Firm couldn’t say `no’ to prized client

Bound by mutual interests and money, managers buckled before the Houston energy trader even when deals seemed questionable

Their paychecks came from Andersen, but their livelihoods depended on the fast-growing darling of Wall Street. Enron could be a volatile partner, at times even a bully. But Andersen was hooked on a relationship that it found simply too lucrative to abandon.

Many of Andersen and Enron’s top number crunchers took annual golf vacations together, making friendly bets on each round. They went on ski outings, schussing down the slopes together. Others would sneak away from the office for Astros games at Enron Field and take turns buying margaritas at Mama Ninfa’s, a local Mexican restaurant chain. They played fantasy football against each other over the office computers.

It was like these very bright geeks at Andersen suddenly got invited to this really cool, macho frat party, said Leigh Anne Dear, a former senior audit manager at Andersen who worked in Enron tower. They were out of control, and they didn’t even know it because it was so cool to associate yourself with the top, with the guys who run a multibillion-dollar company.

In time, insiders at both disgraced firms now say, those close ties eroded the most important role Andersen was supposed to play as Enron’s auditor: providing strong, independent verification of its financial reports.

As Enron collapsed into bankruptcy in December, further depressing a weakened stock market, Andersen leaders portrayed it as a client run amok. But a closer examination of their relationship reveals that, in Enron, Andersen found a monster partly of its own making.

Andersen’s failures at Enron were the culmination of a decade of sliding standards and audit debacles at the firm, which had come to reward salesmanship over technical skill and to pursue higher profits even if it meant compromising a legacy of defiant independence.

The closeness between Andersen and Enron—the firm’s $58 million client in fiscal 2000 alone—largely robbed the auditor of its good judgment, key employees inside both firms contend. Short-circuiting their system of checks and balances and overriding their own technical staff, Andersen’s lead Enron auditors signed off on questionable deals instead of telling their client no—until it was too late.

The confirmation for such signoffs was often circular: Enron would tell its employees that Andersen had approved the deals, while Andersen would tell its people that Enron’s top decision-makers had OKd them.

But in the hallways and offices at Andersen, some auditors who worked on Enron had a word for the iffy accounting calls: shambolic.

When outsiders learned the details of Enron’s dealmaking, its highflying stock plummeted. By the time the energy trader imploded last fall after admitting it overstated earnings by hundreds of millions of dollars, Andersen had little defense, since its signature was all over the deals.

Other major accounting firms have had their embarrassments in this season of corporate fiascoes, from Deloitte & Touche’s audits of Adelphia Communications Corp. to KPMG’s sign-off on the bad books at Xerox Corp. But none quite match the pileup attributed to Andersen: Enron, WorldCom Inc. Global Crossing Ltd. Qwest Communications International Inc.

And Andersen’s inability to safeguard investors’ interests at Enron had consequences far beyond the two firms. The episode undermined the nation’s faith in the numbers that define corporate America.

Enron Corp. declined to comment for this story, and an Andersen spokesman said the firm made its response clear during its obstruction-of-justice trial that ended in a conviction in June. Andersen contends that its auditors sought to correctly account for Enron’s books but were thwarted by misinformation from the now-bankrupt energy-trading giant.

In court filings this summer, Andersen’s lead partner on its Enron account, David Duncan, denied ignoring alleged red flags in the energy trader’s accounting or that his team abandoned its professional duty to remain independent.

But interviews with executives and staffers at both firms and a review of thousands of pages of court transcripts and internal documents illustrate just how intoxicating Enron became for Andersen, which often accommodated its prized client despite the doubts of some of Andersen’s own auditors.

One executive still at Enron describes the allure: It’s like Patty Hearst, you start identifying with your kidnappers.