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Tuesday, 29 January, 2002, 13:56 GMT
Enron losses 'off the scale'
A 'for sale' sign pinned to Enron's logo
New evidence suggests there may not be much of Enron left
Enron's debts are likely to expand dramatically once investigators have been able to go through all the company's off-the-books investments, according to an expert in forensic accounting due to testify before the US Congress on Wednesday.

After examining the records of just one set of offshore partnerships, Robert McCullough - a consultant from Oregon and a professor at Portland State University - found $2.7bn in unreported losses, he told BBC Radio 4's Today programme.

The company was little better than a pyramid scheme, he said.

And the emerging shape of the Enron scandal was almost identical to one of 70 years ago, which prompted the setting up of the first regulators to govern the way companies report their performance, he said.

That regulation had been chipped away to the point where it is no better than it was in the 1920s, Mr McCullough said.

Blowing the whistle

The investigation confirms all the concerns outlined in the "smoking gun" of the Enron affair: the letter written to former chairman Kenneth Lay by vice president Sherron Watkins in August 2001.

Michael Odom, an Andersen partner, being grilled by a US Congressional committee
A stream of Enron and Andersen employees are being grilled by Congress
Ms Watkins' letter is widely credited with helping to blow the lid off Enron's habit of hiding loss-making investments in a chain of unreported companies set up by senior executives.

Mr McCullough told the Today programme that the 'special purpose entities' or SPEs which Ms Watkins warned of amounted to "a very risky set of investments which in effect allowed Enron to speculate in its own shares".

That, he said, exacerbated the falls that followed the revelations of the company's misdeeds.

Bird-brained

Through one SPE, dubbed Whitewing, Enron secreted investments in Eastern European and Brazilian utilities which had gone sour, to avoid revealing their failure to regulators and shareholders.

Whitewing used money from insurance companies and mutual funds to buy the bad assets, placing them in an offshore company called Condor.

It guaranteed its partners against everything except a complete meltdown - which occurred within a few months of the holes being discovered in Enron's balance sheets.

"Some $4.7bn of investments - failing investments, as it turned out - were housed within Condor, taken off the books so that investors would never be able to see the full impact," he said.

"Our close review indicated that there were probably unrealised losses of $2.7bn in this one set of investments alone."

And worse is probably out there waiting to be uncovered, he said.

"Our review of the single Whitewing group surprised us by the sheer magnitude of the guarantees and investments hidden within it," he said.

"We're hearing about 4,000 of these entities. A usual large business - for example Enron's competitor [and erstwhile merger suitor] Dynegy apparently had six of those."

In other words, the company was running to hide its mistakes by continuing to grow. "Once growth stopped, its true state became apparent to all other participants."

Insull comparison

Enron's situation is uncomfortably similar to another case of misreporting in the late 1920s.

Samuel Insull set up a network of holding companies to control the energy market, with each company controlling the voting stock of the next one lower in the pyramid.

When it collapsed in the Great Depression following the crash of 1929, the US set up the Securities and Exchange Commission to regulate companies' financial reporting.

"At the time, regulatory practices were set in force to avoid its repetition," Mr McCullough said. "Their enforcement has been eroded over the intervening years, and today we are almost exactly reproducing that scandal."

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Professor Robert McCullough
"[They were] taken off the books so that investors would never be able to see the full impact"
See also:

28 Jan 02 | Business
Cheney resists Enron probe
28 Jan 02 | UK Politics
Labour challenged over Enron links
14 Jan 02 | Business
Audit giants called to account
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