Enron's Arthur Andersen auditors settle SEC lawsuits

By Caroline Salls

Pittsburgh, Jan. 28 - The Securities and Exchange Commission has settled four lawsuits against former Arthur Andersen LLP partners in connection with audits of Enron Corp.'s financial statements, according to a news release.

David B. Duncan, former global engagement partner for the Enron audits, was charged with violating the antifraud provisions of the federal securities laws, and he has agreed to a permanent suspension from appearing or practicing as an accountant before the SEC.

Meanwhile, Andersen partners, Thomas H. Bauer, Michael M. Lowther and Michael C. Odom have agreed to findings that they had each engaged in improper professional conduct in connection with their Enron work, and each was denied the privilege of appearing or practicing before the SEC, with the possibility of reinstatement.

The SEC alleged in its complaint that Duncan was reckless in not knowing that the unqualified audit reports he signed on behalf of Andersen for the years 1998 through 2000 were false and misleading.

The SEC said the complaint also alleged that the Fraud Risk Assessment questionnaires that Duncan reviewed acknowledged that Enron used "highly aggressive accounting ... practices" and entered into "unusual" year-end transactions that posed difficult "substance over form" questions.

In addition, the commission said an internal Andersen document prepared each year by Duncan and his engagement team noted that Enron's use of complex "form over substance" and related party transactions created an "extreme" or "very significant" financial reporting risk.

Despite these risks, Duncan did not use the amount of discretion required under Generally Accepted Auditing Standards to ensure that Enron's financial statements were presented in conformity with Generally Accepted Accounting Principles, the SEC complaint alleged.

For example, the release said Duncan failed to ensure that the engagement team audited "Prepays," "Nahanni" and "Raptors" transactions in accordance with GAAS, and he did not make sure that Enron properly presented and disclosed the transactions in its financial statements.

Also, since Duncan was ultimately responsible for deciding whether to include an unqualified opinion in the auditors' report, the SEC alleged that Duncan was wrong to issue unqualified audit opinions that Andersen's audits of Enron's financial statements for the years 1998 through 2000 were conducted in accordance with GAAS and that Enron's financial statements were presented in accordance with GAAP.

The unqualified opinions were included in Andersen's auditors' reports that were filed with Enron's 1998, 1999 and 2000 10-K yearly reports, the SEC said in the release.

Bauer, Lowther, Odom findings

According to the release, Bauer, who was responsible for the audits of Enron's largest and most profitable business unit, can apply for reinstatement to appear before the SEC after three years.

The SEC has specifically ruled that Bauer engaged in improper professional conduct during a 1997 audit by failing to audit Enron's "JEDI/Chewco" transaction in accordance with GAAS.

Specifically, the SEC ruled that Bauer did not obtain enough evidence to support his analysis of Chewco in determining whether the newly formed entity met GAAP requirements for special purpose entities.

The commission said Bauer asked for, but was denied access to, documents relating to the funding of Chewco. The SEC said Bauer relied on oral management representations, but he should have insisted on seeing additional funding documents.

The SEC ruled that Bauer also failed to sufficiently document his planning and supervision of audit procedures and audit evidence.

Lowther, who served as partner in charge of Andersen's energy audit division in Houston and also as concurring review partner, can apply for reinstatement to practice before the SEC after two years.

The commission ruled that Lowther should not have consented to the audit engagement team's faulty conclusions in 1999 and 2000 audits regarding Enron's transaction accounting and the authorization to issue unqualified and false and misleading audit reports.

The SEC said Enron's management rejected the engagement team's recommendation for more robust disclosure of the Prepays transaction, but Lowther, Duncan and others agreed that Enron's disclosures complied with GAAP without the proposed enhancements.

The SEC also ruled that Lowther missed several red flags during his 1999 audit that indicated that Nahanni was purely a "window dressing" transaction that had no economic benefit to Enron.

As a result, the commission ruled that Lowther did not ensure that Enron's balance sheet and cash flow statement were not misleading.

The SEC said Lowther also overlooked repeated red flags and accepted Enron's accounting and misleading disclosure of the Raptors transaction.

Odom, who served as practice director for the Gulf Coast region, can also apply for reinstatement of his right to appear before the SEC after two years.

The SEC said it found that Odom agreed with the audit engagement team's faulty conclusions regarding Enron's accounting and disclosure for some transactions and regarding Andersen's issuance of false and misleading unqualified audit reports.

Specifically, the SEC said Odom was among the engagement team members that rejected Enron management's recommendation for more robust disclosure of the Prepay transactions.

In addition, the SEC said Odom agreed with the improper decision that the Raptor transactions complied with GAAP.

Enron is a Houston-based energy company that emerged from bankruptcy on Nov. 18, 2004.

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