STATEMENT OF DR.
ROBERT K. JAEDICKE
Before the
Permanent Subcommittee on Investigations
The Committee on Government
Affairs
U.S. Senate
May 7, 2002
Chairman Levin, Senator Collins, and Members of the
Subcommittee. Good morning, and thank
you for the opportunity to address the Subcommittee.
My name is Robert Jaedicke. I served as the Chairman of the Audit Committee of the Board of
Directors of Enron Corporation. As part
of an overall restructuring of the Board, I recently resigned as a director,
having served since the mid-1980s.
Let me briefly tell you about my background. I joined the faculty of the Stanford
Graduate School of Business in 1961. I
served as Dean of the Business School from 1983 until 1990. At that time, I returned to the faculty of the
Business School, and retired in 1992.
Throughout my tenure as Chairman of the Enron Board’s
Audit Committee, I was committed to ensuring that it was an effective and
actively functioning body. Over the
last few years, we undertook to review and strengthen our already vigorous
control systems. In 1999, we began a
number of initiatives to ensure that we remained a “best practices” Audit
Committee. Throughout 2000 and into
2001, our Committee worked with Arthur Andersen to make certain we complied
with the recommendations of the Securities and Exchange Commission, the New
York Stock Exchange, and the Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees.
That effort culminated in February 2001, when the Audit Committee
drafted a new charter that was approved by the full Board. Throughout that lengthy process, involving
both Enron management and Arthur Andersen, we implemented a series of further
refinements to our corporate policies and controls.
The lifeblood of the work of any Audit Committee is
the development and implementation of adequate controls, many of which cross
check each other. The Committee’s
responsibility is to receive reports from management and the outside auditors,
to review the adequacy of internal controls, and to oversee the filing of
financial statements. The Committee’s
effective oversight also depends on the full and complete reporting of
information to it. Without full and
accurate information, an Audit Committee cannot be effective. The Committee does not manage the Company
and does not do the auditing. It is my
understanding that the audit committees of most corporations like Enron
typically meet for a few hours several times a year. As Warren Buffet wrote to New York Stock Exchange Chairman and
CEO Richard Grasso in 1999, “An audit committee that meets for a few hours
several times a year is simply not going to pick up anything that is missed by
the outside auditors. . . . Therefore,
the task of the audit committee should be to hold the feet of the outside
auditors to the fire.” In that same
letter, Mr. Buffett also stated, “Simply put, audit committees cannot act as
auditors. Their true job—and I would
argue the only important function that they can adequately discharge—is to make
sure that the auditors do their job instead of becoming subservient to
management.”
I agree. As
Chairman of the Audit Committee, I believe that our duty was to ensure that the
outside auditors were in a position to perform their independent auditing
function with full cooperation from management and with no management-imposed constraints on the
audit scope. We regularly reviewed
Arthur Andersen’s independence, whether they had disagreements with management,
and whether they had the appropriate control over access issues and accounting
treatment.
We held regular meetings at least four—and usually
five—times a year at which we received reports from a broad range of senior
management and Arthur Andersen personnel.
Audit Committee meetings regularly included three Arthur Andersen
partners, the chief accounting officer, the chief risk officer, the general
counsel, the chief internal auditors, Mr. Lay, Mr. Skilling, and other senior
Enron officers and outside advisors as appropriate. We were entitled to rely on the representations made to us by
management, our outside auditors and advisers about the appropriateness of the
accounting for the partnerships, and the adequacy of our disclosures. We asked questions, provided oversight,
received several special reports on accounting policies, and continually
discussed the adequacy of our internal controls. I respectfully submit that we did our job.
Three Arthur Andersen partners regularly attended each
Audit Committee meeting and reported on issues of interest or concern. It was my invariable practice to hold—or at
least offer to hold--an executive session with the Arthur Andersen
representatives where they could meet with us without management present. There, Arthur Andersen could freely report
to the Committee any matters of concern that made the auditors uncomfortable,
including; whether they had had any significant disagreement with management;
whether they had full cooperation of management; whether reasonably effective
accounting systems and controls were in place; whether there were any material
systems and controls that need strengthening; and whether they had detected
instances where company policies had not been fully addressed.
Arthur Andersen did not raise concerns about the
partnerships in these executive sessions.
In fact, they normally reported to us that the structures and
transactions were complex and required judgment, but that they were in at an
early stage to understand and review the transactions and that they were
comfortable with the accounting treatment.
Over the last several months, however, through the
media and other public disclosures, I have learned that within the management
of Enron and within Arthur Andersen, there was substantial turmoil about the
related party partnerships. For
example, until recently, I was unaware that:
·
In February 2001, Arthur
Andersen officials met among themselves and raised concerns about the
accounting for the partnerships and whether the related party transactions were
fair to Enron;
·
In the summer of 2001,
an Enron in-house attorney was sufficiently concerned about the partnerships
that he consulted with a separate law firm;
·
In early October 2001,
Arthur Andersen retained outside counsel in anticipation of possible litigation
arising from Enron’s financial statements;
Contrast what Arthur Andersen knew and was doing
during that time with what it was telling the Audit Committee. In a February 12, 2001 Audit Committee
meeting, Arthur Andersen reported:
·
Arthur Andersen’s
financial statement opinion for the 2000 financial statements would be
unqualified. The 2000 statements would
cover the first full year of existence of the LJM partnerships.
·
Arthur Andersen’s
opinion on the company’s internal controls (which should have included an
assessment of the internal controls in place for related party transactions)
would be unqualified and they noted no material weaknesses.
·
The use of structured
transactions and mark to market accounting required significant judgment, but
Arthur Andersen did not suggest that anything about the judgments being made
was inappropriate.
·
Arthur Andersen was
present when we reviewed the related party transactions, and did not indicate
any impropriety or major concerns with the accounting or the fairness of the
transactions.
I want to highlight two critical pieces of information
about these related party transactions that management did not reveal to the
Board. First, as the Powers Report
indicates, it was never disclosed to the Board that Enron employees other than
Andrew Fastow had acquired interests in, or become parties to, related party
transactions with Enron.
It is also apparent that management’s lack of candor
was not limited simply to the non-disclosure of related party interests. We now know that certain Enron employees
believed that particular transactions with the LJM entities were unfair to
Enron, were an improper effort to manipulate the company’s financials, or were
not properly being disclosed in Enron’s proxy statements and financial
disclosures. These are serious issues
that the employees, management, or both should have brought to the Board’s
attention. The one time the Board was
informed that a concern had been voiced about the related party transactions,
we were informed that the matter had been investigated and resolved by outside
counsel.
LJM1 and LJM2 were presented to the Board as having
significant benefits to Enron. The
Office of the Chairman determined that the LJM structure – with Mr. Fastow as
the general partner of the LJMs– would not adversely affect the interests of
the company. Senior management
discussed with the Board the very real and substantial benefits to Enron of
such a structure. The Board thought,
based upon these presentations, that the LJM partnerships offered real business
benefits to Enron. Many special
controls were put in place to manage the related party aspect of the
partnerships. Significant and
legitimate economic benefits were presented to justify why Mr. Fastow should be
permitted to assume the role that we ultimately permitted him to assume.
Enron’s Code of Conduct allows a senior officer to
participate in a transaction in which he has a potential conflict of interest
with Enron if the Office of the Chairman determines that this participation
will not adversely affect the interests of the Company. Mr. Fastow was allowed to participate in LJM
because the Office of the Chairman made such a determination, and the Board ratified
it. This action had no affect whatsoever
on Mr. Fastow’s obligation to comply with all other requirements of Enron’s
Code of Business Conduct and its Code of Ethics as a senior officer and
fiduciary of Enron.
The Audit Committee executed its responsibility of
overseeing management’s proper implementation of the controls and was
repeatedly assured that they were being followed. The Board was told, and had every reason to believe, that the
several parties with the obligation to monitor the transactions were ensuring
that the procedures that the Board and the Company had put in place were
followed and that transactions with LJM were fair to Enron and were accounted
for properly.
The
Audit Committee reviewed the LJM transactions with Enron’s Chief Accounting
Officer each year, in the presence of Arthur Andersen partners, Mr. Lay, Mr.
Skilling, the Chief Risk Officer, and in-house counsel, and was assured that
all of the transactions were done at arms length and were fair to Enron. The Board and the Audit Committee had no
reason not to trust the assurances they received. Despite the existence of these controls, it is now apparent that
numerous critical and troubling facts about LJM1 and LJM2 were not brought to
the attention of the Board or the Audit Committee. There was ample opportunity to express concerns because the
related party partnerships were discussed at meetings of the Finance and Audit
Committees.
We had the following understandings about Arthur
Andersen’s assurances concerning these transaction:
·
In the October 1999
Audit Committee meeting before the Board meeting where LJM2 was approved,
Arthur Andersen assured the Audit Committee that it “had spent considerable
time during the third quarter reviewing a joint venture [Enron] was forming to
assist in monetizing investments.”
·
In presenting LJM2 to
the Finance Committee in October 1999, senior management also discussed the
fact that Arthur Andersen had reviewed LJM2 and were fine with it.
·
In May 2000, Arthur
Andersen reported to the Audit Committee that Enron’s related party transactions
were a “high priority” area, that Arthur Andersen “would be spending additional
time” specifically on Enron’s “structured transactions related to
securitization and syndication and hedging vehicles.” Notes that apparently were taken at the meeting reflect that
Andersen reported that it “gets involved in the structure on the front end to
discuss applicable accounting issues,” and that Arthur Andersen typically
consults with its Chicago and New York offices.
·
In February 2001, Arthur
Andersen reported to the Audit Committee that its “financial statement opinion
was expected to be unqualified, and that there were no significant audit
adjustments, . . . disagreements with management, [or] significant difficulties
encountered during the audit.” Arthur
Andersen also discussed its “opinion on the [Enron’s] internal controls and
stated that the opinion would be unqualified, the audit was complete, and no
material weaknesses had been identified.”
Arthur Andersen often mentioned that Enron was utilizing highly complex structured transactions that required significant judgment in the application of the accounting rules. As the Audit Committee minutes reflect, Enron paid Arthur Andersen specifically to address the accounting issues related to these transactions. Arthur Andersen assured us that they were working with their experts in Chicago to make sure that Enron properly accounted for those transactions.
Last February, Alan Greenspan testified before
Congress, “I've served on too many audit committees to know that, even though I
would consider myself independent, I would consider myself knowledgeable, I did
not know what questions to ask the chief financial officer during meetings to
find out what is it that conceivably is going wrong in the corporation, and he
wasn't about to tell me. So that there was a very difficult problem that one
confronts.” I agree with Mr.
Greenspan. We did everything possible
to ensure that our controls and procedures were being followed. To my knowledge, we were one of the few
major corporations that required Arthur Andersen to give us an attest opinion
on management’s assertion that our internal controls were adequate.
What happened at Enron has been described as a
systemic failure. As it pertains to the
Board, I see it instead as a cautionary reminder of the limits of a director’s
role. We served as directors of what
was then the seventh largest corporation in America, which required us to
confine our attention to the broad policy decisions. At the meetings of the Board and its committees, in which all of
us participated, these issues were considered and decided on the basis of
summaries, reports and corporate records, upon which we were entitled to
rely. We also reasonably relied upon
the honesty and integrity of management, their subordinates and advisers, and
on the integrity of the information we were receiving. At the time, we had no reason to doubt the
integrity of either the management or our advisors.
We did all of this, and more. Sadly, despite all that we tried to do, in
the face of all the assurances we received, we had no cause for suspicion until
it was too late.
I am prepared to respond to questions from the
Subcommittee.
Thank you.