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Enron Examiner's Second Report Blasts Accounting

Mar 7, 2003 | USA TODAY Former Enron chairman Ken Lay paid off more than $74 million in company loans with Enron stock at a time when the company was sinking in debt.

That's just one of several findings in a new report by a court-appointed examiner.

The 2,000-page report by Neal Batson of Atlanta law firm Alston & Bird is the second in a series requested by U.S. Bankruptcy Judge Arthur Gonzalez to determine how much Enron owes its creditors.

Batson suggests that creditors might be entitled to as much as $2.9 billion in assets that Enron transferred or sold before its Dec. 2, 2001, bankruptcy-reorganization filing.

He says Enron might be able to seek recovery of the more than $74 million lent to Lay in 2000 and $53 million paid to Enron employees in late 2001, when the company was presumed to be insolvent. The $53 million was from a deferred-compensation program, but retirees were rebuffed when they tried to reclaim their money.

The report also calls into question some $5 billion in loans disguised as transactions that Enron entered into with Citibank and J.P. Morgan Chase.

''Both Citibank and J.P. Morgan knew that Enron accounted for its obligations under the prepay transactions as liabilities from price risk management activities rather than debt,'' the report said. ''They also believed that Enron reported the cash as cash flow from operating activities rather than financing activities. ''

Other highlights from the report:

Enron exploited tax loopholes to generate $800 million in reported income over a six-year period. The efforts of employees in the company's tax group, ''went beyond normal tax savings techniques, and even beyond typical corporate 'tax shelter' transactions, to a new genre of transactions aimed largely at 'generating' accounting income from projections of future tax savings,'' Batson wrote.

In a footnote, Batson relates that Robert Hermann, former head of the company's tax group, said in an interview that Enron found the profits generated by the tax department to be ''kind of like cocaine they got kind of hooked on it.''

Enron employed six accounting techniques, including its aggressive tax claims, to generate 96% of the company's $979 million in reported income in 2000. Without resorting to these unusual accounting techniques -- which Batson criticizes Enron's income would have been $42 million.

Those same accounting techniques, combined with Enron's reliance on special purpose entities, allowed the company to claim that its debt in 2000 was $10.3 billion. Without stretching the accounting rules to hide all its debt, Enron's liabilities would have been $22.1 billion for the year.

Enron's quality of earnings were suspect. Batson's report describes one transaction, Project Nahanni, in which Citibank lent $485 million to a group of investors who added $15 million and purchased $500 million in U.S. Treasury bonds.

The Nahanni investors, who were not identified in Batson's report, then contributed the bonds to an Enron subsidiary called Marengo in exchange for 50% ownership of Marengo.

Marengo then sold the Treasuries for $500 million and lent the money to Enron. Enron subsequently reported that the $500 million was cash from operating activities for 1999. The entire transaction took place in December 1999. A month later, Enron repaid the loan without ever recording it as debt on its financial statements.

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