Enron directors knew of and were complicit in the company's dubious accounting practices, inappropriate conflicts of interests involving executives, and extensive undisclosed off-the-books activity, a damning report from the US Senate has claimed, writes Patrick Smyth, Washington Correspondent
"Much that was wrong with Enron was known to the board," the Senate Permanent Subcommittee on Investigations found in a report published yesterday which attacks the myth that the company's problems were the responsibility of a few rogue executives like chief financial officer, Mr Andrew Fustow.
An Enron lawyer claims the report is "unfair" but on Capitol Hill senators were saying it is likely to provide powerful new ammunition to the advocates of legal corporate reform.
The board "failed to heed more than a dozen red flags that should have caused the Enron board to ask hard questions, examine Enron policies and consider changing course," the report says.
The report estimates that at its peak, the company "apparently had between $15 billion and $20 billion involved in hundreds" of complex transactions that entailed "convoluted financing and accounting structures".
It says the former Enron auditor, Mr David Duncan of Andersen, the key state witness in the recent prosecution of the accounting firm, warned directors on the audit committee that the company engaged in high-risk accounting practices. Mr Duncan told the directors that some of what was being done was "pushing the limits" and was "at the edge" of acceptable practice.
Duncan's notes of the discussion were backed up by other documents and by the testimony of a second Andersen accountant who was present.
But the Enron audit committee chairman, Mr Robert Jaedicke, said he did not recall being told that the company's accounting practices pushed the limits.
And the company's lawyer, Mr Robert Bennett, claims that the Senate is setting a far higher standard for directors than is normally understood, an argument that will be music to the ears of reformers despite Mr Bennett's barbed rider.
"I only wish the Congress would apply the same standards to their own conduct," Mr Bennett said. He said the report was "grossly unfair" and that it "leaps to unfounded conclusions".
The report also says Enron's executives compromised the independence of some board members with consulting payments.
Enron paid board member Mr John Urquhart $493,914 for consulting in 2000. And, starting in 1996, the British Conservative Lord Wakeham got a monthly retainer of $6,000 for consulting. The money was in addition to the regular pay for board members at Enron, which amounted to $350,000 per year, much of it in the form of stock options, says the report.
Board members claimed they had been unaware the company paid cash bonuses of $750 million to Enron executives in a year when the company's entire net income was $975 million.
The report is particularly critical of the board's willingness to tolerate the extraordinary freedom given to Mr Fastow and its failure to raise questions when told that one of his outside partnerships had produced a phenomenal $2 billion in funds flow for Enron.
The report says the board only started asking questions late last year about the tens of millions of dollars in outside compensation paid to the executive for his role in keeping hundreds of millions of dollars of Enron debt off the books.
