Enron alarm raised in Aug.

Accountant says Anderson's lawyers advised shredding

Problems known for months

Bush adviser was asked in Oct. to look into matter


WASHINGTON - Enron's auditors knew in mid-August of a senior Enron employee's concerns about improprieties in the energy company's accounting practices, congressional investigators studying Enron's collapse said yesterday.

Officials of the auditing company, Arthur Andersen, sought guidance from their lawyers then about how to respond, according to the investigators. The disclosure raised fresh questions about Andersen's decision to stand by Enron's financial reports until early November, when the accountants forced the company - by then under investigation by the Securities and Exchange Commission - to restate five years of results and erased almost $600 million in reported profits.

Separately yesterday, the White House disclosed that Lawrence B. Lindsey, President Bush's top economic adviser and head of the National Economic Council, had overseen a study in mid-October of how a collapse of Enron would affect the economy.

According to congressional investigators, the Enron employee, Sherron S. Watkins, called a former colleague at Andersen on Aug. 20 and told him of her concerns about the energy company's accounting. At about the same time, Watkins also laid out her doubts in a letter to Enron's chairman, Kenneth L. Lay, disclosed earlier this week by a congressional committee, that warned that the company might be revealed as an "elaborate accounting hoax."

Watkins letter pointed to new questions about Enron's web of partnerships and raised the possibility that the company might have to reduce past earnings by $1.3 billion more than it already has.

In an internal Andersen memo obtained by the House Energy and Commerce Committee, Watkins' former colleague at Andersen wrote that "based on our discussion, I told her she appeared to have some good questions."

The next day, Aug. 21, four Andersen officials met to discuss Watkins' concerns, investigators said. They included David B. Duncan, the lead partner on the Enron account, whom Andersen fired this week after saying he had ordered the destruction of Enron documents while the company's accounting was under investigation by the SEC.

The officials then "agreed to consult with our firm's legal adviser about what actions to take in response to Sherron's discussion of potential accounting and disclosure issues," according to the memo.

Investigators say Andersen began the destruction of Enron documents in September and that an e-mail message from an Andersen lawyer on Oct. 12 re-emphasized Andersen's policy on destroying documents.

In Washington yesterday, Duncan spent hours with government officials investigating the failure of Enron, the Houston firm that pioneered energy deregulation and grew to be the nation's seventh-largest company before plunging into bankruptcy protection last fall.

He met for the second time this week with officials from the Justice Department, which is conducting a criminal investigation of Enron's collapse. On Monday - the day before Andersen fired him - Duncan met with Justice Department officials as well as staff members from the SEC and agents from the FBI, according to people close to the inquiries.

Yesterday afternoon, he spent more than four hours answering questions from eight investigators for the Energy and Commerce Committee, one of several panels in Congress reviewing Enron's demise. Flanked by his lawyers, Duncan was not sworn, but he was warned not to give false statements to Congress. There was no discussion of giving him immunity for his testimony, investigators said.

"He answered our questions and provided us with some valuable information, which we are pursuing," said Ken Johnson, a spokesman for Rep. Billy Tauzin, the Louisiana Republican who chairs the committee. Johnson declined to comment in detail about the interview but said that Andersen's shredding of documents and handling of the Enron account were discussed.

The law firm representing Duncan, Sullivan & Cromwell, released a statement that said he was "continuing to cooperate with all investigations of this matter, and he looks forward to full disclosure of the truth."

Laura Sheehan, the spokeswoman for the committee's Democratic members, said investigators had hoped to learn more from Duncan. "Our investigators were disappointed by the limited nature of Duncan's memory," she said. "We expect documents and other witnesses to fill in the blanks."

Johnson said that the Andersen memo about Watkins' concerns suggested that the firm was well aware that Enron's accounting was suspect long before the company had disclosed its problems.

"It's clear now to us that key players at both Enron and Andersen knew of the problems months before the company imploded," Johnson said.

Rep. James C. Greenwood, the Pennsylvania Republican who heads the committee's oversight and investigation subcommittee, said the internal Andersen memo "raises additional concerns about Andersen's knowledge of potential accounting irregularities and the subsequent destruction of Enron-related documents."

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