Last-minute changes to quarterly earnings reports prosecutors contend were ordered by Enron Corp. Chief Executive Jeffrey Skilling to improve the company’s reputation on Wall Street were accurate, and not the result of improper tapping of company reserves, a defense expert testified Wednesday.
“The whole process of financial reporting, in a company as large as Enron, to get financial statements out ... is an enormous undertaking,” said Walter Rush, an accounting expert hired by Skilling. “And people are scrambling, trying to get these estimates put together.
“There are changes going on up to the very last second. It is universal. Every company goes through this.”
Rush was the second consecutive accounting expert to take the stand, following University of Southern California professor Jerry Arnold, who testified for Enron founder and former CEO Kenneth Lay in the 14th week of their federal fraud trial.
U.S. District Judge Sim Lake said late Wednesday he wanted testimony and rebuttal witnesses finished no later than the end of next week, and tentatively set reading of his charge to the jury and the start of closing arguments for May 15. Defense lawyers would get to make their final arguments the following day, with prosecutors getting the remainder of their closing time on May 17. The case would then go to the jury.
With the trial in the home stretch, Lay’s lead attorney, Michael Ramsey, was returned to a hospital Tuesday. The 66-year-old lawyer underwent a two-hour medical procedure six weeks ago to clear an artery with a stent and was recovering, but felt worse this week. He has been absent during Lay’s testimony earlier this week and last week.
Mark Koenig, former head of investor relations at Enron, testified early in the trial that he believed top Enron executives were so bent on meeting or beating earnings expectations to keep analysts bullish on the company’s stock that they made or knew of overnight changes to estimates. Paula Rieker, Koenig’s former top lieutenant, said Koenig told her Skilling ordered abrupt last-minute changes to two quarterly earnings reports to please analysts and investors.
“They could have just had a bad number,” Rush said, referring to Koenig’s and Rieker’s testimony about a late-night change in a fourth-quarter 1999 report that boosted earnings per share from 30 cents to 31 cents.
Arthur Andersen, Enron’s outside accounting firm, already had the 31-cent number days earlier, Rush said.
“They could have been a couple steps behind the way the process was evolving,” he said of Koenig and Rieker.
In addition, Rush said the intention to “beat the street,” a phrase attributed to Skilling, was typical in business.
“Companies set goals and forecasts for themselves all the time,” Rush said.
He stuck to his assessment under cross-examination by lead prosecutor Sean Berkowitz.
“As I said earlier, I went back to take a look and see if anything unusual was going on to manipulate the numbers, and the answer is no,” Rush said.
Prosecutors also contend Enron achieved its rosy earnings by drawing improperly from reserves. But Rush, responding specifically to second-quarter earnings in 2000, said a transfer from one reserve was not material since Enron had another, underreported reserve.
“That number had the effect of understating Enron’s profits,” he said.
Rush, who was to return to the stand Thursday, wouldn’t bend under cross-examination in his assessment that the reserves were properly used, even when confronted with testimony from Wesley Colwell, former chief accounting officer for Enron’s trading division. Colwell testified he improperly raided reserves to increase earnings when he understood that Skilling and other superiors wanted better results.
“This doesn’t have any impact on my decision whatsoever,” Rush said. “It was audited and agreed to by a variety of individuals at Arthur Andersen, including some very senior partners who were very familiar with the oil and gas industry.”
He also disputed government contentions Enron executives improperly moved parts of the company’s retail operation into its highly profitable wholesale business unit in 2001 to hide financial problems under the guise of an accounting process called “resegmentation.”
“I do believe it was properly disclosed and properly accounted for,” Rush said, adding that he believed Enron went beyond the rules in disclosing particulars about the resegmentation.
“The rules only require we tell we have made a resegmentation. You just merely need to alert the reader there has been a change.”
He wouldn’t budge for Berkowitz.
“The decision was made in the first quarter, and therefore it’s appropriate to recognize the newly organized business on the basis of when the decision was made,” Rush said.
When asked about the intent of the reorganization, which occurred days before the end of the quarter, Rush replied: “There is nothing in the rules that deal with the question of intent.”
And when Berkowitz said intent went to the “heart of integrity” and the “heart of financial statements investors might want to know,” he repeated: “The disclosures were made totally appropriate according to the rules.
“This is why they write the rules.”
Earlier Wednesday, Arnold repeated his sentiment that Lay did not mislead investors about the company’s financial health in the weeks before it filed for bankruptcy protection in December 2001.
Arnold said third-quarter 2001 financial statements cited by Lay in discussions with investors complied with Securities and Exchange Commission rules.
“That is my view,” he said, answering repeated questions about the quarter when Enron reported $638 million in losses and a $1.2 billion reduction in shareholder equity.
The government contends Lay knew many Enron assets were overvalued and that losses were coming and misrepresented this to the public.
Several former high-ranking Enron executives have testified Lay misled investors when he said the losses were one-time events.
“I disagree with their interpretation,” Arnold said, who noted his company had been paid $1 million for his work on the Enron defense.
Only 10 minutes into his testimony Wednesday, U.S. District Judge Sim Lake grew impatient when Arnold and prosecutor Andrew Stolper repeatedly went round and round on the same question.
“I’m not going to have sparring over minor, uncontroverted issues,” a clearly irritated Lake barked.
Skilling, who testified earlier, and Lay, who wrapped up six days on the witness stand Tuesday, are accused of repeatedly lying to investors and employees about Enron when prosecutors say they knew the company’s success stemmed from accounting tricks.
Skilling faces 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy.
The two men counter no fraud occurred at Enron other than that committed by a few executives, like Fastow, who stole money through secret side deals. They attribute Enron’s descent into bankruptcy proceedings to a combination of bad publicity and lost market confidence.