Accountants Face Grilling in Enron Trial

Lawyers for Enron Corp. founder Kenneth Lay and former CEO Jeffrey Skilling have repeatedly grilled prosecution witnesses in their fraud and conspiracy trial on whether they have the expertise to decry accounting decisions as fraudulent moves to manipulate earnings. Now they can grill a couple of the very outside accountants who signed off on Enron's books.

On deck to kick off the eighth week of the trial are two former Arthur Andersen LLP accountants who were among more than 100 assigned to the firm's once-lucrative Enron account.

Prosecutors said they expect to call former Andersen accountants Thomas Bauer and John R. Sult to the witness stand. Bauer oversaw books for Enron North America, the energy company's profitable trading arm. Sult oversaw accounting related to Wessex Water Ltd., a British water utility that was the cornerstone of Azurix, Enron's failed multibillion-dollar water business.

Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces seven counts of fraud and conspiracy. Both are accused of repeatedly lying about Enron's financial strength when they allegedly knew accounting tricks propped up the company's successful image.

Both men say there was no fraud at Enron and negative publicity coupled with diminished market confidence fueled the company's swift descent into bankruptcy protection in December 2001.

Bauer was among several auditors disciplined shortly after Andersen disclosed in January 2002 that the firm had destroyed tons of Enron-related audit documents and e-mails in October and November 2001 as the Securities and Exchange Commission began investigating the energy company's finances.

During Andersen's obstruction of justice trial in 2002, Bauer invoked his Fifth Amendment right not to testify.

Andersen was convicted, but the U.S. Supreme Court last year overturned that conviction, citing vague jury instructions that allowed jurors to convict without finding criminal intent fueled Andersen's actions. Andersen argued throughout the trial that auditors destroyed documents as required by company policy.

Bauer was a top lieutenant to David Duncan, the former head of Andersen's audit team, who pleaded guilty to obstruction in April 2002 and testified against his former employer. During that testimony, he said Enron's accounting was proper.

Last December Duncan withdrew his guilty plea, without government opposition, on grounds that he didn't admit to criminal intent. Prosecutors can re-indict him, so he is expected to invoke his Fifth Amendment rights if the defense calls him to testify in Lay and Skilling's trial. He is not on the government's witness list.

Enron bought Wessex for $2.2 billion in 1998. In 2002, a subsidiary of Malaysian energy group YTL Power International bought the company from the bankrupt parent for $777 million and nearly $1 billion in assumed debt.

The charges against Lay include an allegation that he lied to outside auditors in October 2001 by claiming Enron planned to invest in Wessex rather than sell it. Otherwise, a then-new accounting rule would have required Enron in January 2002 to write down Wessex's inflated value on the energy company's books by $700 million to match its true value.

The indictment alleges that such a writedown could have prompted credit rating agencies to downgrade Enron's credit rating, which was vital to the energy company's ability to borrow millions to support its trading operation.