Enron Tapped Cash Reserves for Profits: Witness

By Matt Daily

HOUSTON — Enron Corp. illicitly tapped into cash reserves to inflate earnings demanded by former CEO Jeff Skilling to impress Wall Street, a former top accountant said on Monday at the trial of Skilling and ex-CEO Ken Lay.

The accountant, Wesley Colwell, testified the orders from his bosses to raid the reserve funds violated accounting rules that govern how companies report on cash set aside to cover expected costs and liabilities.

"If you have (transfers) that are driven by a desire to increase earnings, it is improper," said Colwell, who was the head accountant of Enron’s North American trading business.

Lay and Skilling are on trial for conspiracy and fraud linked to the 2001 collapse of the company that was once the seventh largest in the nation and the darling of Wall Street.

The company plunged into bankruptcy in December 2001 after its use of off-balance sheet partnerships to hide billions of dollars in debt and bolster profit was discovered.

Colwell paid $500,000 in 2003 to settle a civil case brought against him by the U.S. Securities and Exchange Commission. He has not been charged with a crime, and is cooperating with the government under a deal that allows him to be avoid prosecution.

Colwell said he was told by former chief accountant Richard Causey in July 2000 twice to dip into a reserve of $70 million set aside to pay for an electricity deal with the Tennessee Valley Authority.

Colwell moved $14 million of that reserve into profits to enable Enron to boost earnings per share by 2 cents to 34 cents per share, beating financial analysts’ forecasts by 2 cents for the quarter.

Causey had been set to go on trial with Lay and Skilling, but reached a plea deal with prosecutors in December that is expected to send him to prison for seven years.

Later, in preparing the fourth quarter earnings totals, Colwell said the company did not even total up its reserves until after Causey told him how much money from those accounts would be needed to meet profit goals.

"He said to me that he had to talk to Jeff Skilling about where he wanted to land the quarter," Colwell said.

Skilling’s lawyer, Randall Oppenheimer, sought to portray the moves as legitimate, since reserve amounts are often revised.

Enron had booked reserves that were too high for other liabilities, Oppenheimer said, so reducing the reserve for the power deal simply offset the total amount the company had set aside.

But Colwell disagreed, saying each reserve was separate and needed to be determined by its own factors, not by profit goals.

Following Colwell’s testimony, prosecutors called Wanda Curry, a former Enron accountant who, she said, was moved into another job because she was not willing to use aggressive accounting interpretations the company wanted.

Curry testified about the chaos at the company’s retail business, Enron Energy Services (EES), where the company could not even track how much its liabilities on contracts totaled.

Curry said another employee brought her a tray of uncashed checks totaling $30 million from utility Southern California Edison that he had found lying under a desk.

The discovery set off alarms at EES, and a subsequent internal review showed that because of the lax controls the company had an undiscovered exposure of more than $1 billion in possible unpaid bills and future liabilities.

"While it was good news that we collected that money, it wasn’t good news because we had a potential bad debt we had discovered," Curry said.