U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20441 / January 28, 2008
Accounting and Auditing Enforcement Release No. 2777 / January 28, 2008
Securities and Exchange Commission v. David B. Duncan, Civil Action No. 4:08-CV-00314(S.D. Tex.)(January 28, 2008)
Commission Files Settled Action Against Former Arthur Andersen Partner in Connection With the Audits of Enron's Financial Statements
David B. Duncan, Global Engagement Partner for Enron Audits, Consents to Antifraud Permanent Injunction and Permanent Suspension from Appearance or Practice before Commission
The Securities and Exchange Commission ("Commission") today announced the filing and simultaneous settlement of a civil action against a former Arthur Andersen LLP ("Andersen") partner in connection with the audits of Enron Corp.'s financial statements. David B. Duncan, former global engagement partner for the Enron engagement, consented to a settled civil injunctive action charging him with violating the antifraud provisions of the federal securities laws, and to a related administrative proceeding permanently suspending him from appearing or practicing before the Commission. Duncan settled without admitting or denying the allegations or findings in the Commission's Complaint and Order.
Duncan consented to the entry of a permanent injunction enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. In its Complaint against Duncan, the Commission alleged that, for the years 1998 through 2000, Duncan was reckless in not knowing that the unqualified audit reports he signed on behalf of Andersen were materially false and misleading. The Complaint also alleged that the Fraud Risk Assessment questionnaires prepared by the engagement team and reviewed by Duncan documented that Enron used "highly aggressive accounting practices" and entered into "unusual" year-end transactions that posed difficult "substance over form" questions. In addition, an internal Andersen document prepared each year by Duncan and others on the engagement team noted that Enron's use of complex "form over substance" and related party transactions created an "extreme" or "very significant" financial reporting risk.
Despite these risks, Duncan failed to exercise due professional care and the necessary skepticism required under Generally Accepted Auditing Standards ("GAAS") to ensure Enron's financial statements were presented in conformity with Generally Accepted Accounting Principles ("GAAP"). For example, Duncan failed to ensure that the engagement team audited certain transactions known as the "Prepays," "Nahanni" and the "Raptors" in accordance with GAAS and failed to ensure that Enron properly presented and disclosed the transactions in its financial statements. Duncan, as the global engagement partner for the Enron audits, was ultimately responsible for determining whether an unqualified opinion should be issued within the auditors' report. As such, when he issued unqualified audit opinions indicating Andersen's audits of Enron's financial statements for the years 1998 through 2000 were conducted in accordance with GAAS, and that Enron's financial statements were presented, in all material respects, in accordance with GAAP, he made material misstatements or omissions in Andersen's auditors' reports that were filed with Enron's 1998, 1999, and 2000 Forms 10-K. As a result of his conduct, Duncan violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Duncan's settled civil injunctive action is subject to court approval.
Duncan also consented to an order under Rule 102(e) of the Commission's Rules of Practice ("Rule 102(e)") permanently suspending him from appearing or practicing before the Commission as an accountant, based on the anticipated entry of an injunction against him, pursuant to Rule 102(e)(3).
In related administrative proceedings, three other Andersen partners, Thomas H. Bauer, Michael M. Lowther and Michael C. Odom, consented, without admitting or denying the Commission's findings, to settled administrative proceedings which found that they had each engaged in improper professional conduct in connection with their Enron work, and each was denied the privilege of appearing or practicing before the Commission.
The Commission's investigation is continuing.