ENRON'S COLLAPSE: THE OVERVIEW; ARTHUR ANDERSEN FIRES AN EXECUTIVE

FOR ENRON ORDERS

WASHINGTON, Jan. 15 Arthur Andersen fired its partner in charge of auditing the Enron
Corporation today, saying he had ordered the destruction of thousands of documents and e-mail messages
after learning that the Securities and Exchange Commission had begun an investigation of Enron's
accounting.
The fired partner, David B. Duncan, called a meeting of auditors at the firm's Houston office and ordered
''an expedited effort to destroy documents'' on Oct. 23, the day after Enron disclosed that the S.E.C. had
begun its inquiry, the firm said. The destruction apparently did not end until Mr. Duncan's assistant sent
an e-mail message to other secretaries on Nov. 9 that said ''stop the shredding,'' the firm said. Andersen
had received a subpoena from the S.E.C. the day before.
Further disclosures today underscored the accountants' central role in the scandal surrounding Enron, the
pioneering Houston energy company that was the nation's seventh- largest company before its precipitous
fall into bankruptcy protection. [Business Day, Page C1.]
A report in October by Enron's law firm, commissioned by the company to investigate an employee's
allegations of improper accounting, concluded that Andersen auditors reviewed and approved of
transactions by Enron-related partnerships that contributed to the company's collapse. The employee,
who made the allegations in an anonymous letter, has been identified as Sherron S. Watkins, an Enron
vice president for corporate development.
All material facts about the partnerships ''appeared to have been disclosed to and reviewed by AA,'' a
reference to Arthur Andersen, said the report by Vinson & Elkins, a Houston law firm.
In Washington, the House Energy and Commerce Committee released the full text of the employee's
August letter to Kenneth L. Lay, Enron's chairman, a day after disclosing excerpts in which the author
warned that the company could ''implode in a wave of accounting scandals.''
In her seven-page letter, Ms. Watkins questioned whether the company's complicated, largely undisclosed
deals with partnerships set up by Enron officials had helped inflate the company's stock price and, in the
end, would be found out to be an ''elaborate accounting hoax.''
Enron, she warned, should not rely on Andersen's assurances that the company's books were in order.
''None of this will protect Enron if these transactions are ever disclosed in the bright light of day,'' she
wrote.
Ms. Watkins also urged that Vinson & Elkins not be used to investigate the transactions, contending that
the firm had a conflict of interest because of its involvement in advising Enron on some of the deals.

A spokesman for the law firm, Joe Householder, said he could not comment specifically on work the firm
did for Enron because of client-confidentiality rules. ''We are confident everything we did for that client
was with the highest standards and professional ethics,'' he said.
Others in the company had also objected to Enron's financial practices, Ms. Watkins told Mr. Lay in her
letter. She said that J. Clifford Baxter, an Enron vice chairman who resigned in May, had ''complained
mightily'' to officials including Jeffrey K. Skilling, Enron's former chief executive, about the
''inappropriateness'' of the transactions. Mr. Skilling's resignation on Aug. 14 appears to have prompted
the letter, which says his ''abrupt departure will raise suspicions of accounting improprieties.''
Mr. Baxter could not be reached for comment. Mr. Skilling has maintained that no one at the company
raised broad concerns about the transactions with him.
Enron instructed Vinson & Elkins to explore only whether a broader inquiry was needed to deal with the
allegations in the letter from Ms. Watkins and to avoid ''second-guessing the accounting advice and
treatment'' provided by Andersen, according to the law firm's report. As a result, many of the detailed
allegations of accounting problems in the letter went unaddressed in the law firm's report.
While the Enron audits were handled in the accounting firm's Houston office, the report also makes clear
the involvement of Andersen executives at the firm's Chicago headquarters: ''AA consulted with its senior
technical experts in its Chicago office regarding the technical accounting treatment'' involving deals with
the partnerships.
The report, dated Oct. 15, concluded that Enron had done nothing wrong. The next day, Enron issued its
third-quarter earnings report and made no reference to the law firm's inquiry. Within weeks, Enron was
forced to acknowledge that improper accounting, much of it related to the partnerships, had resulted in
overstating its earnings by almost $600 million over five years.
Robert S. Bennett, a lawyer for Enron in Washington, said that Mr. Lay sought the report from Vinson &
Elkins to determine if there was any basis for further concern about Ms. Watkins's claims. Enron's
directive that Vinson & Elkins not re-evaluate the accounting on the partnerships was intended to ensure a
quick response to serious allegations, he said.
''Mr. Lay acted in a very responsible and professional manner,'' Mr. Bennett said. ''He did everything that
could be expected of him.''
As the disclosures tumbled out today, the New York Stock Exchange moved to delist Enron's stock, which
has generally sold for less than $1 a share since the company's Chapter 11 bankruptcy filing on Dec. 2. The
stock -- which peaked at about $90 in August 2000 -- will now trade in the over-the-counter market.
Enron has not traded since Thursday, when the shares closed at 67 cents.
Also today, the Senate Finance Committee said it planned to review Enron's corporate income tax returns,
becoming the sixth Congressional committee to join the investigations of the company. Senator Charles E.

Grassley of Iowa, the committee's ranking Republican, said the issue of primary concern to him was not
tax avoidance but ''whether Enron used tax vehicles that might have masked the company's financial
condition.''
Mr. Duncan, the fired Andersen partner, is expected to meet Wednesday with investigators from the
House Energy and Commerce Committee in Washington.
''Today, we heard one side of the story; tomorrow we'll hear the other,'' said Ken Johnson, a spokesman
for Representative Billy Tauzin, the Louisiana Republican who is chairman of the committee. ''The
admission that Andersen destroyed documents after learning of an S.E.C. inquiry is more than just
unethical. It could be criminal as well.''
Meanwhile, Paul Sarbanes, chairman of the Senate Banking Committee, asked the General Accounting
Office to begin two investigations. One inquiry will be to determine how many employees in the last
decade have suffered substantial retirement losses because of declines in company stock values. The other
will delve into the adequacy of current financial reporting requirements.
Joseph F. Berardino, Andersen's chief executive officer, said today that the firm, one of accounting's Big
Five, was moving aggressively to rehabilitate its reputation. ''The integrity of this firm is in question,'' he
said in an interview. ''Our reputation is our most important asset.''
Legal experts said that firing Mr. Duncan would not relieve Andersen of liability for his actions. A lawyer
for Mr. Duncan, who has been the partner in charge of Enron audits since 1997, said his client had done
nothing wrong and was cooperating with investigators.
''He followed the instructions of an Andersen in-house lawyer, which were consistent with Andersen's
longstanding policy,'' said the lawyer with Sullivan & Cromwell in New York, who insisted that his name
not be used. That appeared to be a reference to a previously disclosed memo from Nancy Temple, an
Andersen lawyer, reminding the Houston office of Andersen's policies on document destruction.
Mr. Berardino, asked if anyone from Andersen's headquarters in Chicago had approved of the destruction,
said, ''I don't know yet if anyone advised him to do that.''
Mr. Duncan, 42, started at Andersen in 1981 and has been a partner since 1995.
In addition to firing Mr. Duncan, the firm placed on leave three other partners who worked on Enron
audits: Thomas H. Bauer, Debra A. Cash and Roger D. Willard. Also, four partners in Andersen's Houston
office were ''relieved of management responsibilities'': D. Stephen Goddard Jr., Michael M. Lowther, Gary
B. Goolsby and Michael C. Odom.
Andersen said it had learned of ''the deletion of thousands of e-mails and the rushed disposal of large
numbers of paper documents'' after the Oct. 23 meeting in its Houston office. ''These activities were on
such a scale and of such a nature as to remove any doubt that Andersen's policies and reasonable good
judgment were violated,'' the firm said.

According to the Vinson & Elkins report, both Enron and Andersen acknowledged that the accounting
treatment given to some of the company's transactions was ''creative and aggressive,'' but the law firm
concluded that no further investigation was warranted.
It did warn, however, that there was a ''serious risk of adverse publicity and litigation'' because of the ''bad
cosmetics'' of the transactions and the falling value of both Enron's stock and assets in the transactions.
According to its report, the law firm received assurances of the legitimacy of the partnership transactions
from officials at Andersen and Enron close to the dealings. Among the main officials the law firm
interviewed to reach those conclusions were Mr. Duncan and Andrew S. Fastow, at the time Enron's chief
financial officer.
Mr. Fastow, who organized the partnerships on the company's behalf and earned more than $30 million
from his own investments in them, was asked to leave the firm on Oct. 23, as Wall Street grew increasingly
distressed about Enron's performance and disclosures.
The transactions involving the partnerships were complex. According to the Vinson & Elkins report, the
first of the partnerships, known as LJM1, was organized to allow Enron to hedge its investment in
Rhythms Netcommunications, an Internet networking company.
Another partnership, LJM2, raised $349 million from investors, according to the Vinson & Elkins report,
including ''commercial and investment banks, insurance companies, public and private pension funds and
high net worth individuals.'' According to the report, LJM2 engaged in 21 transactions with Enron.
Each partnership transaction was closely reviewed by Enron executives, the report says. A sheet tracking
each deal was reviewed and signed by senior Enron officials in the legal, technical and commercial
divisions of the company.
During the lawyers' interviews for their report, concerns were raised by some officials about the potential
for conflicts of interest, because Enron officials including Mr. Fastow were working for both the company
and for the partnerships.
''Within Enron, there appeared to be an air of secrecy regarding the LJM partnerships and suspicion that
those Enron employees acting for LJM were receiving special or additional compensation,'' the report
says. Vinson & Elkins apparently did not learn of Mr. Fastow's earnings from the partnerships.
Photo: A House committee released the letter on Enron's problems yesterday. (Bloomberg News)(pg. C7)
Chart: ''How Concerns Were Deflected at Enron'' Last year, after the resignation of Enron's chief
executive, Jeffrey K. Skilling, questions were raised within the company about some of its accounting
practices. A report commissioned by Enron to look into the allegations exonerated the company only days
before the concerns became public. AUG. 14, 2001 -- Only six months after becoming chief executive,
Jeffrey K. Skilling resigns. He is succeeded by Kenneth L. Lay, who was the chairman and had been chief
executive before Mr. Skilling. AUG. 20 -- Mr. Lay exercises options on 25,000 shares at $20.78 with a

total value of $519,500. The stock closed at $36.25. AUG. 21 -- Mr. Lay exercises options on 68,620 shares
at $21.56 with a total value of $1,479,447. The stock closed at $36.88. Mr. Lay sends an e-mail to
employees assuring them that the company is on solid footing. LATE AUGUST -- Soon after Mr. Skilling
resigns, Sherron S. Watkins, a vice president for corporate development, sends a seven-page letter to Mr.
Lay saying that Enron used improper accounting practices for years and those practices pose a threat to
the company. She also says that many transactions involving Enron and partnerships set up by senior
Enron executives should be examined, but not by the company's outside law firm, Vinson & Elkins,
because it has potential conflicts of interest. Despite Ms. Watkins's concerns about Vinson & Elkins, the
firm is asked to look into whether a broad inquiry is necessary to deal with the allegations. It is specifically
told not to spend time "secondguessing the accounting advice and treatment." OCT. 15 -- The lawyers at
Vinson & Elkins issue a report saying that Arthur Andersen, Enron's accountant, approved of the practices
mentioned in Ms. Watkins's letter and concludes that Enron did nothing wrong. OCT. 22 -- The Securities
and Exchange Commission opens an inquiry into Enron's limited partnerships created by Andrew S.
Fastow, Enron's chief financial officer. OCT. 23 -- Mr. Lay reassures investors in a conference call and
defends Mr. Fastow. OCT. 24 -- Mr. Fastow is forced out. (pg. C7)
Correction: January 17, 2002, Thursday Because of a production error, the continuation of a front-page article yesterday about developments in the collapse
of the Enron Corporation omitted a brief passage in some copies. The affected sentence, about a memorandum by an Enron executive discussing the company's
law firm, should have read, ''Ms. Watkins also urged that Vinson & Elkins not be used to investigate the transactions, contending that the firm had a conflict of
interest because of its involvement in advising Enron on some of the deals.''