Accountant Recounts Shredding Instructions

HOUSTON — An Arthur Andersen partner auditing Enron Corp. told a co-worker last fall that if he ever discussed destroying documents, his instructions would stem from the firm’s document-retention policy, an Andersen executive testified Tuesday.

Partner Thomas Bauer said “if he ever talked to us about getting rid of documents, that it would always be along the lines of being in compliance with the firm’s retention policy,” testified Patricia Grutzmacher, an accountant on Andersen’s Enron team.

The document policy is at the center of Andersen’s trial on an obstruction of justice charge for destroying Enron audit documents. Prosecutors contend that an Oct. 12 e-mail from Andersen staff attorney Nancy Temple reminding the Houston office of the policy was a coded message to begin shredding.

The policy calls for employees to retain records needed to bolster auditors’ conclusions and the disposal of drafts, redundant files and extraneous paper.

Bauer has refused to testify, citing his right against self-incrimination. However, other Andersen executives have testified that they didn’t interpret the e-mail to be a secret instruction.

Prosecutors apparently elicited Grutzmacher’s testimony to support their claim that the Temple e-mail was a signal to start shredding. But as testimony ended Tuesday, her observations remained open to interpretation.

Assistant U.S. Atty. Matt Friedrich did not follow up by asking whether Grutzmacher believed Bauer was telling her to interpret “compliance” as a coded signal. Andersen attorney Rusty Hardin asked Grutzmacher to clarify the comment during cross-examination, but prosecutors’ objections were sustained by U.S. District Judge Melinda Harmon.

Hardin expressed frustration about being blocked from asking Grutzmacher about the conversation, saying, “We’re supposed to be trying to get the truth out.”

Under questioning from Friedrich, Grutzmacher said Bauer had not previously offered such an explanation. Grutzmacher said she could not recall the date of the conversation.

But she said she recalled another discussion with Bauer last fall in which he asked her to comply with the policy.

She also recounted an Oct. 23 meeting with David B. Duncan, the partner who led the Enron audit team and is the government’s key witness. She quoted Duncan as saying: “I’m not telling you to go and shred a bunch of documents or anything, but you need to make sure ... you’re in compliance” with Andersen policy. She said Duncan also informed executives that the Securities and Exchange Commission had initiated an inquiry into Enron’s finances.

Under questioning from Hardin, Grutzmacher said she didn’t leave the meeting believing that she had been instructed to destroy records.

She also said that she told the FBI in an interview that she didn’t believe there was a connection between the SEC investigation and instructions about the policy.

But Grutzmacher also told prosecutors that at some point after the Oct. 23 meeting, she met with Bauer and asked whether she should prioritize organizing her files to comply with the policy, or crunch numbers to determine Enron’s earnings restatement. She said she left with the impression that Bauer wanted her to prioritize the document policy work.

Grutzmacher later conceded to Hardin that she had no reason to suspect impropriety when her superiors began citing the policy. “I didn’t have anything that [outsiders] would find troubling, or anything to hide,” she said.

Earlier Tuesday, Andersen attorneys offered alternate interpretations of notes and e-mails cited by prosecutors as evidence that top executives were growing increasingly anxious last fall that Enron’s collapse would result in regulatory sanctions against their firm.

Prosecutors had introduced notes written by Temple on Oct. 9 in which she concluded that an SEC investigation of Enron’s meltdown was “highly probable.”

Hardin tried to recast Temple’s notes, saying the executives were only mulling the scenarios that could arise if Andersen’s Enron auditors couldn’t concur with the conclusions of the firm’s Professional Standards Group, a specialized unit of accounting experts.

In related developments Tuesday:

* Andersen was fined $250,000 by the Texas Board of Public Accountancy for inflating the stock value of a Houston supermarket chain and for failing to follow accounting rules in tracking the inventory of another company.

* Andersen was dismissed by the last remaining company of its 15 biggest public audit clients last year--energy wholesaler Aquila Inc. The firm’s disintegration continued with the announcement that 25 newly departed partners and 250 other professionals have formed a consulting group.

Andersen spokesman Patrick Dorton said the splitting off of more partners was a transaction the firm chose to make, rather than a further setback in its efforts to stay in business. Chicago-based Andersen reached agreements for the formal release of the Andersen employees on May 10.

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Associated Press was used in compiling this report.