October 17, SEC sends its first letter to Enron

requesting information regarding third quarter losses.

Please answer, each of you, whether you are aware of that letter

at that time.

Mr. ODOM. No, sir, I was not.

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Ms. TEMPLE. I was not aware of that letter on October 17.

Chairman TAUZIN. When did you become aware of it?

Ms. TEMPLE. To the best of my recollection, I received a copy of

the letter on October 25. No later than October 23, perhaps a day

or two before, I learned that the SEC had written a letter to Enron

asking for documents about related party transactions.

Chairman TAUZIN. Mr. Odom, did you learn of that letter at any

time?

Mr. ODOM. Yes, sir, about the same time Ms. Temple did.

Chairman TAUZIN. How about you, Mr. Baskin?

Mr. BASKIN. No, sir. I was not aware of the letter at that time.

Chairman TAUZIN. Have you ever been aware of it?

Mr. BASKIN. Yesterday I became aware of it.

Chairman TAUZIN. How about you, Mr. Andrews?

Mr. ANDREWS. No, sir. I definitely was not aware of it on October

17.

Chairman TAUZIN. When did you become aware of it?

Mr. ANDREWS. I am not sure. But sometime in the latter part of

October.

Chairman TAUZIN. Now, Mr. Duncan did give us an extensive

interview prior to his taking the Fifth Amendment, as you know.

In that interview, he says that he learned of the SEC inquiry of

Enron on October 19-20, and that he informed others at Andersen,

including Odom and Temple, on that date.

Do either of you deny that?

Mr. ODOM. I was not in Houston. He may have called me at

home, but I do not recall the call.

Chairman TAUZIN. Ms. Temple?

Ms. TEMPLE. I don’t recall at this time. To the best of my recollection, I recall focusing on the requests or learning about the requests on the October 23 call.

Chairman TAUZIN. On October 22, Enron publicly acknowledged

an informal inquiry had been started by the SEC—publicly acknowledged. That is when I learned about it, when America

learned about it.

Did any of you learn about it with us on that date?

Mr. ODOM. Yes, I believe that is the date.

Chairman TAUZIN. So on the 22nd you learned publicly that

Enron acknowledged an informal inquiry by the SEC?

Ms. Temple?

Ms. TEMPLE. Yes, I believe that is correct.

Chairman TAUZIN. Mr. Baskin?

Mr. BASKIN. I honestly don’t recollect knowing about it, no, sir.

Chairman TAUZIN. Mr. Andrews?

Mr. ANDREWS. That is probably the time that I became aware of

it as well, so I said, sometime subsequent to the 17th.

Chairman TAUZIN. Mr. Baskin, you really don’t think you knew

about it when Enron announced that there was a public announcement that the SEC has started an informal inquiry?

Mr. BASKIN. I try to read the Wall Street Journal most every

day. And I probably read about it, but I don’t recall.

Chairman TAUZIN. So you probably were aware of it.

That is not the end of the SEC activities. On October 31, the

SEC upgraded its informal inquiry into a formal investigation. Did

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any of you know about that decision by the SEC to formally upgrade it to a formal investigation?

Mr. Odom.

Mr. ODOM. I certainly knew about it the day that Enron announced it.

Chairman TAUZIN. How about you, Ms. Temple?

Ms. TEMPLE. Yes. I learned when Enron announced it, yes.

Chairman TAUZIN. How about you, Mr. Baskin?

Mr. BASKIN. What I read in the newspaper.

Chairman TAUZIN. How about you, Mr. Andrews?

Mr. ANDREWS. Somewhere around that time, yes.

Chairman TAUZIN. Thank you.

It wasn’t until November 8 that the subpoenas were issued. Now,

November 8 the subpoenas were issued. On November 9, Ms. Temple, you leave the voice mail.

On November 10 you write this extraordinary memo. It is a good

one. This really is a good one. It says, we don’t want anybody to

falsely accuse Arthur Andersen of destroying documents. That is

what it says. So we are not only going to preserve current documents, I want you to preserve all of your new documents. Save everything. And I want to read to you from that memo.

On the second page this is what you told everybody to do—everybody now. No. 1, existing documents. ‘‘effective immediately, all existing Enron-related documents and materials must be preserved

and nothing should be destroyed or discarded.’’ Now, I have got a very simple question to ask you. If that was

the policy that was announced on November 10, effective immediately, what policy was in effect on November 9?

Ms. TEMPLE. The firm’s written documentation retention and destruction policy.

Chairman TAUZIN. Right. Which permitted destruction?

Ms. TEMPLE. Right. Only in certain circumstances. And the firm’s

policy continued to be in place.

Chairman TAUZIN. Well, let me make sure I’ve got this on the

record.

On November 9, the day before this policy was issued, ‘‘effective

immediately,’’ the policy of Arthur Andersen was that it is okay to

destroy documents that might be related to the Enron investigation

by the SEC and this committee. Is that correct?

Ms. TEMPLE. The policy states that if there is threatened litigation, no related material shall be destroyed. It also states that in

any circumstance, all materials relevant to the opinions and findings of the auditors shall be maintained.

Chairman TAUZIN. But, you see, you felt it necessary, not on the

date that the SEC announced an informal inquiry but on the date

Enron announced it. You didn’t find it necessary to write this

memo the date that the SEC upgraded its investigation from informal to a formal investigation; you only found it necessary to write

this memo saying, keep everything, don’t destroy anything, the day

a subpoena was issued.

And up until that time, the policy of Arthur Andersen was, it is

okay to destroy documents if you think that it fits our policy of document destruction; is that right?

Mr. Andrews, you are itching to answer. Go ahead and answer.

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Mr. ANDREWS. I think the reason the memo is written at that

point, once a subpoena is received, there is no question there

should be no destruction of documents.

Chairman TAUZIN. You don’t think there was any question documents shouldn’t be destroyed when you learned that a formal inquiry had been instituted by the SEC?

Mr. ANDREWS. Well, prior to the receipt of a subpoena what I

would expect, and we expect, our people to do is understand the

facts and circumstances when a situation—— Chairman TAUZIN. How about when the SEC starts a proceeding

against you? Is it not the responsibility of all of the folks at Arthur

Andersen, every accounting firm, to not destroy documents that

might be relative to that proceeding?

Mr. ANDREWS. Whenever there is a proceeding against us, absolutely we wouldn’t destroy documents.

If I may, may I—— Chairman TAUZIN. Well, please tell me when in the time line I

described to you, in your opinion, any one of you, please tell me,

on behalf of Arthur Andersen, when you thought it was wrong to

destroy any more documents? What date was that? Was it the date

that you found out the letter had been written? Was it the date

that you found out publicly, when we all found out that Enron announced an informal inquiry by the SEC? Was it the date that the

SEC announced a formal inquiry? Or was it only the day you got

a subpoena saying, turn over the documents.

When in that time line was it the responsibility of Arthur Andersen to stop destroying documents? Please tell me. Any one of you.

Mr. ANDREWS. I believe the responsibility existed prior to the receipt of the subpoena.

Chairman TAUZIN. I think it did, too. When did it?

Mr. ANDREWS. The events around October 17, 18, 20, all of the

things that were happening, the receipt of the SEC letter, the announcement of the quarterly results and the resulting litigation,

that those were factors that the engagement partners——

Chairman TAUZIN. I think so, too. And I want to ask you, Ms.

Temple, if you agree with Mr. Andrews—tell me if you don’t agree

with him, first of all. You don’t agree with him?

Ms. TEMPLE. I agree that the policy requires retention of related

materials—— Chairman TAUZIN. If you agree that the destruction should have

stopped back in October when Mr. Andrews said it should have

stopped, why didn’t you write this memo then, saying retain everything, don’t destroy anything anymore, and all of your new products, save it too, because we’re under investigation and there’s litigation coming and you better make sure that nothing is destroyed

for the sake of the reputation of our company and for the sake of

the integrity of the investigation? Why didn’t you issue it then?

Ms. TEMPLE. The issue was not raised with the legal group——

Chairman TAUZIN. Nobody raised it.

Ms. TEMPLE. [continuing] at that point in time. The policy was

in existence to require detention—— Chairman TAUZIN. Does it have to be raised, Ms. Temple, when

you are the counsel representing this company internally on litigation? Does anybody have to raise it, or is it somebody’s responsiVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00167 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
164

bility in the company to say, stop destroying documents, we’re

under investigation? Whose responsibility was it if it was not

yours? Did somebody have to raise it? Whose responsibility, Mr.

Andrews? Was it the president? Was it you? Who was it?

Mr. ANDREWS. In our policy, that responsibility—the policy that

we’re revising, and I acknowledge we’re revising—in that policy,

that responsibility is with the engagement party.

Chairman TAUZIN. With an accountant, not a lawyer? You give

the responsibility to an accountant to decide whether it’s legally

permissible to destroy documents relative to a proceeding? Let me

just tell you, I don’t know what’s going to happen out of all of this,

I really don’t. I hope you’re all okay. I don’t know. But I’ll tell you

this. Every accounting firm that is listening to this had better listen very carefully. If all of your policies are to let accountants decide when it’s legal to destroy documents in a pending investigation, an awful lot of people are going to be in trouble down the

road, not just in this case. I hope you think seriously about what

kind of policies you have on the retention of documents and whether those policies are clear, are vague, or whether you just send

memos out for somebody else to interpret or whether you eventually recognize, as you did, Ms. Temple, at some point, that they

needed guidance on what not to do and what to do. And they

should have gotten that guidance a long time sooner.

We wouldn’t be here. We’d be scheduling the Enron hearing right

now. But we’re here discussing what happened at your company,

because this guidance never went out when it should have gone out

and because your company did not have a clear policy on making

sure the documents were not destroyed once a notice was given by

the SEC that it was checking into your business. That has got to

change. If you don’t change it, I promise you we will. Thank you

very much.

Mr. ANDREWS. May I respond?

Chairman TAUZIN. Yes, sir.

Mr. ANDREWS. I’ll comment on what I think should have taken

place and I’ll comment on the policy. What I believe should have

taken place—I don’t expect our audit personnel, as you say, the accountants, to understand the law. That’s why we have other experts involved.

Chairman TAUZIN. Indeed.

Mr. ANDREWS. What we do expect, a person in a responsible position, an audit partner, to have an understanding of the policy as

well as the judgment to consult, and we encourage consultation. So

we do not expect an engagement partner or audit partner or anyone else to make these decisions alone, but we do expect them to

understand the policy and to have enough knowledge to raise the

question and seek advice in this situation——

Chairman TAUZIN. Except, Mr. Andrews, except—and I’ll conclude, Mr. Chairman—except once a legal proceeding is commencing or about to commence, all of that changes, and if you rely

upon your accountants to seek advice instead of giving them advice

at that time, all of you are going to be in deep trouble as we go

forward.

Mr. ANDREWS. My comment on the policy, I am not here defending our policy in the sense that it was complete and robust and anVerDate 11-MAY-2000 13:38 Apr 25, 2002 Jkt 078319 PO 00000 Frm 00168 Fmt 6633 Sfmt 6602 E:\HEARINGS\77569 pfrm09 PsN: 77569
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ticipated all of the guidance that it should. That’s exactly when we

realized this situation had occurred, which was in early January,

we suspended the policy we have. We put in place an interim policy

that essentially required retention of everything and engaged a

reputable firm to come in—— Chairman TAUZIN. Mr. Chairman, I want to make a request upon

Arthur Andersen, if you don’t mind, Mr. Chairman. The chairman

has asked you to find out who the others were who destroyed documents. I think you ought to do a thorough survey within the company of everybody who destroyed documents, No. 1. I know you

didn’t keep logs of what was destroyed. Now, I asked about that.

Is there a log kept under your policy of what was destroyed and

what was kept? And the answer was, of course not. Then you’d

know what we destroyed. So there are no logs kept.

I’m going to ask Arthur Andersen to do that, to go back and reconstruct as much as you can about what was destroyed that we

can’t recover from hard drives. I want you to be clean with us

about what was destroyed and what was not destroyed to the extent you can. And if you’re as clean as you can be about it, then

we’re not going to have as many problems as we’ve had at this

hearing. But the clear picture we’re getting at this hearing is that

somebody felt it was a good idea to get rid of an awful lot of documents before our investigators got busy and other investigators got

busy. That is the clear message I’m getting and it’s not a pretty

one.

Mr. ANDREWS. Can I respond to your points?

Chairman TAUZIN. Yes, sir.

Mr. ANDREWS. First of all, in terms of the investigation and other

people, our investigation will be complete and comprehensive, and

we will take whatever action based upon that investigation that’s

appropriate.

Chairman TAUZIN. You have my request. I hope you fill it.

Mr. ANDREWS. I do. Trust me, we will do it and we’re in the process of doing it, and when it’s completed we will take those actions.

And on top of our investigation being led by Davis, Polk, we have

in addition to that engaged former Senator Danforth to come in

and look at what we found, to see did we do it thoroughly, was it

completely. We, the firm, are not placing any restrictions on the

scope of that review at all, and it will be thorough and it will involve everyone that was involved in this process.

Chairman TAUZIN. Just be aware that we too will be examining

the work you do to see that it was thorough and complete, not just

Senator Danforth.

Thank you, Mr. Chairman.

Mr. GREENWOOD. The time of the gentleman from Louisiana has

just expired. The Chair recognizes the gentlelady from Colorado.

Ms. DEGETTE. So I’ll have a commensurate amount of time?

Mr. GREENWOOD. When you’re chairman you will, yes.

Ms. DEGETTE. Mr. Odom, I believe that you got the October 12

e-mail from Ms. Temple about the document destruction and retention policy. Is that correct?

Mr. ODOM. Yes, ma’am.

Ms. DEGETTE. And I believe you told our staff that to get a memo

like that was very unusual. Correct?

166

Mr. ODOM. I don’t recall—I mean, I don’t remember using those

exact words.

Ms. DEGETTE. Okay. Well, you had never gotten a memo like

that reminding you of the policy, had you, sir?

Mr. ODOM. I have never gotten one with a doc. link on it like

that, no, ma’am.

Ms. DEGETTE. One with a doc. link linking you back to the document retention policy. Is that correct?

Mr. ODOM. That’s right.

Ms. DEGETTE. And how long have you been with the company?

Mr. ODOM. Since 1969.

Ms. DEGETTE. Thank you.

Now, Ms. Temple, I wanted to ask you about something. This October 12 memo that you sent out to everybody, was that your decision to send that memo out?

Ms. TEMPLE. This e-mail?

Ms. DEGETTE. Yeah.

Ms. TEMPLE. The particular e-mail in the Web site reference——

Ms. DEGETTE. No, no. I want to know who decided to send this—

that it would be a good idea to send this e-mail out to everybody.

Was that you?

Ms. TEMPLE. I believe I thought of that based on the discussions

about the legal advice and the reference to the policy I had with

others.

Ms. DEGETTE. Okay. Now, who did you have those discussions

with?

Ms. TEMPLE. I discussed the legal advice about appropriate documentation with my supervisor and others——

Ms. DEGETTE. And your supervisor was Don Dreyfus?

Ms. TEMPLE. Yes.

Ms. DEGETTE. Okay. And who else was involved in those discussions?

Ms. TEMPLE. I believe a senior risk management or practice director by the name of Jim Freidlief.

Ms. DEGETTE. And Jim Freidlief also?

Ms. TEMPLE. Yes.

Ms. DEGETTE. And you decided to send that e-mail out to remind

people of the document policy because there were concerns about

the growing thunderclouds over Enron?

Ms. TEMPLE. No. Because of the questions that had arisen about

appropriate documentation and retention——

Ms. DEGETTE. People were wondering what documents they

should retain or destroy. Right?

Ms. TEMPLE. I testified earlier about the specific questions——

Ms. DEGETTE. No. Just—you know, just yes or no I think would

be good.

Ms. TEMPLE. No. It was about questions about specific documentation issues that had arisen.

Ms. DEGETTE. Uh-huh, about what should be kept or destroyed?

Ms. TEMPLE. About how to date current period documents, about

whether to acknowledge in writing—how to acknowledge in writing

currently the fact that the firm had concluded that the prior

accounting——

167

Ms. DEGETTE. Those questions that you testified to or that you’re

delineating right now, does this policy that you linked in your email answer those questions?

Ms. TEMPLE. It was used as a reference in providing advice to

answer the questions.

Ms. DEGETTE. Okay. But you gave the link to the entire policy,

correct, not just one section?

Ms. TEMPLE. Correct.

Ms. DEGETTE. Now, at that time, Arthur Andersen had not been

served with a subpoena as of October 12. Correct?

Ms. TEMPLE. Correct.

Ms. DEGETTE. And there is some sense, I think everybody here

will agree, that there was probably some concern about pending

litigation as of that time. Right?

Ms. TEMPLE. To the best of my recollection, I don’t recall——

Ms. DEGETTE. Well, you knew that there were probably—that

there was a sense there might be lawsuits; I mean, really, didn’t

you?

Ms. TEMPLE. I don’t recall that being a focus of discussion or——

Ms. DEGETTE. I don’t want to talk about a focus of discussion.

I mean, you’re a Harvard-trained lawyer. You’re a litigator. You’re

an SEC expert, all of the things we’ve been talking to. You knew

there might be a risk of litigation didn’t you?

Ms. TEMPLE. I knew there was a possibility of litigation——

Ms. DEGETTE. Thank you.

Ms. TEMPLE. [continuing] but we did not discuss it.

Ms. DEGETTE. Now, Arthur Andersen’s policy does not require

retention of all documents when there is simply a risk of litigation

but, rather, when Arthur Andersen is served with a subpoena,

doesn’t it?

Ms. TEMPLE. The policy has several different provisions requiring

retention——

Ms. DEGETTE. I know, uh-huh.

Ms. TEMPLE. [continuing] and it requires retention if there’s

threatened litigation——

Ms. DEGETTE. Okay. Stop for a second. Why did you not send out

an e-mail on October 12 telling people to retain all documents?

Ms. TEMPLE. At that point in time, there was no litigation

against Enron that I was aware of. There was no litigation against

Arthur Andersen——

Ms. DEGETTE. Right.

Ms. TEMPLE. [continuing] that I was aware of——

Ms. DEGETTE. In truth—and I don’t want to mislead you, okay?

I only got this document this morning. So it’s taken me a few hours

to look through it, but luckily I’ve had a few hours to look through

it. And here’s what I think the document says. The thing that says

retain the documents in case of threatened litigation is in the executive summary. Right? And it’s on page 2, paragraph 9 of the executive summary. That refers you to paragraph 3.5.3, which I think

is a typo and really means paragraph 4.5.4, because 3.5.3 talks

about the kinds of information to be destroyed. 4.5.4 says in the

event Arthur Andersen BU is advised of litigation or subpoenas regarding a particular engagement, the related information should

168

not be destroyed. See policy statement 780. Right? Your adviser behind you is nodding his head yes.

Ms. TEMPLE. I see where that is, yes. Thank you.

Ms. DEGETTE. And policy statement 780 says that you are only

to retain documents other than the—other than the documents

you’re supposed to destroy if you’re served with a subpoena. Right?

Ms. TEMPLE. Well, I think you have to read the retention policy,

which also provides that all information relevant to the findings

and opinions should be retained in 3.5.3.

Ms. DEGETTE. Well, that’s your work papers. Right?

Ms. TEMPLE. It says information having relevance to our opinions

or findings to be a part of the central client engagement files.

Ms. DEGETTE. Right. Except for 3.5.3 talks about all of the different things that should be destroyed. That’s what we’re talking

about here today.

Mr. Andrews, you don’t know of any essential documents being

destroyed by Mr. Duncan, do you?

Mr. ANDREWS. What I know is that a large amount of documents

were destroyed. At this time I’m not aware that any of those were

what I call the permanent audit work papers.

Ms. DEGETTE. Right. What we’re really talking about is the

backup papers, which you had said then, later on in November,

should be retained.

What I’m getting at here, Mr. Chairman, is I think the problem

is with Arthur Andersen’s policy, because Arthur Andersen’s policy

says if you’re threatened with litigation, then you are to notify, and

then it has the whole notification procedure of who you’re to notify,

but it does not say that you are to retain these backup papers. And

the only time you are legally required, or under Arthur Andersen’s

policy—which it applies, I assume, to all of its clients—the only

time you’re required to retain those is if a subpoena is served,

which is exactly what Ms. Temple did.

And so my opinion, after looking at this, is that Mr. Duncan

probably interpreted this e-mail on October 12 saying, oh, okay, I’m

supposed to destroy all these documents, like drafts and preliminary versions, et cetera. That’s what she’s telling me. And then in

November when they get the subpoena, they say, loop, we’re not

doing it. And I think the problem is that this policy allows reckless

destruction of documents, and I think that that’s what the problem

is. And with that, I’ll yield back any time I might have.

Mr. ANDREWS. Could I comment on that?

Mr. GREENWOOD. Yeah. You may certainly, Mr. Andrews.

Mr. ANDREWS. First, with respect to the policy, again, I think we

have acknowledged that we do not think the policy is as robust and

well written as we would like, after we discovered this, and that’s

why we suspended it and introduced an interim policy. And we’ll

have, I would imagine, as sound of a policy as possible to cover all

of these circumstances.

Now, having said that, no policy can anticipate every situation

that you can imagine. What I have said and what we have said is

that what took place at the end of October, the volume of e-mail

elimination, the volume of document destruction, is completely out

of character with this policy, in my opinion. And even if it’s not out

of character with this policy, it is in fact a gross error in judgment

169

and totally inappropriate and totally different than anything I’ve

ever experienced in my career.

Ms. DEGETTE. Let me just say something to you, Mr. Andrews.

I was a litigator for 15 years, and I advised a lot of businesses. I

didn’t do SEC work, and I didn’t work with ‘‘Big 5’’ accounting

firms. My clients were small businesses. But I will tell you that

when I knew of threatened litigation against a client, I called them

up, and I said, don’t destroy a thing. And sometimes I had to go

over and physically take possession of papers.

And that’s I think the ethical obligation of every attorney who

represents a client, and it’s the ethical obligation of every accounting firm or auditor who represents a client. I don’t think that that

is so unreasonable, that that should have been in your policy for

all of these years, and I hope to God it’s in the interim policy that

you have adopted.

Mr. GREENWOOD. The time of the gentlelady has expired. My

mother, I think, would say that your policy was dumb like a fox.

The chairman recognizes the gentleman from Florida, Mr. Bilirakis.

Mr. BILIRAKIS. Thank you, Mr. Chairman. Mr. Odom, does Andersen rate all of its clients on the basis of risk management—on

a risk management scale?

Mr. ODOM. Yes. Yes, sir, we do.

Mr. BILIRAKIS. What is—has been the rating for Enron?

Mr. ODOM. It’s always been at least maximum.

Mr. BILIRAKIS. At least maximum?

Mr. ODOM. Yes.

Mr. BILIRAKIS. Now, is maximum the highest?

Mr. ODOM. There’s a max star.

Mr. BILIRAKIS. There’s a max star. Has it also been a max star?

Mr. ODOM. Yes, sir.

Mr. BILIRAKIS. When was it at a max star? And max star is the

highest?

Mr. ODOM. Yes, sir.

Mr. BILIRAKIS. When was it a max star?

Mr. ODOM. It was a max star in 2000 and I think in the year— I don’t know prior to 2000, but in 2000 it was a max star. In 2001

it was rated max, but we update that rating as the year goes on,

and I’m sure it would have hit max star again before we did an

audit—had we done an audit.

Mr. BILIRAKIS. All right. Now, the criteria that you use in order

to establish these ratings—there is a criteria, apparently, that you

use. Right?

Mr. ODOM. That’s correct.

Mr. BILIRAKIS. All right. Is that criteria reflected in the work papers?

Mr. ODOM. Yes, sir, it is.

Mr. BILIRAKIS. It is. And those work papers are available?

Mr. ODOM. I believe they are, yes, sir.

Mr. BILIRAKIS. Boy, this better be more than a belief. I sure hope

that’s more than a belief. Mr. Andrews?

Mr. ANDREWS. Yes. As consistent with what we have done, we

said we’ll provide the information that this committee or the SEC

or the Department of Justice has requested.

170

Mr. BILIRAKIS. Okay. And when we get into that portion of this

set of hearings, those work papers—those work papers will be

available? They’re not—they’re available now—you’re saying

they’re available now because they have not been destroyed, and

there is no criteria for having destroyed them, right, in your retention policy as I read it?

Mr. ANDREWS. Right. The actual audit work papers themselves,

certainly nothing will be destroyed now, and as I—I’d like to just

make sure I clarify one thing, because I may have not been as clear

as I could have when you were questioning me earlier. I just want

to make sure that we understand what an audit work paper is. An

audit work paper is the permanent record, if you will, of the audit

itself. That’s where once you’ve done all of your work, reviewed all

of the documents, it’s where you reduced your documentation that

becomes the permanent support for that audit conclusion. As I said

earlier—— Chairman TAUZIN. Would the gentleman yield?

Mr. BILIRAKIS. Yes.

Chairman TAUZIN. Again, that may not be the most important

papers, however. The most important papers might be the Andersen consulting documents.

Mr. BILIRAKIS. The initial papers.

Chairman TAUZIN. I’m understanding that Enron would contact

Andersen for consulting services, we want to set up this partnership, we want to set up this financing arrangement and we want

to know if it will pass audit later on, so comment on the structure

and the financing of this situation so that it will pass audit later

on. And then Andersen issues a consulting report to its client, like

Enron, saying it’s okay to set up Raptor. It’s okay to set up Jedi

the way you propose it; or no, it’s not, and here’s how you should

change it if it’s going to pass audit standards later on.

Those consulting documents are probably much more important,

Mr. Bilirakis, than the audit work papers. Is it possible that consulting documents were destroyed in this period when there was

document destruction going on so massively, Mr. Andrews?

Mr. ANDREWS. Well, let me comment. First of all, a client in a

situation you have a complex transaction or they need to request,

if you will, accounting advice regarding how a transaction might be

accounted for, that would be a normal dialog that would occur with

a client.

Chairman TAUZIN. But answer my question. Is it possible that

those documents were destroyed?

Mr. ANDREWS. In that documentation, to the extent that that

documentation is important to an accounting and audit conclusion,

they would become part of the audit work paper files. Your question about documents that were destroyed, as I said, at this point

in time in your investigation, what I know was destroyed was a

large quantity of e-mails and then other hard documents that were

shredded. Now, the documents that were shredded, I do not know

what was—— Chairman TAUZIN. Let me——

Mr. ANDREWS. [continuing] the e-mail—— Chairman TAUZIN. Any of you know whether consulting service

document reports were destroyed? Any of you know? Ms. Temple?

171

Ms. TEMPLE. I have no facts about——

Chairman TAUZIN. Mr. Odom?

Mr. ODOM. I do not know what was destroyed.

Chairman TAUZIN. Mr. Baskin, you have no knowledge?

Mr. BASKIN. I have no knowledge.

Chairman TAUZIN. Thank you, Mr. Bilirakis.

Mr. BILIRAKIS. Well, so getting back into the risk management

analysis, Mr. Odom and Mr. Andrews, whoever it might be more

apropos, the original documentation, the original work sheets

where you set out the criteria and your analysis and everything of

that nature, and then that led to this final conclusion, I guess it

is, which would be the document that Mr. Andrews is telling us

would remain in the file. Would that original document be available, not the conclusion, if you will, but the original documentation

that led to that conclusion? I mean, that’s a work paper any way

you look at it.

Mr. ANDREWS. If your question is related to the work paper that

led to that conclusion and that risk assessment——

Mr. BILIRAKIS. Yes.

Mr. ANDREWS. [continuing] there would be documentation in the

audit file related to that.

Mr. BILIRAKIS. And that would not have been destroyed? There’s

no way that the retention—the retention policy would have encouraged or required that to be destroyed?

Mr. ANDREWS. Obviously the documents are shredded. I don’t

know what was in that, but to the extent that it’s part of the permanent core audit files, the core materials, it would——

Mr. BILIRAKIS. I think you can see where I’m leading here. A

point was raised, that you’re an auditor on one hand, but then

you’re also the consultant, and so you can see where the potential

problem might rise. So your analyses are so darn important in

terms of the risk management analysis, and why you graded them

so high, in fact the top risk at one point, and then why you dropped

it down the prior—the next year to just plain max. That’s awfully

important.

Now, Mr. Andrews, hopefully that’s all available in terms of the

risk analysis area, as well as what led—disappointingly—I would

say, to Andersen basically blessing the Enron documentation, the

financial statements and everything of that nature. This hearing is

focusing obviously on the destruction of documentation, and I’m not

belittling that.

But I am really concerned with the thought process that has

gone into—resulting in all of this having taken place, and hopefully

whatever it is that we can do to keep it from happening again. I

know that people are aware now and whatnot, but it’s just terrible,

and can anyone—I don’t know whether I have any time left. The

red light is on. I was told they had——

Mr. GREENWOOD. We’re keeping very strict rules today. The gentleman from Florida has an additional minute. If he would like, he

will get the same indulgence.

Mr. BILIRAKIS. Can anyone explain, very briefly, in 1 minute,

why the risk analysis dropped from max plus to max?

Mr. BASKIN. I don’t know the answer to that.

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Mr. BILIRAKIS. Does anyone have the answer to that? Who does

that? Who makes the ultimate decision?

Mr. ANDREWS. The way the process works, the engagement partner, the engagement team makes the initial assessment, and to the

extent that the risk ratings are at certain levels—and in this case

a maximum risk rating requires, then, the consultation with others

in the firm, and that in fact is what occurred in this situation. As

to why it changed from max star to max, I don’t know.

Mr. BILIRAKIS. So it goes back to Mr. Duncan again?

Mr. ANDREWS. That’s where the process begins, but then once he

goes through the process, the engagement team completes its analysis. If it results in a risk rating at a maximum risk, it then requires further consultation. And that’s in fact what occurred.

Mr. BILIRAKIS. Ms. Temple, very quickly—I haven’t gone into you

at all—you’re house counsel. Were you aware of this risk management rating? Have you been aware of it all along?

Ms. TEMPLE. To the best of my recollection, I learned about the

level of risk management rating much later. I don’t recall the exact

time, but much later.

Mr. BILIRAKIS. Much later after all the problems——

Ms. TEMPLE. After I——

Mr. BILIRAKIS. You became aware of?

Ms. TEMPLE. [continuing] was initially consulted on September

28, and I don’t recall exactly when I exactly learned about the risk

rating. Probably sometime in November is my best recollection

now.

Mr. BILIRAKIS. Well, see, that’s what looks bad, is you yourselves

in your own minds, you’ve established a risk management rating,

and you rate them as really bad—rated them as really bad guys;

but then you continued on, and obviously it was for the money, I

don’t know. If there wasn’t millions of dollars at stake, I guess we

could sort of understand that.

Mr. ANDREWS. Can I respond——

Mr. BILIRAKIS. Well, very briefly, sir. I don’t mean to tie up——

Mr. ANDREWS. [continuing] very briefly?

The risk process is designed so we assess the risk environment

within a client, and as Mr. Odom said, we do this on all of our clients. And depending on what that risk rating is, it will influence

various actions that we take on our audit; including, for example,

because this was maximum risk, it required Mr. Duncan to consult

with others in the acceptance of that client. It also drives certain

other procedures we do in the course of the audit. So the risk rating is a very important part of helping us determine the scope of

the audit, the consultation that occurs on an audit, and it has a

very meaningful purpose in our audit process. And each year we

go through a process of reassessing the risk of each of our clients

in that regard, and it drives certain processes and audit procedures

as a result of that. I mean, so it is a very important component of

the audit process.

Mr. BILIRAKIS. If you hadn’t been a consultant also earning whatever the fee was for that, would you have—would you have continued on as an auditor, taking into consideration that very—the

highest risk rating that existed?

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Mr. ANDREWS. Congressman, I do not believe our role as consulting played any part of our decision in reaching that conclusion.

Mr. GREENWOOD. Time of the gentleman from Florida has expired. The Chair recognizes the other gentleman from Florida, Mr.

Stearns.

Mr. STEARNS. Thank you, Mr. Chairman. Mr. Odom, I just—as

I understand it, you have been relieved of your duties. Is that true?

Mr. ODOM. I am no longer the practice director for the Gulf Coast

market, sir.

Mr. STEARNS. Say that again slower, sir.

Mr. ODOM. I am no longer the audit practice director——

Mr. GREENWOOD. Perhaps you could bring your microphone a little closer, Mr. Odom, please.

Mr. ODOM. I am no longer the audit practice director for the Gulf

Coast market circle.

Mr. STEARNS. And when did that change occur with your job description, or when were you relieved of that duty?

Mr. ODOM. It was announced in the same press release where

Mr. Duncan was discharged.

Mr. STEARNS. Okay. And did they call you in and say to you, Mr.

Odom, we are going to relieve you of your duties; you’ve been with

the company since 1969?

Mr. ODOM. I did get a telephone call, yes, sir.

Mr. STEARNS. And who did the telephone call come from?

Mr. ODOM. Rich Corgill.

Mr. STEARNS. And who is Rich Corgill?

Mr. ODOM. He is the head of the U.S. Practice directors.

Mr. STEARNS. And what did he say to you?

Mr. ODOM. He told me that the firm had decided that they needed to make management changes in the Houston office and that I

was one of the management changes.

Mr. STEARNS. And were you surprised?

Mr. ODOM. I was not surprised that the firm had decided to do

something to demonstrate that they were being active in dealing

with, obviously, the perception problems. I was disappointed.

Mr. STEARNS. Do you feel that you’re a part of the problem and

that’s why you were let go and that’s why you sort of did not protest or indicate that they were wrong and that you wanted to be

a part of the proactive program to clean this up? Why did you just

acquiesce so easily?

Mr. ODOM. I’ve been with the firm a long time, Congressman

Stearns, and sometimes you have to trust other people’s judgment.

And you don’t always have to agree with them, but you can trust

their judgment.

Mr. STEARNS. In your position which they relieved you of, how

many people worked—responded or worked for you?

Mr. ODOM. Actually, I didn’t have any employees.

Mr. STEARNS. Oh, you just had a title?

Mr. ODOM. I just had a title.

Mr. STEARNS. Okay. So they just——

Mr. GREENWOOD. Would the gentleman yield? I’ll give you plenty

of time. You know that.

Mr. STEARNS. Okay. Sure.

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Mr. GREENWOOD. Mr. Odom, did you say that they changed your

responsibilities to demonstrate that they were making changes. Did

they tell you what you did wrong?

Mr. ODOM. No, sir they did not.

Mr. STEARNS. Mr. Chairman, that’s what I was going to ask.

Well, if someone called me up and said they wanted to relieve me

of a position, even if it was just a title position with no people

working for me, I’d ask them why. And you never asked why?

Mr. ODOM. I asked what the reason was, and I was told the firm

felt they needed to make some bold moves to regain confidence in

the Houston community.

Mr. STEARNS. Is it true that you told our committee staff that

some clients in the past had been upset that old or extraneous documents had been unnecessarily maintained and discovered during

IRS and SEC inquiries? I mean, our staff indicated that you told

them that.

Mr. ODOM. That’s correct.

Mr. STEARNS. Is it also true you told the committee staff that

with a high-profile client about to take a big charge, people will

want to look at Andersen’s files, people with, in your words, ‘‘adverse interests to Enron and Andersen.’’ Is that true?

Mr. ODOM. I think I said that was a possibility, yes, sir.

Mr. STEARNS. Now, based upon those two statements that you

just admitted that you told the committee staff, and when they

called you up, I find it implausible that you wouldn’t say to them

in a candid discussion, why—ask why you were being relieved and

what the story was, and they were explaining it to you in certain

code words, saying, hey, we’re trying to—I’m not going to use the

word ‘‘cover-up,’’ but there seems to be something going on here to

see a man of your stature to be let go, you accept it mightily and

to step forward for the company’s benefit, and you step down, and

now you’re in a different—total different title, and you just acquiesce to it. It seems to me, based on what you said to the staff, that

there seems to be something else out of mind, out of sight, going

on here. Am I wrong?

Mr. ODOM. Yes, sir.

Mr. STEARNS. Okay. Tell me how I’m wrong.

Mr. ODOM. I don’t know of anything out of mind, out of sight.

Mr. ANDREWS. Congressman, could I—— Mr. STEARNS. Yes.

Mr. ANDREWS. Since I obviously was involved in those decisions,

I’m probably more appropriate to answer it, if you will allow me

to. The actions that we took, that’s announced in that press release, were really two separate actions. One related specifically to

the document destruction issue and the action we took at that

point in our investigation, which is incomplete as I’ve said, was to

relieve Mr. Duncan of his responsibilities, dismiss him from the

firm. Three other engagement partners were relieved of their responsibility but are still with the firm, certainly pending the rest

of our investigation.

The second action that we took was really not directly related to

the document destruction. It was in fact an action we believed, as

an organization, we needed to do to begin the process of rebuilding

the trust in the Houston community, as well as a statement beyond

175

Houston, externally and internally, that we are serious about getting this issue behind us and doing the things that we need to do.

Mr. STEARNS. Mr. Andrews, couldn’t Mr. Odom have done it in

his position? Why did his position have to be changed? Couldn’t he

have done this? He’s a loyal employee.

Mr. ANDREWS. Again, this was a judgment, we made that collectively; the management changes we made, we believed as an organization, were changes we needed to make to rebuild the confidence.

Mr. STEARNS. Mr. Odom, it looks like to us that the reason you

were let go, and based upon the comments you told the staff, is

these folks were out to work on the files, and here it is mid-October, and they’ve got all of this possibility of the SEC and the Justice Department and our committee and others coming down, that

they wanted to make this adjustment, as you say, because of adverse interests to Enron and Andersen. It wasn’t a salubrious effect. It was basically that they were trying to get rid of these files

and to instigate a process to do it.

And based upon what you say, wouldn’t you agree that adverse

interests were coming at Enron and Andersen and that that’s

why—using you sort of not as a scapegoat but somebody to say,

well, we’re changing things?

Mr. ODOM. I don’t believe that to be true, Congressman Stearns.

Mr. STEARNS. Well, you also indicated that they’re upset some

old extraneous information was still being kept, dealing—discovered during some SEC inquiries in the past, and they wanted to

make sure that that information wasn’t there either. So——

Mr. ODOM. That had nothing to do with Enron.

Mr. STEARNS. Yeah, no. But I’m just saying that we have here

you being let go in early to mid-October when Andersen was trying

to clean up their files, and it appears that it was less than ingenuous. That’s my point.

Mr. ODOM. It wasn’t early to mid-October.

Mr. ANDREWS. Congressman, I was involved in that decision.

First, January 15 was the date of the action. The management actions we took have nothing directly to do with the audit engagement itself. And so I’m not privy and I haven’t seen the comments

that you have there regarding Mr. Odom’s testimony, but nonetheless, it has no core connection to that whatsoever.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. GREENWOOD. The time of the gentleman from Florida has expired. Mr. Odom, have the firm’s investigators who were doing the

investigation, Davis, Polk, have they interviewed you?

Mr. ODOM. No, sir, they have not.

Mr. GREENWOOD. Mr. Andrews, have they interviewed Mr.

Bauer, Tom Bauer, the engagement partner?

Mr. ANDREWS. I——

Mr. GREENWOOD. Also put on administrative leave?

Mr. ANDREWS. Again, I don’t know all they have and all they

have not——

Mr. GREENWOOD. We understand they haven’t. It just seems a

little odd that you’ve taken this administrative action. You tell us

today that you’re busily engaged in getting to the bottom of this,

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and you’ve got a couple of big guys that you’ve laid off that you

haven’t even talked to yet.

Mr. ANDREWS. Mr. Chairman, I do not know if our investigators

have interviewed Mr. Bauer or not.

Mr. GREENWOOD. Well, you know they haven’t interviewed Mr.

Odom. He just told you that.

Mr. ANDREWS. Yes, he did.

Mr. GREENWOOD. What are you waiting for?

Mr. ANDREWS. Again, our counsel is performing the investigation.

We commit to you that that will be a full, complete investigation.

And we, Andersen——

Mr. GREENWOOD. They’re charging you by the hour and they

haven’t gotten Mr. Odom yet——

Mr. ANDREWS. But we are not restricting in any way the scope

of that investigation. We want it to be full and——

Mr. GREENWOOD. Mr. Andrews, will you give us a list of all of

the members of the firm who have been interviewed in this internal investigation by Davis, Polk and who you expect to have interviewed during the course of this investigation?

Mr. ANDREWS. Well, we certainly will fully cooperate and provide

a full reporting and accounting of our investigation, yes.

Mr. BILIRAKIS. Mr. Chairman?

Mr. GREENWOOD. I’m asking you a straightforward question. We

would like a list of the people within the firm, for that matter outside the firm, who have been interviewed as part of this internal

investigation that we thought you were going to tell us about

today. And we would like a list of the individuals you anticipate

interviewing in the course of your investigation, because it’s obviously critical to everything we’ve spent the last 6 hours here doing.

Mr. ANDREWS. May I have a moment?

Mr. ODOM. Mr. Chairman, may I clarify one thing?

Mr. GREENWOOD. Mr. Odom, you wanted to say something?

Mr. ODOM. Yes. I did have an appointment to meet with Davis,

Polk in New York a couple of weeks ago, and actually flew up

there, and they were unable to meet with me. But I don’t know

whether that was their investigators or whatever.

Mr. GREENWOOD. When was that?

Mr. ODOM. I think it was about 2 weeks ago.

Mr. GREENWOOD. Mr. Andrews, have you completed your consultation?

Mr. ANDREWS. Uh-huh.

Mr. GREENWOOD. Do you want to say something?

Mr. ANDREWS. Yes, yes. What I will do is, since Davis, Polk is

conducting the investigation, I will talk with them as soon as we

complete the hearing, and I will put them appropriately in touch

with whoever from the committee to——

Mr. GREENWOOD. And you’ll direct—you’re the client, you’re paying them—so you’ll direct them to provide us the information we’re

asking for?

Mr. ANDREWS. I will direct them to immediately talk with you,

and you request the information of them, and we’ll make sure that

that happens immediately.

Mr. GREENWOOD. Thank you. Thank you.

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The Chair recognizes the gentleman, Mr. Green, for 5 minutes.

Pardon me, just yield for a moment.

Mr. BILIRAKIS. May I have 30 seconds out of order?

Mr. GREENWOOD. Sure.

Mr. BILIRAKIS. I just wanted to follow up, Mr. Andrews, very

quickly, on the work paper thing. You can see it’s sort of sticking

with me. Now, these papers are—you’ve requested that they be

submitted from whatever your—the various offices are regarding

the Enron situation. And they’re filed in one central location; is

that correct? Are they—is there a central location for all of this

documentation in Houston?

Mr. ANDREWS. Well, Enron was a very complex company in many

geographical areas, and the work papers themselves, to the extent

work is done in other offices, the work papers themselves would be

maintained in the other offices.

Mr. BILIRAKIS. In the other offices. They haven’t been pulled

into—all to one central location yet. Is that right?

Mr. ANDREWS. Well, at this point in time, I believe they have,

but normally—I thought your question was related to how do audit

work papers typically get created and where are they—— Mr. BILIRAKIS. Now, are they numbered? Are they lettered, numbered? Is there some sort of identification?

Mr. ANDREWS. Well, an audit engagement file does have an indexing scheme and an order to it, yes.

Mr. BILIRAKIS. They’re numbered, Mr. Odom?

Mr. ODOM. Mr. Andrews and I are both old auditors. He can answer the question just as well as I can.

Mr. ANDREWS. They are indexed, and there’s a filing order to

them and all that sort of thing; yes, we certainly capture the information of what files exist and what the descriptions are of those

files.

Mr. BILIRAKIS. All right. Thank you.

Mr. GREENWOOD. The time of the gentleman from Florida has expired. The Chair recognizes the gentleman from Texas, Mr. Green,

for 5 minutes.

Mr. GREEN. Thank you, Mr. Chairman, and thank you again for

the courtesies. Let me follow up on both Mr. Bilirakis—Chairman

Bilirakis’s—the high-risk rating or higher rating for risk, I would

assume, equates that Andersen has to spend more time with a client, then the higher the fees. Is that correct? Mr. Odom, Mr. Andrews? The higher the risk, the more time, if you’re going to continue with a client, the more it’s going to cost that client?

Mr. ANDREWS. Congressman, as I said before, the higher the risk

rating, it will require you or lead you to do additional procedures

and consultation, which would be more time, yes.

Mr. GREEN. So the higher—okay. So what Chairman Bilirakis

said, that it obviously—if—even if it’s in Enron, which is the seventh largest company, you know, it would be a substantial fee, because those fees have been talked about, you know, $52 million, a

million dollars a week. Now, I know auditing was a small percentage of that, so to speak, compared to the consulting, but it was

rated as higher. When was that done? When was that decision

made on the higher—that Enron made—that it needed a higher

risk rating?

178

Mr. ANDREWS. Well, the risk rating process occurs annually, and

the last——

Mr. GREEN. Do you have it in a month—what month did it occur

last year?

Mr. ANDREWS. The 2001—which, of course, we never completed

the audit—the documentation that at least I think you have been

provided information—early February.

Mr. GREEN. Oh, early February of last year. So that was also the

discussion at one time—and I know this has been publicized—

about a memo about whether continuing Enron as a client. So——

Mr. ANDREWS. I think that’s the right timeframe, yes, sir.

Mr. GREEN. Let me go to some—and I’m sorry——

Mr. ANDREWS. If I could clarify one point, though, in terms of the

fees. Actually, the audit-related fees on Enron were $25 million, essentially half of the total fee.

Mr. GREEN. And then 27 for the consulting. Okay.

Mr. ODOM. Excuse me, Congressman Green—of that consulting,

a lot of it is work that is typically done by the auditor, you know.

So, I mean, correct me on this, Dorsey, but the SEC requires when

you report fees in the matter that you’re looking at them, that the

top fee, the audit fee, be only the fee for the annual audit. So if

the auditor, for example, does a statutory audit in the United Kingdom that is not part of the annual audit, that gets plopped down

into consulting.

Mr. ANDREWS. As do tax fees and comfort letter and registration

statements.

Mr. GREEN. Mr. Andrews, let me go back to—and again, like a

lot of members, we have a lot of things we have to do, and then

come back when it’s our turn. I apologize for having been gone, but

during—while I was gone, you mentioned something about the clarity of Enron’s financial statements and that—I was told that—

we’ve talked in our office to numerous Wall Street analysts who

could not tell what was going on at Enron by looking at the financial disclosure statements signed off by Arthur Andersen. And is it

Arthur Andersen’s opinion or your opinion, and maybe you gave it

earlier, that Enron’s quarterly financial statements accurately reflected Enron’s financial position? Is that what was said earlier in

questioning, that——

Mr. ANDREWS. Congressman, your question referred to quarterly

financial statements?

Mr. GREEN. Did their quarterly financial statements accurately

reflect Enron’s true financial position?

Mr. ANDREWS. We don’t audit the quarterly financial statements.

Mr. GREEN. Okay. The annual financial statements, you know,

the annual financial statements, all those partnerships that were—

and I know partner—those—to take out liability is something that

is not unusual in the industry, but yet Enron took what is not unusual and then shot the moon with it. In the annual financial

statements, are you saying that those were—that someone—even

Wall Street analysts could tell the true financial position of Enron?

Mr. ANDREWS. In terms of the Wall Street analysts, you know,

obviously we would have to address that question to them. I don’t

know what they did or didn’t understand. I would hope if they

179

didn’t understand them, then they wouldn’t recommend investing

in the stock—— Mr. GREEN. That will be subject to another hearing that we—— Mr. ANDREWS. Right. So I can’t comment on what they would.

The company’s responsibility and ours is to make sure that those

financials are presented and conforming with generally accepted

accounting principles, which includes the basic financials and the

disclosures as well. And at this point in time those financial statements made by the company have been restated and our opinions

have been withdrawn. So that has since changed.

Mr. GREEN. Starting in 2000, October of 2000, some folks on

Wall Street actually started to figure out that there was something

going on. And are you familiar with the story in the Wall Street

Journal, ‘‘Heard on the Street,’’ in October of 2000 from a James

Chanos? Are you familiar with that?

Mr. ANDREWS. Congressman, I don’t recognize it, no.

Mr. GREEN. The story cited this short seller named Mr. Chanos

who began saying that in October of 2000, Enron’s books were not

clear. His position, obviously, has been borne out, as we know, from

October of 2001. Maybe all of us should have read the Wall Street

Journal closer in October of 2000. In his—I have never heard of

any financial analysts I’ve spoken with with Enron that said they

were—that their financial disclosures are easily understood. And

that’s—and I guess that’s been reported widely, too, and I—that it

was so difficult to understand Enron’s true financial picture.

Do you feel like, again, those annual statements reflected the

true financial picture at Enron?

Mr. ANDREWS. Congressman, again, our reports have been withdrawn now, so we don’t have an opinion on those statements. But

the point I would make is that Enron is an extremely complex company, and I think any complex company of that magnitude, the financial statements are going to be complex. It’s hard to simplify

complex issues and those disclosures can be improved. Can the accounting model be improved? Absolutely.

Mr. GREEN. Again, those partnerships were signed off on at the

time, and I know you’ve retracted that, but at some time in the

past they were the typical way that Enron was doing business, I

guess, and they were signed off. But I know that’s been retracted.

But let me go on to Mr. Odom and go back to the October 12 email that you received from Ms. Temple and—— Mr. GREENWOOD. This will be your final question, Mr. Green.

Mr. GREEN. Okay. Thanks, Mr. Chairman. And was it your testimony you had never received a memo in your 32 years with Arthur

Andersen—because you said you started work in 1969—that explained or denoted what Enron’s destruction of documents policy

was?

Mr. ODOM. This had nothing to do with Enron’s destruction

policy——

Mr. GREEN. Well, no. With Arthur Andersen’s policies.

Mr. ODOM. I do not recall someone sending me a memo saying,

you know, here is a doc. link to our policies. Clearly, on many engagements and many training sessions, we’ve talked about what

Arthur Andersen’s policy was, because we try to teach our people

to comply with our policy.

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Mr. GREEN. But you never received anything like that from the

legal side of Arthur Andersen?

Mr. ODOM. No, sir.

Mr. GREEN. And so you looked at it as advice, I would assume,

from legal counsel?

Mr. ODOM. I looked at it. I didn’t view this really as advice from

legal counsel, no, sir. Somebody had sent me a doc. link. I knew

Nancy was a lawyer, but I didn’t take it as being legal advice.

Mr. GREEN. Well, normally when a lawyer sends you——

Mr. GREENWOOD. The time of the gentleman from Texas has expired. I see that the gentleman from California has arrived. Does

the gentleman wish to inquire?

Mr. WAXMAN. I do, Mr. Chairman.

Mr. GREEN. Before my colleague has his time, it seems like—I’m

glad our committee is going to continue this, because, you know,

there are so many questions that are still—haven’t been answered,

and I just appreciate the time today of this subcommittee and, Mr.

Chairman, of the full committee, because obviously there’s a lot

that needs to be discussed.

Mr. GREENWOOD. We’ll be back. The gentleman from California,

5 minutes.

Mr. WAXMAN. I want to follow up on the questions I asked in the

last round. Mr. Odom, you indicated that with regard to the partnership LJM 2, there’s a, ‘‘private placement memorandum’’ that

details the names and identities of the secret partners. Mr. Odom,

some press reports have said there could have been hundreds or

thousands of secret partnerships. Can you tell us approximately

how many secret partnerships Enron had?

Mr. ODOM. I do not know the number of partnerships.

Mr. WAXMAN. And do any of the other witnesses have any answer?

Mr. ANDREWS. I do not know the number.

Mr. WAXMAN. Is it fair to say it’s hundreds?

Mr. ODOM. I’m not sure what you mean by secret.

Mr. WAXMAN. Partnerships.

Mr. ODOM. Partnerships weren’t necessarily secret, but they did

use a number of partnerships. Hundreds would be a fair statement.

Perhaps more.

Mr. WAXMAN. Perhaps more. Do you know, would it be as much

as a thousand?

Mr. ODOM. I don’t know.

Mr. WAXMAN. Are there private placement memoranda for each

of the partnerships that Enron had created?

Mr. ODOM. I don’t believe so.

Mr. WAXMAN. Okay. And I’d like to ask the chairman a question.

Mr. Chairman, obviously this is a very important issue. We have

a situation where I believe secret partners may have made a lot of

money without being exposed to any risk. At the same time, shareholders and employees lost millions. And I understand that currently the committee subpoena may cover documents that identify

some of the partners but not necessarily all of them, and I want

to ask the chairman of the subcommittee and the chairman of the

committee if they will subpoena the necessary documents to reveal

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the identity of all of the secret partners and make them available

to all of the members of the committee.

Mr. GREENWOOD. We certainly will, Mr. Waxman, and we’ll be

happy to work with you in that regard.

Mr. WAXMAN. Thank you.

Chairman TAUZIN. Would the gentleman yield? Among other

things, let me read you what we have already requested from

Enron. A list of all Enron’s SPEs, partnerships, other subsidiaries,

a list of all the Enron officers, individuals, entities who hold or held

equity interest in any Enron SPE, subsidiary or partnership—— Mr. WAXMAN. If I could reclaim my time, my point is that we

could look at the precise language of the subpoena better, but it

will certainly be—if I understand Mr. Greenwood’s statement, it

would be the intent of the Republican leadership on this committee

to get by subpoena all the necessary documents to reveal the identity of all the secret partners and make them available to the members of the committee.

Chairman TAUZIN. It’s not only our intent. It’s the working

agreement I have with Mr. Dingell to make sure we get all of that

information. We’ve requested it. We expect Enron to deliver it to

us. They’re in compliance right now. If it is not delivered, we will

all have something serious to say about it.

Mr. WAXMAN. Thank you. Do any of the witnesses know or have

you heard discussions of the identities of any of the secret partners? Mr. Odom?

Mr. ODOM. I’ve seen a listing of some of the investors in some

of the partnerships. I don’t know that they’re secret. There is a listing of some of the investors and some of the partnerships.

Mr. WAXMAN. And from your recollection, would you give us, for

the record, some of the names that you’ve heard of as partners?

Mr. ODOM. I don’t recall the names, but many of them are names

you will recognize in terms of retirement systems and things like

that.

Mr. WAXMAN. Andrew Fastow, a former Enron official, reportedly

made $30 million from his role in these partnerships. Did other

Enron or Andersen executives participate in or profit from these secret partnerships, and what can any of you tell us about the identity of these secret partners?

Mr. ODOM. It’s already been disclosed, I believe, that in the

Chewco partnership, an Enron employee named Michael Koppers

had an interest, I believe in the LJM 2 prospectus. There are two

other Enron employees who are mentioned as being part of LJM

2, ex-Enron employees, Mr. Glisan is one of them, and I don’t know

who the other one was. It could have been Mr. Koppers again. I’m

certainly not aware of any Arthur Andersen people.

Mr. ANDREWS. When you ask the question, you may not have intended it this way, but you mentioned Andersen investors. We’re

not allowed, obviously, to invest in our clients.

Mr. WAXMAN. I understand. I said Andersen executives.

Mr. ANDREWS. Oh, Andersen executives, as investors in—— Mr. WAXMAN. Well, did any of the Andersen executives participate in or profit from these partnerships?

Mr. ANDREWS. Congressman, no; we’re not allowed to invest in

our clients.

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Mr. WAXMAN. And do you have any information about those partners that were involved with Enron?

Mr. ANDREWS. I’m not part of the audit engagement team, so I’m

not familiar with the audit itself. It’s my understanding that on the

related party transactions, I think that is what you’re referring to,

that those particular investments, that the board took specific action, took exception to its policy and put in special oversight procedures related to that and to deal with related party transactions.

I’m not familiar with the individual names and the individuals

involved, but that’s my understanding of what was done. And, of

course, Andersen in no way would be an investor or anybody at Andersen would not be an investor in anything. We’re not allowed to

do that from an independent standpoint.

Mr. GREENWOOD. The time of the gentleman from California has

expired. We thank the witnesses.

Chairman TAUZIN. Would the gentleman yield first?

Mr. GREENWOOD. The Chair yields a minute to the chairman.

Chairman TAUZIN. I want to tell Mr. Waxman also that our staff

is attempting to interview the partners that we are aware of that

had been mentioned here by the witness, and we’re in the process

of attempting to do that. We’ve written letters to them; investigators on both of our staffs are doing their work as we speak. So the

gentleman should be aware of that as well.

Mr. WAXMAN. And so you are involving the Democratic staff.

Chairman TAUZIN. Yes, sir. I think I made the announcement at

the beginning of the hearing. Mr. Waxman, you should know that

Mr. Dingell and I reached an agreement at the onset of this investigation that we would share investigative staff and consult with

each other as we go through the process.

Mr. GREENWOOD. Mr. Andrews, will you provide the committee

with the interim policy that you’ve—we have that.

Mr. ANDREWS. Do you have that?

Mr. GREENWOOD. All right. Thank you. I want to thank witnesses. It’s been a long day. You’ve been here for 5 hours. I’m

afraid you might have to consider this practice, because we may

have to have you back, because at the end of the day here, we still

don’t have evidence that suggests that Mr. Duncan, who did not

testify, is a rogue employee of Andersen. We still don’t have information from you that suggests that Mr. Duncan admitted to errors.

We still don’t have information that you’ve interviewed individuals

who have implicated Mr. Duncan in ordering them to violate the

policies of the company, and we still don’t have any information as

to what documents were actually destroyed at Mr. Duncan’s orders.

So we have a lot of information we need to gather from you, and

we may need to call you back.

Mr. ANDREWS. May I say something?

Mr. GREENWOOD. Yes.

Mr. ANDREWS. I just want to reiterate, as we are here today, our

commitment to cooperate fully as your investigation is in process.

When we have completed with that, we intend to share it with you.

We will continue to share documents, we will continue to cooperate.

And so I just want to make that clear; and we’re working to recover

any of these destroyed documents we can to provide for our own

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investigation, as well as to make available to you, the SEC, and

other parties.

Mr. GREENWOOD. Thank you, Mr. Andrews.

Mr. ANDREWS. We intend to fully cooperate.

Mr. GREENWOOD. And we’ll need to cooperate with you not only

when you’ve completed your investigation, but in the course of your

investigation.

All of that said, this hearing is now adjourned.

[Whereupon, at 2:36 p.m., the subcommittee was adjourned.]