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House Hears Arthur Andersen Execs

Aired January 24, 2002 - 11:02   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DARYN KAGAN, CNN ANCHOR: Enron's amazing fall from grace and power is the hot topic on Capitol Hill today. Two separate congressional hearings are under way this morning, looking into Enron and its auditors.

Our congressional correspondent Kate Snow is Capitol Hill with the latest, as she the tracking those hearings.

Kate, good morning once again.

KATE SNOW, CNN CORRESPONDENT: Good morning again, Daryn.

Let's start with the hearing that's going on in the House of Representatives, one of the House committees, the first one to look into and really start gathering documents about Enron. They're particularly interested in Arthur Andersen. They have invited a number of people to testify this morning.

We can take a look a live picture, just a moment ago reading his statement. That's the chairman of the subcommittee you see now testifying right now. But just a moment ago, Dorsey Baskin was reading a statement. He has been with Andersen for almost 25 years. He said he was sent here in place of Mr. Joseph Berardino, who is the CEO of Andersen. Instead, they sent this gentleman, Dorsey Baskin; he said -- quote -- "We are not proud of the document destruction" -- talking about destruction of documents at Andersen, but he said -- "we're proud of stepping forward and talking about this publicly."

He said that the company is limited on how much they know at this point about that destruction of documents that occurred last fall. But he did say that October 23, six days after they knew the SEC was looking into Enron, a destruction of documents began.

He pinned the blame rather squarely on David Duncan, David Duncan also appearing in this hearing room a short time ago. Mr. Duncan fired, you might recall, from Andersen after the company said he was the one that paved the way for the construction of documents. He was here in the hearing room. He was sworn in. But just a few moments later, he was asked a rather lengthy question by the chairman, and here's his response.

(BEGIN VIDEO CLIP)

REP. JIM GREENWOOD (R), PENNSYLVANIA: 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 Andersen or at Enron?

DAVID DUNCAN, FIRED ARTHUR ANDERSEN AUDITOR: Mr. Chairman, I would like to answer the committee's question, 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.

GREENWOOD: 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?

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.

GREENWOOD: Will you invoke your Fifth Amendment rights in response to all of our questions here today?

DUNCAN: Respectfully, that will be my response to all your questions.

(END VIDEO CLIP)

SNOW: Mr. Duncan's attorneys explained he wanted immunity if he was going to testify. Short of that, he refused to answer their questions, although he did talk to investigators last week, and the chairman of the committee went through some of that testimony, outlining that Mr. Duncan said he was following instructions, company orders, when he destroyed documents.

Let's quickly run through who else is going to testify here this morning. I mentioned all ready Dorsey Baskin, who's been reading his opening statement, a short time ago. He's an executive in charge of Andersen's document retention and disposal policy. They negotiated with the committee to send him in place of Joseph Berardino as a witness.

Secondly testifying, Nancy Temple, the attorney who is in Chicago. She sent a memo October 12 reminding of Andersen's policy to get rid of nonessential documents; one month later, she changed that and said, No, don't destroy documents any longer. It is that memo that David Duncan says he was following. David Duncan, of course, was formerly in charge of the Houston operation on the Enron account. He was fired for allegedly leading the destruction of documents; he claims he was following that October 12 memo sent by Nancy Temple. He by the way headed Andersen's Houston team since 1997.

One other gentleman we expect to hear from is Michael Odom. He's a former risk management partner of the Andersen's Houston office. He's been stripped of some of his managerial responsibilities, but still works for the company. He forwarded on Temple's October 12 memo to Duncan and confirmed Duncan's account that document destruction at Andersen began only after that memo went out.

It's a confusing tale. There are a lot of questions about that memo. The chronology of events, we are getting at all of that. We expect the lawmakers to ask a lot of questions here today.

Separately, there's one other hearing going on on the Senate side of the Capitol. That is led by Sen. Joseph Lieberman. That hearing is a little broader in scope, Daryn. At that hearing, they're talking about the questions raised overall about what legislatively needs to be done to rectify the situation and make sure that no other Enron collapse, no other company is able to collapse the way Enron did.

Back to you.

KAGAN: Kate, thanks very much.

We want to go ahead and dip into the House hearing right now. And the question put before the panel on the hot seat right now. The question from Congressman Greenwood: If indeed there was this internal memo saying you should not shred documents, why did the shredding go on? The question is being put to Andersen executives.

Let's go ahead and listen in.

(JOINED IN PROGRESS)

C.E. ANDREWS, ARTHUR ANDERSEN MANAGING PARTNER: Without the knowledge -- without our knowledge, without the knowledge of the legal council, 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...

GREENWOOD: And all of Mr. Duncan's superiors in the company, including Mr. Berardino, knowing this meltdown is happening at Enron, knowing that this SEC investigation on, sat silently, just assuming that Mr. Duncan would do the right thing? They gave him no direction whatsoever?

ANDREWS: Mr. Chairman, again, Mr. Duncan had been advised of our policies in the memo on October 12. Mr. Duncan, we believe -- and we expect our engagement partners to understand our policies and apply them. And we did not -- we were not -- superiors 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's why, when we performed 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 completed.

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's completely unacceptable. So it's totally out of balance with good judgment in that situation, and we took action as a result of that.

GREENWOOD: Let me turn it to Ms. Temple, and since I don't have any other members here right now, I'll continue with the questioning.

We have a memo from you, Mr. Temple, that's dated, I believe, November 10.

UNIDENTIFIED MALE: Tab 20.

GREENWOOD: November -- Tab 20. It's tab 20 in your notebook.

And that memo is very explicit and it's 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 ago, you knew that the question of retention and destruction of documents was going to be critical to investigations and to litigation?

NANCY TEMPLE, ANDERSEN MANAGER: Yes, Mr. Chairman, I'll tell you the circumstances of sending the November 10 memo and the facts, as I understood them, in the previous time period.

On November 10, the memo we sent, it was drafted by our outside counsel, a law firm, Davis Polk & Wardwell.

GREENWOOD: When was that firm retained for this purpose?

TEMPLE: I did not personally retain that law firm. I know I spoke to a partner at that law firm on October 16.

GREENWOOD: Is your testimony that you do not know when they were retained?

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.

GREENWOOD: OK, you may proceed.

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...

(AUDIO GAP)

TEMPLE: ... my recollection, the firm received a subpoena from the Securities and Exchange Commission at the end of the business day on November 8. And a voicemail 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 time frame 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.

GREENWOOD: Let me interrupt you for a second. I asked Ms. Temple when Davis Polk was retained for this purpose, and she indicated that she -- her response was that she didn't know.

Mr. Baskin, Mr. Andrews, do you know when this firm was retained?

And I will remind you that I asked you last night to be prepared to answer that question this morning.

ANDREWS: Mr. Chairman, the firm was retained on October 9 and commenced work with us on October 16.

GREENWOOD: OK. And what was the purpose for retaining that firm on October 9?

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...

GREENWOOD: Are they handling the potential litigation for the firm now?

ANDREWS: But what they were -- 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 it's 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.

GREENWOOD: So on October 9, when you retained this firm, you did so because you considered -- Andersen considered it likely that you were going to confront litigation?

ANDREWS: Mr. Chairman, that's 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. And we had no reason at that particular point in time to expect litigation, no.

GREENWOOD: Even given the Sharon 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's now handling your litigation, but on October 9 you didn't hire them for that purpose?

ANDREWS: On October 9, we made the decision -- the principal reason 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 refer to 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, and my experience is that we engage legal counsel to advise us on things in many other situations. 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?

TEMPLE: I don't recall making a particular determination that Andersen was likely to face litigation or being asked to make that determination.

This time, looking back in retrospect, I can see all 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.

GREENWOOD: I believe you told our investigators that it wasn't until sometime in November that you thought it was likely that there would be litigation...

TEMPLE: Once it...

GREENWOOD: Is that right? Is that what you...

TEMPLE: ... 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.

GREENWOOD: When was the first time that Davis Polk gave the company any advice whatsoever, or counsel whatsoever, with regard to document retention and destruction?

TEMPLE: I believe, in my conversation on October 16, I discussed the documentation and retention issues that had arisen as of that date with Davis Polk.

GREENWOOD: Mr. Baskin or Mr. Andrews, or even 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 eight 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?

DORSEY BASKIN, TOP TECHNICAL ANDERSEN EXPERT ON AUDITING: Well, as it pertains to -- this is the first time I've read this memo, but as it pertains to our actions, again, we believe that it was the engagement partners' responsibility in this situation, given what was occurring in that late-October period, which is the date of this memo, that there was enough information available that, in that partner's judgment, the instruction 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 -- apparently that's 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, and we have admitted that. It is wrong. And once we learned of that -- once we learned of that in our investigation, we took firm actions. That is not Andersen, that is not what we encourage our employees to do, and it is inappropriate.

UNIDENTIFIED MALE: The chairman of the subcommittee has had to go to the floor to make the 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.

REP. PETER DEUTSCH (D-FL), RANKING MEMBER: And I'm sorry, I had a chance to read through testimony but not to listen, just because we're 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-five accounting firm, with destruction of documents with the time line that we...

ANDREWS: I want to make sure I understand...

DEUTSCH: Basically the time line where you're aware of an investigation and documents were destroyed.

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 were still destroyed, you know, even though they knew 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's a conflict. And whether it's illegal or not, you know, we're not going to determine today. But factually that does seem as if it occurred. I mean, would you question whether that occurred?

ANDREWS: Would I question whether or not...

DEUTSCH: I mean, just from a time line -- that occurred after, at least, employees of Andersen were aware of an SEC investigation.

ANDREWS: Congressman, maybe what -- 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 that 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're not completed with the investigation, as is the SEC or as is the committee investigating this, as is the Department of Justice. So it is a work, it is in process.

Now, what happened during that period and what was going on, I believe I'm agreeing with your statement in the sense that, once the company itself was a recipient of a lawsuit, once the company...

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