December 12, 2001, Wednesday

HEARING OF THE CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED
ENTERPRISES SUBCOMMITTEE AND OVERSIGHT AND INVESTIGATIONS SUBCOMMITTEE OF THE
HOUSE FINANCIAL SERVICES COMMITTEE

THE ENRON COLLAPSE: IMPACT ON INVESTORS AND FINANCIAL MARKETS

CHAIRED BY REPRESENTATIVE RICHARD H. BAKER (R-LA)

2128 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

Opening Statements by
REP._MICHAEL_G._OXLEY
REP._JOHN_BOEHNER
REP._SUE_KELLY
REP._PAUL_E._KANJORSKI
REP._LUIS_V._GUTIERREZ

WITNESSES:
PANEL I
ROBERT_K._HERDMAN, CHIEF ACCOUNTANT, SECURITIES AND EXCHANGE COMMISSION;

PANEL II
JOSEPH_F._BERARDINO, CHIEF EXECUTIVE OFFICER, ARTHUR ANDERSEN, LLP;

CHARLES_L._HILL, DIRECTOR OF RESEARCH, THOMSON FINANCIAL/FIRST CALL;

RICHARD_TRUMKA, SECRETARY-TREASURER, AFL-CIO


REP. RICHARD H. BAKER (R-LA): I would like to call this meeting of the
Capital Markets Subcommittee to order.

To begin our proceedings this morning there are a couple of matters of
business to which -- procedural matters to which I would like to attend. The
first is that by prior agreement with Mr. LaFalce and Mr. Kanjorski, each chair
and ranking member of the subcommittees and full committee will be recognized
for opening statements of five minutes, then each side would be given an
additional 10 minutes for delegation of opening statement time for whichever
members each side so chooses. By utilizing this method we will still consume at
least 40 to 45 minutes of committee time before we begin discussion with
witnesses, so I think it very important the committee adopt, without objection,
this plan for proceeding.

Any objection?

Without objection, so ordered.

In addition, we have two members here at present, Mr. Sanders is not a
member of the subcommittee but certainly a member of the full committee, as
well as Ms. Jackson Lee from Texas, who will be recognized in regular order
pursuant to recognition of all members of the subcommittee for purposes of
questions.

Without objection, there is agreement on that matter.

We are here today to examine and begin the process of understanding the most
stunning business reversal in recent history. One moment an international
corporation with the diversified portfolio enjoying incredible run-up of stock
prices, the darling of financial press and analysts, which, by the way,
contributed to the view that Enron had indeed become the new model for business
of the future, indeed, a new paradigm. One edition of Fortune magazine called
it
the best place in America for an employee to work. Analysts gave increasingly
creative praise, while stock prices soared. The corporate mission statement
perhaps says it best. I take from page 53 of Exxon Annual Report 2000:

"We are satisfied with nothing less than the very best in everything we do.
We continue to raise the bar for everyone. The great fun here will be for all
of
us to discover just how good we really can be."

Enron even redefined fun. The sad fact: while having too much fun, it was
really all too good to be true. Not only were investors left with lawsuits as
their only asset, lifelong employees lost their jobs, retirement and their
savings, virtually left to start completely over in the midst of a national
recession. While there were apparent indicators of potential difficulty to a
few
insiders, virtually all observers were shocked by surprising re-statements of
earnings expectations and then the incredibly fast demise of the huge
enterprise.

Now in retrospect, it is clear, at least to me, that while Enron executives
were having fun, it actually became a very large hedge fund, which just
happened
to own a power company. While that in itself does not warrant criticism, it was
the extraordinary risk taking by powerful executives which rarely added value
but simply accelerated the cash burn-off rate. Executives having Enron fun are
apparently very costly and, all the while, they were aggressive in the exercise
of their own stock options, flipping acquisitions for quick sale. One executive
sold a total of $353 million in the 3-year period preceding the failure. What
did he know? When did he know it? And why didn't we?

Again, referring to the mission statement of the corporation's annual report
of 2000, on communication:

"We have an obligation to communicate. Here we take time to talk with one
another and to listen. We believe that information is meant to move and that
information moves people."

Apparently so, it moved this executive to sell $353 million worth of stock.
Then we learn of the multiple special purpose enterprises, SPEs as they are
known, in which some executives apparently set up businesses which contracted
with Enron, usually on exceptionally profitable terms. Everyone seems to have
their own place to go for self-dealing at great cost to employees and
shareholders.

Another concern. Even though I must admit, when times were good, single stock
401(k) seemed to be an advantageous thing to do when stock prices were soaring,
but have you actually ever met a financial adviser who would tell you to have
the most fun, be sure to put all your eggs in one basket? Some things are too
risky, even for the purpose of having fun. We are here today to begin to
grapple
with just how all of this could happen. A lot of smart people with no conflicts
of interest just missed it. Our task is to establish the facts, change the
rules
where needed and assist the SEC in the pursuit of those who apparently have
violated the law. This will not be fun and it won't happen as quickly as
Enron's demise. We will do this the old-fashioned way, with a lot of hard work
and a lot of time. In the end, our goal is to assure individual investors that
there is real value in the marketplace, credibility and professional conduct
and consequences for those who abuse the system.

I wish to express my appreciation to Chairman Oxley and Ranking Member
LaFalce for their significant interest in these matters, to Chairman Sue Kelly
who chairs the oversight investigation subcommittee of financial institutions,
who has graciously agreed to join with us in this hearing today and use their
committee resources to take on important aspects of this enquiry and to
announce, on our return in late January, possibly early February, the committee
will continue a series of hearings to look at a number of elements.

One, this certainly rekindles prior committee interest in the conduct of
analysts and their role in this matter, to evaluate the potential for an SRO
for
the CPA profession. A review of the 33 and 34 Securities Act to determine where
there are inadequacies. To examine Reg. FD and its failure to protect investors
in this current debacle.

And a special word to Mr. Kenneth Lay, the CEO of Enron, who, after numerous
requests by the committee, sent a letter which I do not have in my possession
at
the moment but will be entered into the record at a later time, indicating his
appearance before bankruptcy proceedings today obviated his ability to respond
to the committee request. On the record, I wish to make it clear the committee
will have additional meetings. Should Mr. Lay's social obligations preclude his
participation, the committee also has the power to subpoena. At such time as we
deem as appropriate, the committee will take action to get the appropriate
information from Mr. Lay and other executives of Enron. I do have a letter
dated
December 11, which I will enter into the record at this time without objection.

When we're done, I hope we will establish a methodology in which all
participants will understand, when a corporation is just having too much fun,
it
won't result in the loss of personal fortunes for innocent third parties,
investors, shareholders and, most importantly, the innocent employees.

This time, I'd like to recognize Mr. Kanjorski for his opening statement.

REP. PAUL E. KANJORSKI (D-PA): Thank you, Mr. Chairman.

Today's hearing will help us to understand at least some of the factors that
contributed to the downfall of Enron, a once mighty international conglomerate
that recently filed the largest corporate bankruptcy in American history. Our
hearing will also help us to discern whether Congress needs to take steps to
restore the faith and trust of investors in the American dynamic capital
markets. Although I have not yet arrived at any conclusions about the
disturbing
downfall of a corporate icon, I have already identified a number of concerns
that I expect we will address during our investigations.

First, I would like to learn more about the serious financial harm to
thousands of Enron's employees and the many others who owned Enron stock. Some
press reports suggest that company rules blocked rank-and-file employees from
selling Enron's stock in their 401(k) retirement plans in days and weeks
following the announcement that Enron had overstated its earnings by $583
million in the past four years. Those hard-working Americans had to watch
helplessly as their savings shrank without any recourse while Enron executives
could apparently sell their stock options and avoid the financial pain. That is
wrong.

Second, I have concerns about whether the accounting industry experiences any
conflicts of interest in serving its customers. In recent years, many have
noted
that accounting firms' consulting fees from one company may exceed its auditing
receipts from the same company. This practice calls into question whether
shareholders can rely on earnings reports and other indicators of the company's
health and its future stock price. In order to provide transparency for
investors, auditors should actively work to limit potential conflicts.

Third, we will return today to the issue of analysts' independence, a topic
we have closely studied this last year. From our past hearings, we have learned
that an analyst, working for a firm that handles investment banking for a
company the analyst covers, could receive a more favorable rating to attract
new
business. I am therefore interested in learning why of the 15 analysts covering
Enron on the day following the failed merger with Dynergy, only one had a sale
rating on the company stock. These ratings misled investors.

Finally, in hindsight, it appears the Enron board of directors failed to
serve Enron's shareholders. Several news stories have detailed how gifts,
contributions and other activities may have compromised some members of
Enron's board. I expect that, as time goes on, we will learn that Enron is not
the only company where these questions arise. Members of the corporate board
must retain their independence and hold management accountable.

In closing, Mr. Chairman, I typically prefer private sector regulation to
federal regulation. But if the private sector fails in its responsibilities and
creates a vacuum, then the Federal Government has a duty to protect its
citizens
by addressing the market failure. More Americans than even have their savings
invested in the stock market and we have an obligation to protect them from the
conflicts of interest we are investigating in the Enron collapse.

REP. BAKER: Thank you, Mr. Kanjorski.

I this time recognize Chairwoman of the Oversight Investigation Subcommittee,
Ms. Sue Kelly.

REP. SUE W. KELLY (R-NY): I want to thank Chairman Baker and Ranking Members
Kanjorski and Gutierrez for agreeing to hold this hearing on the recent
collapse of Enron and its impact on investors and the financial market.

In this hearing, I hope we can all gain a better understanding of why Enron
collapsed so quickly and why Enron's public filings and Andersen's audit
reviews
failed until it was much too late to give any indication of the problems they
were experiencing. Transparency is the goal of the disclosures a company is
required to make, and a fundamental necessity to a properly functioning open
market. Unfortunately, the disclosures made by Enron did not give any
indication of the problems they were experiencing until October 16th. News
reports have had many different versions of what may or may not have happened.

I've read about a partnership that hid the level of leverage the company had
incurred, mistakes, and misstatements, that may have occurred in the audits,
certain Brazilian investments that also may have contributed to Enron's fall.
What is clear is that people have been hurt by the collapse of Enron. From the
thousands of investors whose retirement and other investment savings have been
devastated, to the thousands of employees who now find themselves without a
job, and with a jeopardized pension plan.

We have, on our hands, what appears to be the largest bankruptcy ever, which
could have implications for our economy. We have the duty, and the
responsibility, to ensure that safeguards are in place to prevent a disaster of
this magnitude from ever being repeated. We must determine when the
accountants,
executives and regulators knew what was happening, what they did to rectify the
problems. While it would be impossible to ever have in place a system that
would
prevent failures in the future, we always must try to improve on the current
system of disclosures, and enforcement that's the responsibility of the SEC.
Enron's collapse underscores how important it is for Congress to act
immediately
to pass the netting provisions of the bankruptcy bill, which have already
passed
the House numerous times.

For the record, Mr. Chairman, I'd like to ask unanimous consent to have a
letter, signed by seven financial regulators who support the netting provision,
made part of the record. This legislation would reduce the uncertainty for
financial market participants about the disposition of their contracts in the
event one of their counterparts becomes insolvent. In this letter, the
financial
regulators state that failure to act, these financial contract netting
provisions would unnecessarily place the financial system at greater risk.

Chairman Oxley has been working on this. I want to add my strong support for
enacting these needed provisions before we adjourn this year.

I want to thank all the witnesses for taking their time out of their busy
schedules to share their views with us, and I look forward to discussing these
issues with them.

I yield back the balance of my time. And I do thank those members of my
committee who are here today.

REP. BAKER: Thank you very much, Ms Kelly. We certainly appreciate your
cooperation and assistance in this important matter.

The ranking member, Mr. Gutierrez?

REP. LUIS V. GUTIERREZ (D-IL): Good morning, Chairman Baker, and Chairwoman
Kelly, and the ranking member Mr. Kanjorski.

And I want to thank Mr. LaFalce for joining us also here this morning, and
for holding this hearing.

We are gathered here today because of a series of unfortunate events that
culminated on December 2nd, with the filing for bankruptcy of Enron. In Houston
alone, Enron has laid off more than 4,500 of its 7,000 employees as part of a
corporate restructuring program. The victims of this catastrophe, Enron's
employees, have been left wondering how bankruptcy will affect their severance
pay, health insurance, and financial future. For a vast majority of them, the
spectacular collapse of this company causes a financial and personal tragedy.
Many feel betrayed and angry. Sadly, many workers didn't even know they were
about to lose their jobs. They just came in one day to work, and they were
simply given 30 minutes to pack up their belongings and leave.

In addition to the lay-offs, a great number of Enron employees lost, in a
matter of months, almost all of the value of the stock they owned, which
plunged
to levels below one dollar. The Labor Department stated that Enron employees
may
have lost 70 to 90 percent of their retirement funds, which translates into
more
than a billion dollars. Many of Enron's employees have invested all of their
401(k) funds into Enron stock. And why shouldn't they? Just months ago, Enron
was the country's seventh largest company in terms of reported revenue. I state
reported revenue. Enron was a fast rising star that had turned the dreary
business of energy trading into one of the world's vast corporate empires. It
reported quarterly revenues of nearly $47 million.

The Enron case brings to the fore an issue that has long worried pension and
benefits experts, a retirement plan usually dependent on the health of a
company
that provides it. Although the Employer Retirement Security Act of 1974 states
an employer, with a transitional pension plan, cannot invest more than 10 per
cent of the plan's assets in the employer's stocks, traditional pension plans
are rapidly falling out of favor with the newer 401(k)s replacing them.

Currently, there are no limits, yet, on how much an employee's pension plan
may be compromised by the employer's stock. Nor are there any caps on
investments in employer stock with employer contributed funds. Enron owns
stocks
accounted for more than 60 percent of the assets in the $2.1 billion defined
benefit of the 401(k) plan several months ago.

It is widely known that some companies have even higher levels, creating an
even worse scenario should these companies fail. Indeed, these amounts are
situated well beyond what would be described as prudent diversification. The
dangers of over-concentrating company stock in a 401(k) plan has been made
vividly clear by Enron Corporation's debacle. But despite the perils, millions
of American workers have little choice but to bet their retirement savings, as
well as their jobs, on the fortunes of their employers.

However, Enron is hardly alone in this high exposure of its own stock. Almost
120 of the largest U.S. companies are represented by the committee on
investment
of employee benefit assets, have seen their own stock rise to an average
one-third of the plan's assets. Hardest hit will be Enron's 21,000 workers.

For three weeks, starting in late October, all Enron retirement plan
participants were locked into their current allocation, when the firm decided
to
go ahead with a switch to new plan administrator. Enron stock lost 30 per cent
of its value during the freeze, but the workers' pain was not shared by top
executives. According to Press reports, many of them cashed in millions of
dollars worth of Enron stock, while the employees were locked into those
stocks.

For instance, Enron Chairman, Mr. Kenneth Lay, who refused to come before
this committee, alone took $23 million of Enron stock and sold it in the year
2001, a year in which the price of the stock plummeted from $82 to 26 cents a
share, while the employees were stuck with the stock.

The only mistake these employees have committed were being loyal to their
company, and wanting their own small, but well deserved, share of the riches
Enron executives habitually pocketed during their years at the company. Of
Enron's 21,000 employees, 12,000 or so were Enron's 401(k) plan, have virtually
nothing.

Another source of problems is the companies that make their own matching
contributions in stock usually place restrictions on the trading of these
shares
by the employees. Generally, workers cannot sell their shares until they are
near the age of retirement, making them captive investors. Enron prevented its
workers from selling the shares they had accumulated, until they reached the
age of 50.

Although this did not save the stock from collapse, it did major harm to its
employees. It's alarming to consider that Enron is not alone in such a
requirement. Other big companies lock workers into their 401(k) company shares
until a certain age. We all know that you are not supposed to put all your eggs
in one basket.

Mr. Chairman, to conclude, I would like to touch on an issue that I think is
key to this affair. Under my perspective, transparency of information must be
enforced in publicly traded firms, such as Enron. Transparency in financial
reporting plays an essential role in making financial markets fundamentally
efficient. This is absolutely necessary to want to make healthy markets.

And, last, Mr. Chairman, we should give them what members of Congress have. I
can pick up the phone, and today I can change my 401(k). We all can, as members
of Congress. All of our employees can make one simple phone call, and we can
change our investment strategy at an instant. The employees of America should
have the same right, and the same prerogative, that members of Congress and
Federal employees have.

Thank you very much, Mr. Chairman.

REP. BAKER: Thank you, Mr. Gutierrez.

Chairman of the full Financial Institution Committee, Chairman Oxley?

REP. MICHAEL G. OXLEY (R-OH): Thank you, Mr. Chairman. And thank you for
chairing this subcommittee hearing, as well as Chairwoman Kelly.

Today, we'll begin the committee's investigation of the facts, and
circumstances, surrounding the largest corporate failure in history. Today we
will hear about the dramatic collapse of Enron Corporation, once the seventh
largest company in the United States. Riding high, as recently as six months
ago, the company has since lost more than 99 percent of its market cap, and now
trades below one dollar.

Until all the facts are known, it's prudent for this committee to avoid
reaching sweeping conclusions about the causes, and persons, responsible for
Enron's collapse. But that does not mean we should refrain from asking the
difficult questions that demand answers. We will ask the difficult questions.
We
will delve thoroughly into the facts, and circumstances, surrounding Enron's
collapse, and we will get answers.

This committee, and the subcommittees on capital markets and oversight, will
vigorously pursue this matter, to ensure that the Congress, and the American
public, know who to hold accountable. We need to learn whether millions of
investors were intentionally misled by Enron's financial engineering and
reluctance to disclose information. We need to learn why financial statements
that provided less than a complete picture of Enron's financial situation, were
certified. We need to learn why almost all of the securities analysts following
Enron failed to warn investors, and why exactly half of them continued to rate
the company a buy or a strong buy, even after it had plunged below $1. We need
to learn whether the current reporting and financial disclosure system needs to
be overhauled, and we need to learn why the accounting rules permit companies
to
keep important information off their balance sheets.

Above all, we need to reduce the likelihood that this will happen again. The
effects have been devastating as one might expect when a $75 billion company,
files for bankruptcy. Hit hardest by the meltdown, of course, were Enron's
employees. Thousands have already lost their jobs and more will undoubtedly
follow, and the 11,000 employees who participated in the company's 401(k) plan
have seen their retirement savings practically eliminated.

In addition, beyond the impact on Enron employees themselves, Enron's
collapse has drained the investment savings of investors across the country who
put their retirement and other investments into mutual funds, pension funds and
other vehicles that invested in Enron. Thankfully, at this point there does not
seem to be a systemic threat to the financial markets as a result of Enron's
collapse, but the damage the collapse has done to the financial position of
thousands of Americans who -- (break in audio).

The identification of these contracts and verification that they are eligible
for netting, will require vast expenditures of time and money, and divert the
attention of Enron and the court from the task of reorganizing. Meanwhile,
creditors will remain uncertain as to the enforceability of their contracts,
and
the ultimate status of their claims against Enron. Let's eliminate the
uncertainty, the waste of valuable court time, and estate funds, and allow
institutions to eliminate exposure more efficiently.

We are pleased to welcome the distinguished chief accountant of the
Securities and Exchange Commission, Bob Herdman, to the committee to discuss
the
reporting and financial disclosure system mandated by the federal securities
laws. I'm particularly pleased that Mr. Herdman is here today, as the central
issues that the Enron collapse raises are issues of investor protection and
accounting rules about which there are few better experts than the chief
accountant of the commission on which to opine.

Mr. Herdman, welcome to the committee for your first appearance since you
have been appointed. I would like to remind the members of the committee that
Enron, as well as Arthur Andersen, are the subjects of a formal investigation
by
the SEC, so Mr. Herdman will not be able to provide any specific information
about those investigations. And I would ask the members to please phrase your
questions accordingly.

On the third panel we will hear from the chief executive of Arthur Andersen,
Joseph Berardino, who serves as Enron's auditor. We welcome back Chuck Hill to
the committee to discuss the performance of Wall Street research analysts in
this matter, and finally we will hear from the AFL-CIO on the impact to
investors. Unfortunately, Enron's CEO, Kenneth Lay, was not able to testify
before the committee here today. Mr. Chairman, you entered the letter into the
record, where he is participating in the first hearing of creditors in a
bankruptcy proceeding.

I want to assure the members of this committee, as well as to the public,
that I am confident that Mr. Lay and Enron will provide answers to us and to
the
public as the committee continues this investigation into this matter.

Mr. Chairman, I yield back the balance of my time.

REP. BAKER: Thank you very much, Mr. Chairman.

The ranking member of Financial Institutions, Mr. LaFalce?

REP. JOHN J. LaFALCE (D-NY): Thank you very much, Mr. Baker, and thank you
also for acceding to my request to have a representative of the employees, Mr.
Trumka, testify at today's hearing.

He is also a 1974 graduate of Villanova Law School, and I had the pleasure of
graduating from the same law school just a few years earlier though.

Enron is a wake-up call. Enron gives us a very important glimpse of what is
necessary to hold our markets together --, the integrity, the adequacy, the
clarity of information provided by public companies, to the public. When the
adequacy and accuracy of that information is compromised, devastation can, and
does, occur. Devastation to large and small investors alike. And how many more
Enron's are out there? And what are the systemic factors that made this
collapse and make other future collapses, possible.

Today, we will get but a small glimpse of that. But, when our committee
returns in January, we must, and I'm confident we will, conduct a comprehensive
review of all of the policy issues this debacle raises, including at least, the
following. First, earnings management or earnings manipulation. To what extent
did Enron's management bend or break accounting conventions to distort their
financial condition, and most important, is this practice widespread? And are
there more Enron's out there?

Secondly, corporate governance. The board of directors, in particular, the
audit committee of the compensation committee, have a fiduciary responsibility
to the shareholders. Did they meet that responsibility in this case? Are audit
committees in corporate America meeting their responsibility to vigorously
review the financial statements of companies and hold management accountable,
to
the standards of the law, as well as sound business practices? And what reforms
should the SEC, SROs, and this Congress, consider?

Related party transactions. What were the nature of the related party
transactions in what was basically a publicly traded hedge-fund? Were those
transactions proper? Were they properly disclosed to investors and to the board
of investors? Accounting and auditing. Are the accounting standards as they
apply to a company of this type, too difficult to apply, and do such rules
incentivize companies, to exploit unintended loopholes? To what extent, if any,
should we rely on the accounting industry to protect shareholders and assure
that companies disclose the true nature of their financial conditions? Do
consulting fees or the desire to keep clients, affect accountant's ability to
conduct their audit objectively, and their willingness to bring accounting
irregularities to the attention of management, the board of directors and the
SEC?

Analysts and market expectations. It's clear that the Enron collapse was in
large part due to a crisis in confidence, throughout the market, after Enron
made material adjustments to the financial statements. Should financial
analysts
have known by their own critical analysis of the company's financial statements
and their regular meetings with management, that something was fundamentally
wrong? Did analysts whose firms had significant business with Enron maintain a
favorable rating, even after it became clear that the company was in serious
trouble?

It would be very useful, in fact I think imperative, for our committee to
hear testimony from independent research analysts not affiliated with
investment
banks, and then from research analysts from investment banks, to compare their
ratings on Enron at different points in time over the last several years. For
it
is my understanding that there were some independent analysts issuing negative
recommendations on Enron. What did they know that others did not and should
have
known? We need to understand the quality and objectivity of their research and
how well such analysts communicated with investors.

Employee pension plans. People didn't have money in their 401(k)s. They had
their lives in the 401(k)s. Were they encouraged to invest in those 401(k)s by
management to buttress the stock? Did management tell them what they knew or
did
management tell them what they thought was necessary to stabilize the price of
the stock? What laws exist under ERISA? Is it possible for a company to say we
will contribute matching monies only if you invest in our stock as opposed to
others? If that's true, should the law be changed?

And lastly, the sufficiency of regulation. Has the SEC fulfilled its
oversight obligation in this case? Is the current framework of self-regulation
adequate. Does the SEC have sufficient resources to effectively fulfill its
oversight responsibility whatever it perceives it's oversight responsibility to
be? There was a day when people had virtually all their money in a bank, in a
thrift, in a credit union, and we mandated that the Federal Reserve, the FDIC,
the OTS, the OCC, basically live with those institutions examining the books.
But, today, people have most of their wealth in publicly traded companies. And
there is very little governmental oversight, if any, at all. Should this
change?

Mr. Chairman, I look forward to pursuing all these questions very
aggressively in the future.

Thank you.

REP. BAKER: Thank you, Mr. LaFalce.

For the record, Ms. Kelly had a letter that she wished to have introduced in
the record relative to contract netting. Without objection, it is included. I
had two charts distributed to members. I just realized the charts are mine,
relative to the Enron stock value over time and the trading record.
Those are documents that I've had distributed to the members and also be made
part of the record, without objection. At this time we will begin to recognize
members on each side for opening statements to be limited to no longer than two
minutes, with five members per side. The first I have on my recognition list is
Mr. Shays, for two minutes.

Mr. Shays?

The next I have is Mr. Paul, this is by time of arrival. Mr. Paul? No
statement.

Mr. Fossella, we're on a roll here.

Mr. Ose, as it works out. Okay, well then we will work that plan.

Mr. Toomey?

REP. PATRICK J. TOOMEY (R-PA): Thank you, Mr. Chairman.

It appears that the complex nature, the large volume and some questionable
reporting of numerous transactions introduced uncertainty, significant
uncertainty, as to the leverage, the nature of the risks, even the solemnity of
Enron and the market responded. It responded severely shutting off credit,
allowing Enron to collapse with breathtaking speed. But I would remind my
colleagues that we tolerate another kind of uncertainty and that is the legal
uncertainty that credit exposures could be properly netted and resolved
according to their documents under our bankruptcy code.

So I want to join with some of my colleagues who have emphasized the
importance of passing the netting bill. I introduced the bill that would make
the necessary changes to the bankruptcy code and we should do that this year. I
would just briefly like to make one other point. Several of my colleagues have
strongly criticized the practices that caused employees of Enron to lose large
sums of the money that they had invested in Enron stock and I share that
criticism, generally. But I would remind all of us that we contribute to that
very problem in some respects when you consider that last year we passed a bill
that forbids people of ordinary means from engaging in the very transactions
which could have allowed them to hedge their exposure. Retail swaps would allow
people to preserve the value of their retirement savings and this committee and
the federal government should not continue to restrict the use of these vital
risk management tools, only to institutions and to the very rich as we do
today.

With that, I yield the balance of my time.

REP. BAKER: Thank you, Mr. Toomey.

Mr. Bentsen?

REP. KEN BENTSEN (D-TX): Thank you, Mr. Chairman.

This hearing today will begin the process of unraveling the reasons for the
collapse of the Enron corporation. While the impact of Enron's collapse will be
felt in many quarters, not the least of which is Houston where thousands of
employees have lost their jobs, and apparently their savings. This hearing will
focus on the failure of the company's corporate governance structure to
properly oversee management, along with serious questions regarding the
performance of Enron's outside auditor.

The committee needs to begin to understand whether the fall of Enron from its
perch as one the largest public corporations in the United States with its
market capitalization at $75 billion and the stock trading at $84 a share a
year
ago, to bankruptcy and a stock at about 25 cents today. Was the failure wholly
inside the company, with its outside advisers, within the financial market or
our regulatory and legal structure. As a Houstonian this is not just this is
not just a failure within the marketplace but also a tremendous loss to our
community. Thousands of employees have been laid off just before Christmas into
a down economy. Their savings and pensions wiped out. Our city has lost not
just a corporate icon, but a corporate partner in civic affairs. A company
which transformed the nation's energy markets from a staid, regulated
structure, into an innovative, efficient marketplace, collapsed under its own
weight apparently due, not to the new trading markets it helped create and
nurture, but apparently because of old economy corporate mistakes.

While it is doubtful in my mind that Enron will survive, the energy
marketplace it helped to found will, and it is telling that throughout its fall
those markets still have remained steady and calm. The scope of our hearing
today must determine whether Enron's management knowingly violated securities
laws regarding disclosure, or whether those laws allowed for the company to
limit disclosure of certain financing structures which had the effect of
understating liabilities and overstating assets and revenues.

We must determine whether the corporate governance structure of Enron broke
down, or whether the laws providing for outside directors of public companies
is flawed. We must determine whether Enron's auditors properly stated its
financial
condition or ignored warning signs to the detriment of investors and employees.
The increasing volume of corporate earnings restatements, not just Enron,
should
be alarming to the investing public, capital markets, and the Congress. Were
the disclosure laws lacking in providing investors and regulators with accurate

data regarding a company's true financial condition?

REP. BAKER: One more line, Mr. Bentsen --

REP. BENTSEN: Is Enron an anomaly or a preface of things to come at the end
of the roaring 1990s and its period of so-called irrational exuberance? And I
hope we have many more hearings on this and the pension effects of this and I
ask unanimous consent to present my whole statement for the record.

REP. BAKER: And don't forget to yield back the balance of your time.

REP. BENTSEN: And yield back the remaining time I have.

(Laughter.)

REP. BAKER: Mr. Shays has returned. Mr. Shays?

REP. CHRISTOPHER SHAYS (R-CT): Thank you, Mr. Chairman.

I just want to associate my remarks to the remarks of the chairman of the
full committee, your remarks, and Ms. Kelly's. They express my views quite
well,
and I would then yield to my colleague, Mr. Ose, if you would like to?

REP. DOUG OSE (R-CA): Thank you, Mr. Shays.

Mr. Chairman, if I might , I do have a couple of questions before I make a
statement. I do want to -- there was a comment about the defined benefit plan
at
Enron, which was a second or another means by which people could protect their
retirements. We've checked that out through the Pension Benefit Guarantee
Corporation and those assets are guaranteed by the Pension Benefit Guarantee
Corporation. That's the defined benefit plan.

I appreciate the gentleman from Connecticut yielding. My particular interest
has to do with the special purpose entities and the rules that govern them. I
read the various statements, and as near as I can tell that 3 percent threshold
is considered on the basis of an each separate transaction rather than an
aggregate. I'm hopeful that in the course of these hearings we will get into
that a little bit further. And I yield back the balance of Mr. Shays' time.

REP. BAKER: Thank you, very much, both of you gentlemen.

Ms. Tubbs-Jones?

REP. STEPHANIE TUBBS-JONES (D-OH): Thank you, Mr. Chairman.

Good morning to Chairman Baker, Chairman Kelly, our Ranking Members
Kanjorski, Gutierrez, and LaFalce. I'm glad to have an opportunity to give a
brief opening statement this morning.

We're here to find out as best we can within the public view, what happened
with Enron. I would suggest chairpersons and members that our efforts must run
deeper than that and that is to find out, not just what happened, but how did
it
happen and where did our O.R. regulations, policies and opportunities to
oversee
this particular public company, went wrong. Never before in our recent memory
has a company's stock fallen so quickly. I'm concerned about the loss of jobs
and the possibility of pension loss that will come as a result of the loss of
dollars from people's investments.

I'm as concerned about Enron as I am concerned about a company called LTV
Steel in the City of Cleveland in bankruptcy with 3,200 employees being laid
off, and the steel workers stand on Capitol Hill today saying to the Congress
pass a legislation that would help us and save our industry and give us some
legacy fees. So, today, if members of Congress were asked to do a number of
things and one of those would be to look at some of the agencies and
organizations that are responsible for providing oversight over the accounting
methods of this company and what people have to rely upon when they make
investment. I trust that at the end of the day, we will be able to move forward
and say that we are doing all within our power, as members of Congress, to
provide oversight, to provide regulation, and give insight and protection to
the American public that uses Enron and any other company to do their
investments, and save for the future.

I yield the balance of my time, Mr. Chairman.

REP. BAKER: Thank you very much. I thank the gentlelady.

Mr. Bachus?

REP. SPENCER BACHUS (R-AL): I thank the chairman. I commend you, and
Chairwoman Kelly, for holding is important hearing.

We have very transparent, and strong, capital markets. So when a failure of
this magnitude comes, it takes all of us by surprise. I think it's important
that we, as opposed to pointing fingers, or rushing to judgment, that we take a
hard look at this and study it, and not really rush to conclusions until we've
done that.

In studying what happened, I want to first commend Arthur Andersen for
bringing their CEO today. I wish that Enron had done the same thing. The fact
that Arthur Andersen, that Mr. Berardino is here, I congratulate Arthur
Andersen. I wish Enron had done the same thing. It would have made it easier
for us.

I'd like to focus on three real quick things. First of all, we know that
Enron was, at one time, a very successful company. They were willing to take
risks, they had creative business planning, aggressive expansion, that
contributed to their growth. Obviously, on the flip side, that contributed to
their demise, because they grew too fast, got into areas they didn't
understand.

Secondly, quite apart from the accounting, whether they complied with
accounting rules, we know that this company, and I think this is part of the
bottom line, they had a history of not being forthcoming about their business
operations. And I just want to give you one quote that I think shows this. And
this is from the former CFO of Enron, Andrew Fastow. He told Fortune magazine
in
March, and this is seven months before he was forced out, "We don't want anyone
to know what's on our books. We don't want to tell anyone where we're making
money."

Well, obviously, we found that out today. We didn't need to wait until today
to find that out.

Their lack of transparency was a significant contributive of what happened.
We owe it to the shareholders, to the pension holders, to get to the bottom of
this. And I feel, under your leadership, Chairman, and Ms Kelly's, that with
the help of our witnesses we'll begin to do that.

Thank you.

REP. BAKER: Thank you very much, Mr. Bachus.

Mr. Mascara?

REP. FRANK MASCARA (D-PA): Thank you, Mr. Chairman. And thank you for
calling these hearings.

What I'd like to say in my two minutes is pose some questions that,
hopefully, I'll have an opportunity to do later, but if not they'll be on the
record. One is whether the SEC approves the prospecti followed by Enron on the
various SPE filings in an attempt to ascertain whether a complete financial
disclosure was revealed.

And the other is, given that the SEC representative here, the CEO, cannot
disclose according to, his statement anyway that I read, is - that information
that has to deal with this investigation. And, if not, apparently we're not
going to get many answers today, whether a grand jury should be formed and
empanelled to investigate this calamity -- economic calamity.

And, regarding their pensions, I'm looking for answers, whether the large
number of Enron employees who had 401(k) pension plans in Enron stock, why they
could not sell their stock. We call it down here, thrift plan open season, and
at the same time that management people were cashing in their 401(k)s.

And now that the Enron has declared bankruptcy, does the bankruptcy law
provide any special protection to employees in the pension plan. And that I
understand that before Enron declared bankruptcy, that these stocks in these
401(k)s were traded. And whether the SEC required that the accounting firms
involved comply with all of the FAB, the Financial Accounting Board's
standards.

And those are some of the questions that I need to have answered. And,
hopefully, I'll have an opportunity to ask those questions. And, if not, I
would
hope that the respective firms, and the SEC involved with -- provide those
answers to me.

Thank you, Mr. Chairman. I yield back.

REP. BAKER: Thank you, Mr. Mascara.

Mr. Miller?

REP. GARY G. MILLER (R-CA): Thank you, Mr. Chairman.

To be honest, I'm less interested in what we have to say, and more interested
in listening to what the witnesses have to say. And I'm personally going to
focus on questions following that. And I would yield back my time.

REP. BAKER: Thank you very much, Mr. Miller.

Mr. Sherman.

REP. BRAD SHERMAN (D-CA): Thank you.

I'm interested in the pension plan issues, where workers invest their entire
work life, and their retirement savings, in the same basket. But I would point
out that we, in this Congress, are very much promoting the Aesop (sp) concept,
which encourages the same thing, but with an additional element, and that is
worker control. And I think ERISA should require either pension plan
diversification, or worker control, if the workers are over-invested in the
stock of their employer.

I am a CPA, and particularly interested in the accounting issues.
Fundamentally, responsibility rests with Enron management which engaged in
highly complex and questionable transactions, and then misstated them in the
financial statements.

But we need to see whether generally accepted auditing standards were
sufficient to allow the accounts, the outside auditors, to know what the facts
were, and whether the auditors applied those standards correctly. And if the
auditors did know the facts, then we need to look at whether generally
accepted accounting principles serve -- were employed, and if so, whether they
need to be changed.

I'm particularly interested in these special purpose entities, which seem a
wonderful way to enrich management through self-dealing and conflict of
interest, plus a method of manipulating financial statements. The only
legitimate use that I'm familiar with for SPEs, is to shift risk from the
public
shareholders to a special purpose entity. But you hardly shift risk when the
chief asset of the SPE is stock in the company that they're supposedly
ensuring,
or protecting, against risk. Also, I have to wonder whether the 3 percent
independent equity rule is sufficient. There are -- it seems to beg for
manipulation with insufficient risk protection for the company.

I think we have a bit of analogy here. I guess my -- wrap it up? And that is,
we may discover not only that the auditors did not apply the accounting
standards correctly, but that the company actually came very close to complying
with those standards. And that it is the standards that need to be changed,
even
more than making sure that we had adherence. What I think will worry us most is
we discover that Enron, had they just been a little different, could have
complied with all the technical rules, and still gone down the drain.

I yield back.

REP. BAKER: Thank you, Mr. Sherman.

Mr. Weldon?

REP. CURT WELDON (R-PA): Thank you, Mr. Chairman. I want to thank you, and
the ranking member, and all those involved in putting this very important
hearing together.

This failure of this company has shaken the American confidence in our
investment system. And I feel very strongly that we will need to, either
through
a self-regulating process, or a legislative process, make changes in the way
accounting practices, and stock analysts, operate in the United States.

And I would like to particularly associate myself with the remarks made by
Mr. Gutierrez. I think we will seriously need to consider modifying ERISA
legislation to prohibit the situation where we had with Enron. It is tragic
enough that these employees have been laid off. But the fact that their entire
retirement savings was wiped out is totally unacceptable.

I yield back.

REP. BAKER: Thank you, Mr. Weldon.

And our last participant, opening statements, Mr. Sanders, for two minutes.

REP. BERNARD SANDERS (I-VT): Thank you, Mr. Chairman, and thank you for
holding this hearing.

It seems to me that Enron's collapse raises several very important issues,
some of which has already been discussed by my colleagues. Clearly, we must
protect employees from seeing their retirement funds ripped off, and their life
savings go down the tubes. We've got to look at this in terms of the
implications of the privatization of social security, as some would have us do.
And also understand that other companies around this country, in different
ways,
are ripping off the retirement plans, and the pensions, of their workers.

Second of all, we want to examine the role of accounting firms like Arthur
Andersen. As many know, Andersen recently settled a suit brought against them
by
the SEC for $7 million, as a result of a failed audit at Waste Management
Incorporated. The question arises, what was Arthur Andersen doing when Enron
was
cooking its books? How much confidence should the American people have in
companies like Andersen?

But the third issue, Mr. Chairman, that has not yet been raised seems to me
perhaps to be the most important and that is the role of big money in the
political process and the need for real campaign finance reform. Since 1992,
Enron has contributed over $5 million to Republicans and Democrats. During the
last two years, Enron has spent $4 million lobbying Congress and the White
House. The chairman of Enron, Kenneth Lay and his wife contributed close to
$800,000 to the Republican Party since 1988. During the 2000 presidential
campaign, Enron made available its fleet of corporate jets for political travel
by President Bush - candidate Bush.

Now what did Enron get in return for their campaign contributions from the
federal government? Amazingly enough, as far as I understand, Mr. Chairman,
they
are still in line today for a $254 million tax rebate, if the Republican House
version of the Economic Stimulus Bill becomes law. Thank you, Enron, for all
the
good work that you are doing and you're going to get a check of $254 million
from the American people. Clearly, that's an outrage. Several months ago, the
Bush administration refused to assist California and other states cope with
severe energy crisis --

REP. BAKER: If you can, begin to wrap up, Mr. Sanders.

REP. SANDERS: -- costing consumers tens of millions of dollars. There is no
question that Enron, through their political contributions and influence, had
an
enormous impact on energy policy and the way this government does business.
That's wrong, it's got to be changed. Thank you, Mr. Chairman.

REP. BAKER: Thank you, Mr. Sanders. For the record, I have several documents
relating to political contributions by the Enron Corporation to Republicans and
Democrats. I will admit those for the record as well, just to keep balance in
the hearing record. Thank you, Mr. Sanders.

At this time, I'd like to finally turn to our esteemed witness on our first
panel, Mr. Robert K. Herdman, chief accountant of the Securities and Exchange
Commission. Your first appearance before this committee, Mr. Herdman, I am very
pleased to learn of your acceptance of this position. Your reputation for good
work is outstanding and we are pleased to hear your comments. Welcome.

MR. ROBERT K. HERDMAN: Chairman Oxley, Chairman Baker -

REP. BAKER: And you'll have to pull that mike really closer.

MR. HERDMAN: Chairwoman Kelly, Ranking Members LaFalce, Kanjorski and
Gutierrez and members of the subcommittee. Thank you for the opportunity to
testify today on behalf of the commission, regarding recent events relating to
Enron.

REP. BAKER: Mr. Herdman, could you please bring the microphone a bit closer?
Thank you.

MR. HERDMAN: Okay. Your letter of invitation asked me to address the
regulatory matters and accounting issues that have been publicly raised by
Enron's collapse. My written testimony does address those matters and I ask
that it be included in the record.

As you know, the SEC is investigating the Enron matter. The commission
appreciates the subcommittee's recognition of the non- public nature of its
investigation. And as Chairman Oxley alluded to, the commission also asks that,
in light of its ongoing investigation, the subcommittee understand our
reluctance to address specific issues relating to compliance with the federal
securities laws at this time. If I might add, the reason for this, as I
understand it, from our general counsel, Mr. Becker behind me, is that if there
is public disclosure of the particulars of an investigation while it's still in
process, that runs a risk of prejudice - appearing to prejudice the outcome and
it might, in fact, jeopardize the investigation. Let me assure you that, at the
conclusion of this investigation, we will deal swiftly and completely with any
wrongdoing and wrongdoers to ensure full protection of investor interests.

I want to assure the subcommittees that the commission shares your grave
concern over these events. The sudden collapse of a Fortune 10 company gives
pause to all of us who care about financial reporting. And the tragic
consequence of these events for Enron investors, including the many Enron
employees whose retirement savings have been decimated simultaneously with
losing their jobs, is a sober reminder to all of us of the importance of
reliable and transparent financial reporting. It is axiomatic that confidence
in our markets begins with the quality and transparency of the financial
information available to help investors decide whether, when and where to
invest our hard-earned dollars.

The goal of the federal securities laws is to promote honest and efficient
markets and informed investment decisions through full and fair disclosure of
all material facts. The SEC is tasked with ensuring markets that are
transparent
and hospitable to all investors. Congress wisely ingrained in the federal
securities laws the philosophy that investors have the right to be fully
informed of all material facts and to use markets that are free from
fraudulent,
deceptive and manipulative conduct. Transparency in financial reporting, that
is the extent to which financial information about a company is visible and
understandable to investors and other market participants, plays a fundamental
role in making our markets the most efficient, liquid and resilient in the
world.

Transparency enables investors, creditors and the markets to evaluate any
publicly owned entity. Transparency helps investors make better decisions and
by
doing so, it increases confidence in the fairness of markets. It is critical
that all public companies provide an understandable, comprehensive and reliable
portrayal of their financial condition and performance. When the information
and
financial reports are transparent, then no-one is surprised by unknown
transactions or events.

It also is critical that auditors, standard setters, audit committee members
and the SEC perform our respective roles with respect to financial statements.
My written statement includes information on the accounting standard setting
process that exists in our country, the self-regulatory process of the
accounting profession and the role of the SEC in reviewing filings. As you
know,
last month, Enron disclosed several errors in its previously issued financial
statements and announced its intention to re-state its financial statements
dating back to 1997. As the subcommittee has requested, my written statement
provides an explanation of the accounting and auditing literature on several of
the issues discussed in Enron's recent filing. Specifically, these deal with
re-stating previously issued financial statements, accounting for special
purpose entities or SPEs and a $1.2 billion reduction in shareholders' equity.
Also at the request of members of the subcommittee, my written statement
explains the mark to market accounting, applied to contracts with a purchaser
sale of energy contracts.

As I have said at the outset, the commission will move expeditiously in its
investigation in the Enron matter and take appropriate actions. Regardless of
the outcome of the issues surrounding the Enron situation, the SEC is working
to
improve and modernize our financial disclosure system. Our goals are to make
financial statements more transparent and easier to understand, to foster
private sector standard setting that deals appropriately with current and
immediate needs and to work with the accounting profession to ensure
comprehensive and effective self-regulation.

Chairman Pitt's op-ed piece in the Wall Street Journal yesterday outlined
these and other of the commission's planned improvements to our current
reporting and financial disclosure system. We believe these are extremely
important initiatives that will constitute much of the commission's work in the
coming weeks and months. And I am pleased to advise you that today the
commission is issuing cautionary advice regarding the need for corporations to
make full and fair disclosure about what we're calling critical accounting
policies.

As we continue to move forward, the commission looks forward to working
closely with the Congress on these and other issues of importance to the
investing public. Thank you for the opportunity to appear today. I am happy to
try to respond to any questions the members of the subcommittee may have.

REP. BAKER: Thank you, Mr. Herdman.

The committee will return next month to review of analysts' practices which
had been initiated in the last session and there has been ongoing staff work
and
research effort and efforts to come to closure with my staff on recommendations
which should be forthcoming early next year. I hope that we will be initiating
a
similar process with regard to at least consideration of the SRO approach with
regard to the CPA industry or whatever might be the appropriate recommendation
from the SEC to consider. Although the current body of law, in my view, would
seem to be adequate, I think the complexity of modern business structure may
have surpassed the rules we currently have in place, which would then lead us
to
a discussion the rewriting of the 33, 34 codes, which would be a long-term
obviously extensive process.

The short-term issue for me though is, without regard to the fact-finding in
the matter of Enron, does current law provide sufficient penalty and what is
the nature of the penalty for self- dealing, either inaccurate disclosure or
withholding disclosure or in violation of meeting the duty of care standard or
your fiduciary responsibility. Can you tell us, without making a statement, as
to a finding relative to the performance of Enron officials, not related to the
question, if someone were found to violate the standards, what would be the
penalties available to the commission today in pursuit of bringing someone to
responsible justice?

MR. HERDMAN: Mr. Baker, I'm aware that the commission has a wide range of
sanctions that it can impose against companies and in certain cases, against
individuals. I really though, have to defer the discussion of the specifics
because that's not my area of expertise, but perhaps Mr. Baker --

REP. BAKER: Let me move on, I've got a couple more and we may get back to
those, so let me just save that for the record, and at an appropriate time, to
keep us moving, perhaps a response pursuant to the hearing would be helpful.

With regard to Reg. FD in the current environment, it seems that an element
that works for compliance, is simply not to disclose if there's question in
your
mind if you can do it properly, as opposed to an affirmative responsibility in
the law, to make disclosure of material elements without having to make the
judgment. If it's material, you disclose it. Had we had that standard in
effect,
would that have helped with the transparency concerns and the current concern?

MR. HERDMAN: I really can't speculate about how things might have affected
the particular matters with respect to Enron and the entire question of moving
to a system of current disclosure with affirmative obligations to disclose, is
one of the important parts of our program to improve financial reporting,
coming up in the near future.

REP. BAKER: So, at least we can characterize it this way. A statutory or a
regulatory requirement for affirmative disclosure certainly would not have made
the matter more difficult. It possibly could have helped.

MR. HERDMAN: Certainly.

REP. BAKER: With regard to the adequacy of current disclosures, and they are
extraordinary sophisticated, in trying to wade through the financial statement
of Enron, well it put me in my place. I don't know if -- is there anybody
within
the SEC that really goes through, from A to Z, the entire document on their own
without outside help, that can read these things and understand what business
risk are presented? Or have we gotten the information so convoluted that a
person in good faith, who's reasonably educated, still is rather lost? Make me
feel better please.

(Laughter.)

MR. HERDMAN: I assure you that we have on the staff of the commission, people
who are quite expert in these matters, who do go through documents filed with
us, from A-to-Z. Having said that, I won't deny that at times, that can be a
daunting task because financial statements today are very complicated.

REP. BAKER: Well let me ask it this way. If you had had the time, and the
staff available and someone in the casual review of the data currently
required,
under law, to be disclosed, could they have determined that financial
reversals were in the future, from the current disclosure format? Or do we need
to be looking at a different way of making relevant information more
understandable?

MR. HERDMAN: Without commenting on Enron here, chairman, I think that most
financial statements today are not designed to provide information about the
future. However, our rules for disclosure and management's discussion and
analysis, does require a certain forward looking focus, particularly with
respect to matters that have occurred in the past that might not be reasonably
expected to occur in the future.

REP. BAKER: Well for example, we're going to buy a waterworks company in
England, you know, just making up something here. And we don't know much about
waterworks and we're going to spend a lot of money. That's a material thing.

It doesn't necessary mean it's adverse but disclosures of where you might be
going in business judgment could have been helpful to people trying to
understand the scope of business which a hedge fund like business might have
engaged in.

MR. HERDMAN: Disclosure is designed to provide transparency into the kinds
of activities --

REP. BAKER: And lastly, because I've exhausted my time. With regard to pro
forma reporting as opposed to gap standards, will there be recommendations with
regard -- further recommendations with regard to revision of the pro forma
method of accounting or reporting, as opposed to the current generally accepted
accounting principles?

MR. HERDMAN: At the present time I'm hopeful, and expect, that the cautionary
advice that the commission issued, just several weeks ago, will take care of
any
abusive practices that have existed in the past, with respect to pro forma
reporting.

REP. BAKER: We're going forward. Let's assume we're going forward, we're not
looking historically. There would be pro forma reporting which would have led
to
a misunderstanding in the market place. Under current rule, given your recent
advisory, what would be the consequences for a corporation, or a CFO, issuing
those pro forma advisories that would later be found to be inappropriate?

MR. HERDMAN: I can't generalize. But if such disclosures are made in a way
that violates the anti-fraud provisions of the securities laws, then I expect
that there will be vigorous enforcement action taken.

REP. BAKER: Then I can surmise, given the sensitivity of the response to the
current environment, do you feel adequately armed to respond to inappropriate
conduct in current circumstance, once you have made a factual determination of
wrongdoing?

MR. HERDMAN: I believe that that's correct. I'm not sure that I can speak
for the entire commission on that point.

REP. BAKER: That's the committee's concern. We want to make sure you have the
tools you need to do the job that's ahead of you and if that's not the case on
further reflection, please advise the committee as to areas of concern that
you identify that may warrant the committee's assistance.

MR. HERDMAN: We certainly will do that.

REP. BAKER: Thank you very much, Mr. Herdman.

Mr. Kanjorski?

REP. KANJORSKI: Mr. Herdman, looking over the overall policy, is it the
belief as a professional accountant, of the SEC, that we have sufficient
transparency or has the sophistication and the possible manipulation of
disclosure statements by corporation become so fuzzy, as to really not
constitute true transparency?

MR. HERDMAN: Congressman, I think that our capital markets are clearly the
best in the world and our accounting and financial reporting are widely
acclaimed as the best in the world as well.

REP. KANJORSKI: So, is it your interpretation this is a singular occurrence
that occurred because of economic situations or did this occur because the
stock
became artificially bid up and inflated because of the over accentuation of
revenues and the hiding of debt?

MR. HERDMAN: I really can't say at this point what has led to Enron's demise
with any certainty. That's something that we certainly hope to learn as part of
our investigation as that progresses. As we learn things, we'll be looking to
see whether there are indications that there may be other problems out there.

REP. KANJORSKI: Are there other "Enrons" out there or do you feel this is a
unique situation?

MR. HERDMAN: I think, at this point, it's premature for me to answer that
question one way or the other.

REP. KANJORSKI: So I may assume there may be other Enrons out there?

MR. HERDMAN: There may be.

REP. KANJORSKI: What is the SEC doing to determine whether that's the case
and how will you disclose that to the public or to the Congress?

MR. HERDMAN: Well, when problems are found in a particular industry, the
staff of the Division of Corporation Finance, which does review filings, makes
it a practice to take a look at the filings made by other companies in that
industry and proceeds -- if there are indications of non-compliance with
generally accepted accounting principles, unclear disclosures, et cetera,
enters
into a common process back and forth with the registrar. If there is not a
satisfactory resolution of those matters, and if the staff of the Division of
Corporation Finance believes that it's warranted, there are instances where a
referral is made to the Division of Enforcement, for follow up by them.

REP. KANJORSKI: In regard to the special purpose entities, is this a widely
used methodology in large corporations, specifically to avoid disclosure of the
true nature and condition of the main corporation?

MR. HERDMAN: It's not an uncommon practice, congressman, for special purpose
entities to be engaged and while special purpose entity transactions have the
effect of excluding certain things from a corporation's financial statements,
there are a number of very valid reasons why corporations do enter into them,
including the fact that they often offer the potential for reduced interest
cost
as well as certain tax advantages in some instances.

REP. KANJORSKI: So from your general overall view of the occurrence here at
Enron, you would say that the investing public doesn't have to have a fear that
this may be endemic to the system but this is just a unique separate situation
that just happened?

MR. HERDMAN: No, I don't think any of us can say that at this point,
congressman. I think that the Enron situation raises questions about our entire
system of financial reporting and confidence in that system. And I think --

REP. KANJORSKI: Well, I notice that if I looked at the chairman's chart of
Enron insider trading, you can almost see a picture that the insiders were
getting out at the absolute top point, and they did it in several instances at
several times, and then finally took their life raft and got out about six
months ahead of when -- or maybe even a year ahead of when the ship was finally
going down. Are you looking at insider trading to be an indicator that there
may be something that the insiders are aware of that the investing public isn't
aware of?

MR. HERDMAN: With respect to Enron, I can't comment, obviously. With respect
to whether that's a procedure that might be useful, that's something that we'll
-- we'd consider. I can't answer your -- I don't have any personal knowledge of
whether that's an accepted practice today among the staff of the Commission.

REP. KANJORSKI: I'm just trying to see what we can do, as a committee in the
Congress, to make sure there aren't other innocent investors out there in the
public. Should they be somewhat alarmed when they start seeing the insiders
getting out in a large vault, that they may not want to go in. Obviously, the
analyst didn't bring this to anybody's attention. And the accountants didn't
bring this to anybody's attention. And the SEC didn't bring it to anybody's
attention. So we had a lot of babes in the woods out there, their own stock,
and their trading, the securities, thinking that they have a very secure
corporation, and all the insiders are handing out life jackets.

MR. HERDMAN: I think the question of whether shareholders should pay
particular attention to trading by insiders is an interesting one, but frankly,
Congressman, it's outside of my area of expertise, really, to comment on.

REP. KANJORSKI: Do you clearly write a disclosures made on insider dealing?
Do we -- just pass that information to the general public sufficiently? If I
were on a --

MR. HERDMAN: I'm not in a -- I can't answer your question.

REP. KANJORSKI: If I were on a boat, and I saw some water on the floorboards,
and I saw the captain and the crew jump off the boat real fast, normally, see,
I
think I'd grab a life jacket and jump too, because they must know something I
don't know. It seems to me, in stock transactions, it's somewhat similar. And
if
it isn't, if we're not getting that disclosure out there, then the fact the
captain and the crew are jumping overboard, maybe we ought to find a vehicle to
alert people.

MR. HERDMAN: I am aware that there is a -- requirements for disclosure of
trading by insiders, and that that information is made public.

REP. KANJORSKI: I yield back the time.

REP. BAKER: Thank you, Mr. Kanjorski. I'm sure those dispositions were purely
coincidental, and that time will prove there was no relationship.

Ms Kelly?

REP. KELLY: Thank you, Mr. Chairman.

Mr. Herdman, I'm interested in the Mark-to-Market accounting standards that
energy traders are given. It's a sophisticated kind of a thing. A lot of people
who invest are not really, I think, aware of what's going on there. And I
wonder
about -- given the difficulties in ascribing a value to some of these
transactions with this policy, I think, don't you think it's led to some
misleading information that could -- that's been provided to investors? And I'm
not asking specifically about this, but investors in general.

MR. HERDMAN: I don't know that -- I don't believe that there's any evidence
to indicate that Mark-to-Market accounting has led to misleading information to
investors. The brokered dealers in this country have used Mark-to-Market
accounting in their -- to account for their activities for many, many, many
years. And they have sophisticated financial instruments that aren't quoted on
exchanges that need to be accounted for at market value. And so estimates need
to be made of value in order to accomplish the Mark-to-Market process.

Energy trading contracts can be, and are, very, very complicated. And they
sometimes go out for periods of time, as I understand it, that goes beyond the
period of time where there are quotes, either for purposes of forward
contracts,
or broker dealer type contracts. And therefore they require that a model be
developed that takes into account recentcy (ph) of other transactions, and
mechanics such as that, leading to an estimate of fair value. And that really
is
the difficult part of it. It's pretty easy to Mark-to-Market a financial
instrument that is traded on the New York Stock Exchange, and even I can
calculate that. But the calculation of the market value of a 30- year contract
to supply electricity requires a great deal of specialized expertise.

REP. KELLY: Well, is the SEC looking into changing any of these rules with
regard to the energy policies of the energy companies?

MR. HERDMAN: As I said, at this time, Chairwoman, we haven't seen any
indication that the Mark-to-Market accounting has caused problems at -- in any
-- for any -- for companies within the energy industry. If we do, we would
certainly expect that there might be a need to tighten up the accounting rules,
yes.

REP. KELLY: Do you think that the investors, and transparency, would be
helped if the SEC and the FASB clarified the principles of Mark-to-Market
accounting?

MR. HERDMAN: I think the principles of Mark-to-Market accounting are quite
clear in the accounting literature that exists today, and the circumstances
under which it should be done.

REP. KELLY: And yet you said earlier that this was a bit murky with regard
to energy.

MR. HERDMAN: What's not rigid in the accounting rules today is a specified
methodology for how to calculate the market values.

REP. KELLY: And perhaps you might be looking into that?

MR. HERDMAN: It's a possibility.

REP. KELLY: I also understand that FASB has been reviewing standards related
to the consolidation of the financial statements of -- by parents and the SPEs
for 10 years. Do you find it a little troubling that FASB is still looking, and
has taken that long, to address this?

MR. HERDMAN: Well, the project that FASB has had on consolidations includes
issues in addition to the appropriate treatment of special purpose entities. We
are encouraged, at this point, that the FASB announced just recently that it is
refocusing its project on consolidations to address a number of issues that
really are at the heart of the SPE question. And we're very hopeful that they
will proceed apace with that, and get it done, subject to all of their due
process procedures.

REP. KELLY: Perhaps, sir, you could, at the SEC, make sure that it's sooner
rather than later that it has been. We need to see a little sooner on this, I
think. If I understood your testimony correctly, you said you've issued new
cautionary advice with regard to critical accounting policy today. Could you
describe that for us?

MR. HERDMAN: Certainly. What we're doing is getting something out for this
year end, to encourage companies to make disclosures of a type that really have
not been made before. And we're doing this with a view towards accomplishing
better disclosure in 2001 annual reports, as well as facilitating work that
we're going to be doing in 2002 to move to very definitive role making in this
area.

But what these particular disclosures would relate to are critical accounting
policies which we are characterizing as those that really make a difference in
a
company's financial statements, but also require extremely complex and
subjective judgments to be made by management in their application. And often
the complexity and subjectivity is due to the fact that there needs to be very
sophisticated estimation processes, in order to take into account the fact that
a lot of accounting has to grapple, today, with the uncertain effects of the
future. And so better disclosure about those kinds of things, we think, will
help to mitigate the potential for surprises in the future.

REP. KELLY: My time is up. Thank you very much.

REP. BAKER: Thank you, Ms Kelly.

Mr. Gutierrez?

REP. GUTIERREZ: Thank you very much, and thank you for participating this
afternoon.

Some in the accounting industry have argued that the accounting rules have
become too complicated for companies to apply rationally, and for auditors to
apply in connection with their audit. Do you believe this is true?

MR. HERDMAN: Congressman, accounting rules have become very, very
complicated. But let me also point out that the world is very, very
complicated,
and the types of transactions that are engaged in today have -- are also very
complicated.

At the same time, I think that the fact that the FASB is in the process of
studying a project that they want to put on their agenda, to deal with
complexity in the accounting rules, is very encouraging. I think that's
terrific. Because the accounting literature that we have today rivals, in fact,
exceeds the size of the internal revenue code, and all of the various
regulations that pertain to that. And, ultimately, the accounting rules have to
be applied by people, and simplification would be a good thing.

REP. GUTIERREZ: Is the goal of meaningful disclosure to provide investors
with an accurate and complete picture of a company's financial condition and
has
the SEC considered a top-down review of accounting disclosure rules? I know you
talked about them a little bit earlier on today.

MR. HERDMAN: One of the critical projects that we're going to be working on
in the coming months is a real look at the nature of financial information that
is conveyed to shareholders. Certainly, at this point, we're considering about
things in addition to the current system of periodic disclosure. But we're
considering and we'll be working with many, many people that are interested in
this and will provide input to us about things like disclosure by companies of
trend information on a more current basis than just quarterly disclosure, about
changes and those types, those kinds of trends that might give earlier warnings
about the company's prospects, the going up and going down, and all those kinds
of things.

REP. GUTIERREZ: I think that's action I look forward to working with you and
your team and obviously the members of this committee on doing that, because an
accurate picture might have helped a lot of people at Enron, because given what
we know today, we didn't get an accurate picture. And I would suggest that
maybe
-- and this is just a humble suggestion on my part, Mr. Herdman -- is that, as
you look at this situation, the specific situation of Enron, that you look at
the relationship - it's simply a suggestion on my part - that you look at the
relationship between insiders selling their stock options, because the chairman
has been very, very kind to share with us this form and this graph. I mean, in
January 2001, you got the insiders at Enron selling over $160 million worth of
stock.

Maybe you should look at that, maybe we could find a way so that, as Mr.
Kanjorski -- because it sounds to me like the captain jumping off the ship --
when the insiders are selling all their stock options, they are obviously not
keeping them. And as we look at the sheet, you know, they sold it at the
highest
point and then they went in May with the next time and then it seems like they
sell things at the highest point, they know what's going on, they're inside --
obviously they are on the inside, that's why we call them insiders -- they're
the executives and if you have a CEO as in the case of Enron that's going to
sell $100 million worth of his own stock, I think it will be good and prudent,
in my humble opinion, it will be good and prudent and advisable for the public
to know, "Hey, the CEO is selling all his stock."

He is selling $100 million, and we know about it in - everybody knows at
least to that extent what he knows. I mean, we can't put in there like he sold
it because his wife wanted a new yacht or, you know, his kid's tuition came up,
although I don't know what college he would send someone to for $100 million,
but you never know. We don't have to know why they did it but at least know
that
they did it and when they did it. It's a simple suggestion because I think that
that way we all know.

REP. OSE: Would the gentleman yield?

REP. GUTIERREZ: Sure, I will.

REP. OSE: The insider trading by members of the board of directors of a
Fortune 500 or members of the management team are in fact tracked by the SEC
and
you can read them in the Wall Street Journal on a regular basis, accordingly.

REP. GUTIERREZ: I would yield but you know something, if you can read them,
then it's interesting that nobody knew about it, and nobody read about it and
nobody made a note about it and maybe our friends here should take a note about
it and what kinds of action they can take, when somebody's doing specifically
that. I know there are members of this committee that want capitalism to drive
at any expense and I'm certainly a capitalist. But when you have tens of
thousands of employees losing their jobs, I think it's a regrettable situation
and we should look at ways to correct that situation.

REP. BAKER: Thank you, Mr. Gutierrez. You'll note on the form that the
document you made reference to in the left hand corner, it's the source as the
insider and form 144 filing, so to support Mr. Ose, there are mechanisms by
which this information is publicly available. The real question is as to timing
and understanding, and I think that, perhaps, is the bigger concern.

MR. HERDMAN: Congressman Ose is correct. It's published in the Wall Street
Journal periodically. But certainly, we'll follow up on your suggestion,
Congressman.

Chairman Oxley?

REP. OXLEY: Thank you, Mr. Chairman.

Mr. Herdman, the Enron collapse clearly points out the need for Congress to
act on netting legislation. Our good friend from Pennsylvania, Mr. Toomey, has
that legislation ready to go. Does the SEC have a position on that issue? And
if
so, what is it?

MR. HERDMAN: The commission is in favor of the netting provisions of the
bankruptcy bill. Chairman Pitts did sign the letter in November that was also
signed by the chairman of, I believe, six regulatory agencies. He signed on
behalf of the SEC and the commission is very much in favor of that
legislation.

REP. OXLEY: Mr. Herdman, is that your understanding, if we are able to pass
the Toomey legislation before Congress adjourns for the year that the netting
would - that the court would be able to use the netting provisions in the law
in
the Enron case specifically.

MR. HERDMAN: I can't answer that question, Mr. Chairman. I'm not an expert at
that in bankruptcy law.

REP. OXLEY: I'll submit that for the -- we'll follow-up the record. Thank you
very much.

MR. HERDMAN: We'll follow that up for you.

REP. OXLEY: Mr. Herdman, as you know, there has been a series of accounting
shortfalls and problems, waste management, ZZZ, Bass, Sunbeam and now, of
course, Enron, probably the grand daddy of them all.

Does this suggest a systemic problem and if it may, what is the SEC planning
to do to alleviate that systemic problem?

MR. HERDMAN: I think it's premature, Mr. Chairman, to conclude about whether
there are systemic issues here. I also believe that it would be premature to
look to one potential source of whether there might be a systemic issue.
Instead, there's work that needs to be done by all concerned in all these
processes in all likelihood. Chairman Pitt's op-ed piece in the Journal the
other day points out that things need to be done with respect to faster
standard
settings, things need to be done with respect to the analyst community. The Big
Five accounting firms in the ACPA have already stepped up and said that they're
going to take a look at self-regulation, the self- regulatory structure that
exists today to determine what types of improvements may be needed. And so
there
are issues here for everyone. The SEC can and will work hard to improve our
review process for reviews of filings with us. So there's lessons to be learnt
for everyone. But I think that it's premature to say that that translates into
a
particular or a series of particular systemic issues.

REP. OXLEY: Well, I too read the op-ed piece in the Wall Street Journal by
Chairman Pitt and I was most impressed with the breadth and scope of what
recommendations that he came, and obviously, we will be pursuing that as a
committee, particularly when we take SEC re- authorization early next year. But
indeed, it's fair to say that even before all the bad news came out of Houston
that the chairman had already put on the table numerous modernization efforts
and indeed, as you know, many of the regulations date back to the 34 Act. In a
modern world of instant communications, in many ways, we still rely on a
quarterly report and I think one of the best ideas he had was more timely
disclosure and obviously, the technology and infrastructure is there today to
do
that.

Maybe Mr. Gutierrez will be able to pick up some insider trading information
electronically instead of having to leaf through the Wall Street Journal. My
friend from California here is fairly flogging the Wall Street Journal for
whatever reason.

But I think it does point out that the new chairman has recognized that we
are in a new environment here and that modernization of our structure of
regulation is clearly called for. To that end, we thank you and the chairman
for
your aggressive work in that area. I yield back.

REP. BAKER: Mr. Chairman, I'd just point out that if it is not a systemic
regulatory problem in the matter of Enron, then one would not have a large leap
to assume that there's at least significant fraud or criminal conduct. And I
cannot believe that every person involved in Enron engage in that activity. So,
it's got to be one or the other, and I think I would hopefully land on the
systemic side for necessary form and review, then assume that everybody who
engaged in activities there was not above board.

Thank you, Mr. Chairman.

REP. BAKER: Mr. LaFalce?

REP. LaFALCE: Thank you very much, Mr. Chairman.

First of all, with respect to netting, this is not a new issue. The House of
Representatives has passed netting legislation not only in this Congress, but
in
the Congress before this, and in the Congress before that, and so too has this
Senate. But the leadership of the House and the Senate have put the netting
legislation in a bankruptcy conference bill that is destined to go down to
defeat. We need to extricate the netting provisions that have passed three
successive Congresses, and simply pass it independently. If there's such
bipartisanship in support of netting, and I was a co-author of all the bills,
let's do it.

Now, Mr. Herdman, you recently came from the private world of accounting from
Ernst & Young, and you were the chief accountant now for the SEC.

My first question is, very briefly, what are you responsibilities as opposed
to the chief accountant within the Enforcement Bureau?

MR. HERDMAN: The chief accountant of the Enforcement Division works strictly
on enforcement matters. As the chief accountant of the Commission I am the
principal advisor to the Commission on accounting and auditing matters and also
--

REP. LaFALCE: -- would be more involved with policy and procedures and
general practices and your counterpart would be more involved with the
specifics
of individual situations.

MR. HERDMAN: That's a -- that's a fair generalization.

REP. LaFALCE: Fine. Let's go back to your days at Ernst & Young. There are
basically five big accounting firms worldwide, I believe. You vie with each
other, you want to represent clients because that's the only way you make
money,
and so you have to be competitive. But there's a tension that exists because
you
have certain fiduciary responsibilities as members of the accounting
profession,
and you have other fiduciary responsibilities either to your clients or to the
public at large. Tell me a little bit about what you do when a CFO is engaging
in practices that are not black and white, but are very gray and make you feel
ill at ease. And how could the system be improved to make sure that the gray
comes out white rather than black?

REP. HERDMAN: Well, first of all, Congressman, auditors have a code of ethics
that they follow, and as part of doing that they have --

REP. LaFALCE: Accountants do and lawyers do and doctors do and virtually
every professional organization do. One of the difficulties is sometimes the
code is not too clear, or it's not enforced too well.

MR. HERDMAN: The code in this case is quite clear, Congressman, that
accountants, auditors owe a duty of care and professionalism to their client,
but they also owe a duty to make sure that the financial statements that they
certify on accordance with generally accepted accounting principles, and that
their audits are performed in accordance with generally accepted --

REP. LaFALCE: Okay, but a CFO is about to do something or is doing something,
and the audit committee either is unaware of it or goes along with it, and you
really don't think they should, although you suppose they could push the
envelope that far. What are you do under those circumstances?

MR. HERDMAN: In those circumstances, first of all, I think you said keep in
mind that recently the accounting profession is part of its part to implement
the recommendations of a blue ribbon panel on audit committees from several
years ago, implemented a requirement that auditors meet and discuss with audit
committees and management the audit partners assessment of the quality and not
just the acceptability of the accounting principles that companies are
following. Recently, in a speech that I gave last week --

REP. LaFALCE: But, you know, sometimes there's a tendency to tell people what
you think they want to hear, especially if you want to keep them as clients.
And
I'm just wondering -- I'm not saying that it ever was done, but when you're
dealing with a firm -- Arthur Anderson, I believe, is the smallest of the big
five, about 85,000 employees. How many employees worldwide does Ernst & Young
have?

MR. HERDMAN: Probably about 150,000.

REP. LaFALCE: One hundred and fifty thousand. I would imagine it's difficult
to monitor the activities of 150,000 people, try as hard and best as you can.
And so I'm just wondering how we can improve the system. I know Mr. Pitt wants
to improve the system, I'm just wondering if self-regulation is going to be
good
enough.

MR. HERDMAN: Well, Congressman, that certainly is the topic that has to be
considered at this point, and I also would encourage you to think about the
fact
that big public accounting firms don't have numerous controls and procedures to
ensure that their people do follow the firm's policies and positions, et
cetera.

REP. LaFALCE: Right. But every now and again there's a little bit of a slip
and it amounts to $90 billion. An awful lot of people get hurt.

MR. HERDMAN: Okay, if you begin --

REP. LaFALCE: I'm not sure how many more $90 billion blips are out there. I
do know that your predecessor, Mr. Lynn Turner, referred to the restatements
that have existed thus far as the tip of the iceberg --

REP. BAKER: Can you begin to wrap up, Mr. --

REP. LaFALCE: -- and I'm wondering whether Enron is the tip of the iceberg.

REP. BAKER: Mr. LaFalce, can you begin to wrap up?

MR. HERDMAN: I think it's premature to come to that conclusion, Congressman.

(Cross talk.)

I think it's very important at this point that we recognize the seriousness
in the Enron matter, but at the same time we should neither under react to it,
nor should we overreact to it.

REP. LaFALCE: But we ought to react to it very aggressively.

MR. HERDMAN: Yes, sir.

REP. BAKER: Thank you, Mr. LaFalce.

Mr. Shays?

REP. SHAYS: Thank you, Mr. Chairman.

Mr. Herdman, Enron's collapse is alarming, to say the least, and it's
obviously heartbreaking for the investors and the employees and the retirees
that have depended on it. I don't invest in individual stocks because I'm not
willing to do the due diligence, but it amazes me that the people who do, do
diligence were caught by surprise. And so I'm interested in Enron, but I'm also
interested in the implications for other investments in other companies. I'm
particularly interested in the special purpose entity and I'm new at this, I'm
trying to understand it, and I gather that if you have more than 3 percent
ownership you have to consolidate, and I gather that one of the values of these
funds is it enables you to hide assets.

And what I want to understand first is basically the 3-percent rule was
established by the SEC. I mean FASB declared it, but it was SEC generated. And
the issue of the controlling test or the risks versus reward, you're people and
the SEC have been, over the last 10 years, trying to describe different tests
with qualitative factors as well as quantitative factors, and, I mean, I'm
looking at one speech that was delivered to the 2000 28th Annual National
Convention on the current SEC developments, and it was by Dominic Ragone (ph),
I
guess, who works for you who's a professional accounting fellow. And he went
through all of these, which seems to me to almost set up a confusing process
for
the accounting firms and others.

And one is I want to know why the SEC doesn't just step in and get this
resolved, and why it doesn't do it sooner. And I carry with me the basic view
that it used to be the large eat the small, but now it's the fast eat the slow.
And it seems to me you can't have a system that takes so damn long to resolve.

MR. HERDMAN: I think, Congressman, actually the first statements that were
made by the SEC staff with respect to special purpose entities were directed
particularly towards certain leasing transactions --

REP. SHAYS: Towards what?

MR. HERDMAN: Their statements towards leasing transactions. Those statements
were made in the late '80s. The Emerging Issues Task Force of the FASB put
together a working group which I chaired, and we got --

REP. SHAYS: What's your point?

MR. HERDMAN: We got up rules that were pretty quick with respect to special
purpose entities back in 1990. There have been some ongoing comments by the
staff with respect to that, but on balance I think that the special purpose
entity accounting is working as well as could be expected right now, but it
does
cry out for the FASB to finish their project here and conclude whether --

REP. SHAYS: I'm a little --

MR. HERDMAN: -- a different set of rules should be enacted.

REP. SHAYS: I'm a little confused. What confuses me is my sense is the SEC
has been injecting itself in this debate and looking at a standard different
than the 3 percent. Isn't that accurate?

MR. HERDMAN: Congressman, I'll have to look into that. I've been on board for
two months and in the time that I've been here we have not been injecting
ourselves, particularly in that debate.

REP. SHAYS: It said -- in the speech you said the staff believes that the
registrant should not apply any specific factor to determine the sponsor of a
SPE and believes that all the facts and circumstances of each transaction
should
be considered carefully. In this regard the staff believes registrants should
consider the following qualitative and quantitative factors in evaluating who
is
the sponsor, who the sponsor is of an SPE and then basically it has a number of
qualitative factors and then you have a few quantitative factors.

Bottom line, do you think we're going to be able to continue to exist with
FASB and the SEC, not resolving issues more quickly?

MR. HERDMAN: No. We do need and it's one of the major points that was made
the other day in Chairman Pitts' op-ed article. We need to foster an
environment
where private sector standards setting moves quickly and decisively to deal
with
the important issues.

REP. SHAYS: Tell me, to someone like myself who isn't an investor, tell me
what the purpose is of a special purpose entity? I mean, I look at it and I
think why does it exist?

MR. HERDMAN: Special purpose entities exist in order to finance -- this is a
generalization. There are many types of special purpose entities that engage in
different types of things. As you may be aware, the banking industry and the
credit card aspect of the banking industry relies extensively on securitization
transactions where they sell credit card balances, accounts receivable in
essence, to special purpose entities that -- thus providing for the bank a
source of liquidity to carry on their ongoing operations. This is a huge
market, it's done with a great deal of transparency and there are other types
of
special purpose entities that are created, perhaps to finance a particular
investment. There are special purpose entities that are created to provide
leasing facilities to a company. It's a way to achieve financing and often
times
there are some tax advantages associated with the use of these types of
entities.

REP. BAKER: Would the gentleman yield?

REP. SHAYS: Yes.

MR. HERDMAN: I think there are structural reasons why SPEs have legitimate
purpose, but I think the analysis should be, and I don't know that it has been,
does the creation of the SPE create real value for the underlying shareholder
of
the principal corporation, or in this case, were the SPEs used for self-dealing
of the official, to profit at the expense of the taxpayer. That's what hadn't
been determined.

REP. SHAYS: And then the question would be, is this happening in other
companies and in other areas? I thank the gentleman. Thank you, Mr. Chairman.

REP. BAKER: I thank the gentleman for yielding.

Mr. Bentsen?

REP. BENTSEN: Thank you, Mr. Chairman, Mr. Herdman.

Let me -- I want to follow up on what Mr. Shays was talking about. But I also
want to say, a moment ago, and I can't remember who was asking the question on
the issue of restatements, and I think you're trying to be sincere of just
being
there for two months and looking at this, I think the increasing -- it may have
been the chairman's question. I think the increasing volume of restatements is
somewhat alarming. And, I hope that the SEC is taking a harder look at that.

Now, I don't know if it's systemic or not, and the more you look at the
Enron case, it really does seem to me, this is not, it's certainly not -- they
didn't fail because of a cyclical reason or recessionary reason, or an economic
reason. It certainly appears to me that they failed because of severe
structural
reasons in their corporate governance. And, I think the chairman's right about
the SPEs and your comments are, as well. They can be an attractive and
efficient
financing vehicle.

But in this case isn't it a problem, or shouldn't it be a problem for the SEC
or the auditors, which the auditors did apparently find at one point, when on
the one hand you're calling debt an increase in equity, and you're really
swapping what you're doing. They were taking -- they were double counting notes
receivable and double counting equity when it was going the opposite direction.
And the restatements were quite severe.

And, isn't I also a problem in having a restatement of a billion dollars
plus, of equity, that's not just going back to the beginning of the quarter
that
you were filing the 10Q, but going back not just four quarters, but four years.
I mean, is that -- does it appear and I know you have to be circumspect on your
comments with respect to Enron because it's under investigation, but it seems
to
me to have every appearance of either using the SPEs as an artifice or self-
dealing of some sorts, even your own chronology in your statement.

MR. HERDMAN: I think, congressman, with respect to the -- you referred to the
doubling counting of the notes receivable in the stockholders equity, what has
been disclosed with respect to that indicates that it does not go back four
years, about 170 million (dollars) of it arose in 2000 and the other 830
million
(dollars) arose in 2001.

REP. BENTSEN: But they reduced their net income going back four years as it
related --

MR. HERDMAN: Reduction is not income --

REP. BENTSEN: -- to I think is it related to both JEDI (ph) and Chewco (ph),
right.

In those, they restated it going back to '97 to the point --

MR. HERDMAN: That's correct.

REP. BENTSEN: -- where they would have, instead of having net income they
would have had a net loss, which is somewhat substantial to the investing
public. Let me ask you this. When they restated -- when they went through the
transition, the CFO was out, the CEO net was out, the chairman of the board
resumed the role of CEO. In a conference call with analysts the issue sort of
came up, if I understand the chronology correct, that a billion two of equity
basically had washed away, it no longer existed. The chairman and now CEO
states
in response to a question from analysts, well that's over my head, I'm not sure
I know the details of that and the special financing -- special purpose
entities.

Isn't it a problem when you have the chairman of the board who can't -- of a
Fortune 500 company, publicly traded company, and not a penny stock company it
is today, but certainly wasn't a penny stock company then, who doesn't
understand the financing mechanisms of the company as it's operating, and is
there a question here of corporate governance and is the SEC looking at that
issue? Was the audit committee functioning properly? Are we, through the 33 and
34 Act or through the tools you have, are we sure that the boards of public
companies are operating efficiently for the benefit of shareholders and the
investing public, and the pensioners, for that matter?

MR. HERDMAN: Congressman, your question carefully weaved in and out of
Enron and to the extent that it pertains to Enron, as you understand I can't
address that.

REP. BENTSEN: Well, address it in the hypothetical.

MR. HERDMAN: As to a generality, of course, chairman of boards and audit
committees should understand the important elements, the material elements of
financing for the entities with which they're associated.

REP. BENTSEN: Is the SEC doing enough? I mean, obviously you can't sit and
review every company's board minutes and what's going -- you know, and all of
that. But, I mean do you think that the SEC is providing enough oversight in
that area. I mean, if everything that has been said turns -- or half of
everything that's been said, turns out to be true, the collapse of Enron's
going
to be one hell of a story. And, what happened and a huge mess on the part of
the
board, and potentially, it's auditors. I mean I can see where things -- certain
things can be missed and certain things can -- the contract with the copying
machine company maybe wasn't the best deal you could get --

REP. BAKER: Can you begin to wrap up, Mr. Bentsen?

REP. BENTSEN: -- but this is a pretty big deal.

MR. HERDMAN: The processes of the SEC uses to review filings have been --
have basically been based on a selective review process, now for 20 years and
we
don't talk about the particulars of that process in public because we don't
want
companies to know, frankly, when they'll be subject to review or when they
won't
be subject to review. I can assure you, congressman, that continuous
improvement
has been the hallmark of working with that review process and I can certainly
assure you that going forward, we will continue to do that. We will learn the
lessons that are out there to be learned from what we might discern from the
Enron matter, and will apply those to improving our processes.

REP. BENTSEN: Thank you.

Thank you, Mr. Chairman.

REP. BAKER: Thank you, Mr. Bentsen.

Mr. Toomey?

REP. TOOMEY: Thank you, Mr. Chairman.

A further question on the SPEs, if I could. First of all, maybe you could
just correct me if I have this wrong. But my understanding is that if you own
2.9 percent of the equity in some corporate entity, on 2.9 percent of the
equity
of an SPE and you meet the other criteria regarding the control of the SPE,
then
your balance sheet is essentially silent on that fact. It does not reflect it
in
any way. Is that incorrect?

MR. HERDMAN: No, that's -- Congressman, the way -- the 3 percent doesn't have
to do with what the company that enters into transaction with the SPE owns. It
has to do with the fact that many SPEs could be formed and providers of capital
would be quite comfortable to provide 100 percent of the financing of an SPE in
the form of debt securities. Let's say that that SPE was formed to carry out a
sophisticated leasing program for a major company. They could borrow -- the SPE
could be formed, it's a legal entity -- it could borrow 100 percent of the
money
from banks or private providers of capital. What these rules say is that in
order for -- there's to be enough substance to the SPE, in order for it to be
viewed as an entity independent from the sponsor, somebody has to put in some
common equity to it and that common equity has to be at least equal to 3
percent
of the total capitalization of the SPE.

REP. TOOMEY: Okay, that's important clarification, thank you. If the
corporate entity that wants to create the SPE provides a certain amount of that
3 percent equity and other entities provide the rest, then is there a
requirement that that be represented on the balance sheet at all?

MR. HERDMAN: That would have to be on the balance sheet.

REP. TOOMEY: It would have to be?

MR. HERDMAN: If the 3 percent isn't owned by independent entities, then --
and all the other conditions are met, of course -- then the SPE would have to
be
consolidated on the balance sheet.

REP. TOOMEY: It has to be consolidated when the sort of sponsoring
corporation has less than 3 percent?

MR. HERDMAN: No. It has to be consolidated if the SPE doesn't have at least 3
percent of its total capital owned by outsiders. Independent third parties who
have common equity type capital.

REP. TOOMEY: I understand that. I guess what I'm getting at is there is a set
of criteria, there are rules that allow for someone to create a SPE. They
follow
all the rules and they're allowed to choose not to consolidate that SPE or, in
fact, they're required not to consolidate it. Right. And my question is, if the
contribution - if you've made some kind of contribution, say you've contributed
your own equity to part of the capitalization but you're not so much that you
would consolidate - but if you've done it in a fashion that has the additional
proviso that you'll top up that contribution in the event that the value of
your
stock declines, then that creates a contingent liability on the part of the
sponsoring company, correct? Would you consider that?

MR. HERDMAN: In the rare event when a sponsoring company would be part of
that capital structure of an SPE, that's potentially -- you could view it as a
contingency. I don't think that they would consider it to be a contingent
liability.

REP. TOOMEY: Do you think it should be happening?

MR. HERDMAN: It would have to be recognized on a financial statement.

REP. TOOMEY: Well, it seems to me it certainly is a contingent liability.
It's equivalent to having sold a put option on your own stock and therefore it
would be required to be reported, is that correct?

MR. HERDMAN: Congressman, there are very, very complicated rules on the
accounting for put options and call options on your own stock and I'd be glad
to
get back to you on these issues, if you'd like to explore this further.

REP. TOOMEY: Yes, I think I would because --

MR. HERDMAN: There's a lot of detail too.

REP. TOOMEY: And it seems to me that this is part of what was going on with
at least one of the SPEs that Enron had created and I'm just wondering whether
that had contributed to a larger exposure than perhaps was evident.

MR. HERDMAN: I can't comment on the Enron --

REP. TOOMEY: I yield the balance of my time to my colleague, Mr. Ose.

REP. OSE: I thank the gentleman from Pennsylvania. Mr. Chairman, I do -- it's
ironic. I was reading through the Wall Street Journal as I listened to some of
the comments about the insider trading spotlight and in fact, today, Wednesday
December 12, there's the most recent report on insider trading listed in the
top
eight or ten individuals both on the buy and the sell side and the top six or
eight companies both on the buy and sell side. And there's a little footnote
down here. It's a Wall Street Journal link. "See a list of companies with the
highest number of insiders filing Form 144 with the SEC disclosing their
intention to sell restricted stock."

So it seemed to me that the information's being collected at the present.
It's in the public domain. There may be some people who perhaps aren't aware of
that fact. But, as it relates to any directorships or managerial positions
liquidating stock, it's a matter of public record by rule, if I understand that
it has to be disclosed.

MR. HERDMAN: That's correct, Congressman.

REP. OSE: Now there's also a secondary cut, if you will, and that is that -
correct me, if I'm wrong, Mr. Herdman - that members of the board of directors
or members of a management team only have specific windows during which they
can
sell stock that they receive. Is that correct?

MR. HERDMAN: I understand that to be true. I couldn't give you the
particulars on that because that is a matter of law and --

REP. OSE: The reason I ask that is that somebody put together a very, very
read document here that highlights the sales seemingly on a -- for some purpose
but I wonder whether the windows correspond with the dates showing the large
amounts of sale. I think that --

REP. BAKER: I can help you, Mr. Ose, because if you look down the left hand
corner, it says, "Source insider and Form 144 filings." That's all the
corporate
records and what happened is there were two different types of actors here. A
Mr. Alea (ph) - I don't have the correct pronunciation - who sold in large
blocks. Mr. Lay, however, sold in $10,000-$100,000 blocks virtually every week,
some every day. So if there were windows that were closing, they took a long
time to close in the case of this particular matter, so.

REP. OSE: But there are windows during which they --.

REP. BAKER: Apparently so. A goodly number of them in this case.

REP. OSE: But they're different types of stock. This is where I get beyond my
level of knowledge and that is, with respect to senior management, do they hold
restricted stock and unrestricted stock, is that what you're saying?

REP. BAKER: They were exercising stock options. Normally there would be an
acquisition on the morning of the day and the disposition of that same stock
that afternoon. And there were various classes of stock being exercised, I'm
assuming, in accordance with their contractual relationship with Enron.
Whatever
their employment agreement guaranteed them, they were entitled to receive and
therefore make disposition of.

REP. OSE: And they were eligible to do that because they met certain minimum
financial requirements on a personal basis --

REP. BAKER: I'm certain that was --

REP. OSE: But which are not necessarily available to someone working lower
down in the company.

REP. BAKER: It was clearly a benefit of their contractual relationship as an
employee of Enron as an officer.

REP. OSE: Okay, I understand I'm on Mr. Toomey's time. I want to come back to
that question, because the issue of why certain people are eligible to hedge
their exposures and others aren't has been the substance of significant debate
in this committee and over in the Agricultural Committee on which I sit.
Relative to the minimum financial standards a participant must meet and
coincidentally and quite interestingly, there's been a lot of argument that
people who are going to participate in hedging of exposures must meet certain
minimum financial requirements and, in fact, that has been a demand from one
side of the aisle in particular. And I think that merits exposure - that merits
investigation because it's at the heart of people participating in the 401(k)s
getting stuck, if you will, when stock collapses. And I am hopeful you'll come
back to me because I know I'm on Mr. Toomey's time.

REP. BAKER: And Mr. Toomey's exhausted time. Thank you, Mr. Ose.

Mr. Sandlin?

REP. MAX SANDLIN (D-TX): Thank you, Mr. Chairman.

Just briefly, and thank you, Mr. Herdman, for being here today. The goal of
meaningful disclosure is to provide the investors and the market with an
accurate and complete picture of the financial condition of the company. Is
that
correct?

MR. HERDMAN: That's correct.

REP. SANDLIN: And the public is protected, at least in part, by an
independent audit and by SEC oversight, is that correct?

MR. HERDMAN: That's correct.

REP. SANDLIN: It's already been brought out today that the issue about the
partnerships with SPEs but it has not been brought out - it's my understanding
that in this particular case, the partnerships were run by the officers of the
company, is that correct, of Enron?

MR. HERDMAN: That's what's been reported, yes.

REP. SANDLIN: And it's my understanding that these partnerships were unnamed
partnerships, is that correct?

MR. HERDMAN: What kind of partnerships?

REP. SANDLIN: Unnamed. That they were not identified by name.

MR. HERDMAN: I believe that's correct from the disclosures I've seen, yes.

REP. SANDLIN: Would this not cause -- that's not in accordance with normal
business practice or generally accepted accounting principles, is it?

MR. HERDMAN: Congressman, I don't believe that there's a generally accepted
accounting principle requirement with respect to related party transactions,
that specifically calls the names, of the partnership.

REP. SANDLIN: So it's -- so you think it's fine then just to list
partnerships but not by name and not to indicate that the partnership is run by
an officer of the company.

MR. HERDMAN: No, that's not what I said.

REP. SANDLIN: That's what I'm asking.

MR. HERDMAN: If that is the related party, is the officer and generally
accepted accounting principles does require disclosure of --

(Cross talk.)

REP. SANDLIN: Now, these partnerships were treated, in this particular case,
as a separate entity, correct, from Enron?

MR. HERDMAN: We're now starting to get far too specific --

REP. SANDLIN: Okay.

MR. HERDMAN: With respect to Enron.

REP. SANDLIN: In the event that a SPE set up or a partnership is set up in
this sort of situation, then that partnership is considered as a separate
entity
from the original company, is that correct?

MR. HERDMAN: An SPE or a partnership that meets the applicable accounting
rules to be considered, is separate.

REP. SANDLIN: And that allows debt to be moved away from the original
company, is that correct?

MR. HERDMAN: What that does, congressman, is it says that the debt that's
incurred by the SPE doesn't have to be consolidated in the financial statements
of the company that does business with the SPE.

REP. SANDLIN: But in the event that the companies or SPEs are set up
properly, or do not meet accounting principles, then you're allowing the
liabilities and equities of the company and ultimately the stockholder, be
distorted, is that correct?

MR. HERDMAN: No, I wouldn't say that's, could you repeat that question?

REP. SANDLIN: My point is you're allowing debt of an original company to be
spun off into an SPE that's run by an officer of the original company in order
to move debt away from the original company so that the stockholder equity
appears much higher than it is. Is that correct?

MR. HERDMAN: My experience, congressman, with respect to SPEs, is that they
normally do their own borrowing.

REP. SANDLIN: Should auditors be involved in auditing partnerships or SPEs
that they have a part in setting up?

MR. HERDMAN: I don't know what auditors would be doing in terms of setting up
partnerships.

REP. SANDLIN: If an auditor that's a part of an accounting firm or a law
firm, is a member of that same firm and helped set up an SPE or a partnership,
should that same firm then, regardless of your artificial restrictions within
the firm, should that same firm be involved in auditing that set up?

MR. HERDMAN: I don't think there would be any prohibition against doing that.

REP. SANDLIN: You don't see a problem in the fact that in an accounting firm
or a law firm which set up a partnership and then turn around and audit its own
work. You think that's fine?

MR. HERDMAN: Well accounting firms don't practice law so they don't set up --

REP. SANDLIN: I'm very well aware of that. Well, let me ask you this. Should
it raise a red flag for an auditor if a firm is setting up a special purpose
entity transactions in the firm's own stock. Is that a red flag?

MR. HERDMAN: If the transactions are material to the company's financial
statements and if the auditor is aware of them, I would expect that that would
be something that the auditors would pursue diligently.

REP. SANDLIN: Now the press reported that the enforcement division of the SEC
sent a letter in October to Enron about having questions about the disclosure.
Could you tell us what disclosures raise the red flags for you?

MR. HERDMAN: The disclosures that prompted the letter were those that were
made in an October 16 press release in which Enron released the results of its
operations for its third quarter of 2001.

REP. SANDLIN: Okay. What factors does the SEC consider to determine what
filings it's going to review?

MR. HERDMAN: Congressman, as I said earlier, the selective review process
that's used by the staff of the commission to determine filings for review, is
not a topic that we discuss publicly because it would take what element of
surprise is in it, out of it, and companies might know better when they might
expect to be reviewed.

REP. SANDLIN: So you feel, I'm being tapped and I think that means I'm done.
Thank you for your response.

REP. BAKER: Thank you Mr. Sandlin. I'll just make a brief announcement for
the committee. I have to step out for a moment. Mr. Bachus will assume the
chair. We'll proceed with questions of Mr. Herdman until I understand there's a
likely vote on the floor about 1:30. It's my hope that all members could get
there questions in before that vote and I'm making this announcement for our
second panelists. Pending that vote, we would take a few minutes for a lunch
break and probably try to come back around 2:15 if the vote occurs around 1:30,
which is a guess at this point, but to let our panelists know they will have a
few minutes from whenever that vote occurs, and members, a little time to go
grab a sandwich and come back.

Let's just make it 45 minutes from whenever the bells first sound. So, if we
can get a vote in, get some lunch, and then come back for the second panel.

Mr. Bachus, in the chair.

Mr. Royce?

REP. EDWARD R. ROYCE (R-CA): Yes, thank you, Mr. Chairman.

Mr. Herdman, are you troubled by Enron's use of partnerships to keep
significant liabilities off of the balance sheet?

MR. HERDMAN: Congressman, I can't comment about any of the particulars of the
Enron matter because of the pendancy of our investigation.

REP. ROYCE: Okay, well let me ask you then on a broader scope here. Do you
see ways in which the SEC can encourage or maybe compel companies to provide
financial information that's useful to investors, on more of a real time basis,
let's say, for large corporations, monthly, rather than quarterly financial
statements. Would that be helpful, in your view?

MR. HERDMAN: I don't necessarily think that a requirement for monthly
financial statements would be helpful but the things that we're going to be
considering with respect to improving the totality of financial reporting,
could
very well lead to disclosures of financial and other types of performance
indicator information, on a more frequent basis than quarterly.

REP. ROYCE: Well, we've had accounting problems now that are almost systemic,
Waste Management, we've had Sunbeam, we've now had Enron. It would seem to me
that there would be need to be move quickly on developing such changes. Let me
ask you a question about the ongoing investigation.

Let us say that fraud is discovered in this investigation with respect to
Enron in terms of insider trailing -- trading. What is the likelihood that the
profits made through fraud, through insider trading, would then be compelled to
be paid back to Enron so that the assets held by the employees of Enron and
shareholders of Enron who did not have access to this insider information,
could
then be, at least, partially benefited?

MR. HERDMAN: That's beyond my personal expertise, congressman. I just don't
know all of the particulars about the specific remedies the SEC has available
including the potential for disgorgement here.

REP. ROYCE: Well let me just close by saying, it seems to me that investors
need current information that is in fact true on a real time basis and we have
not developed to date, apparently, an effective system to make sure that -- is
delivered on a timely basis to them, and I would suggest that the SEC look at
changing its procedures in a way that effectively does that, because the
Congress is certainly going to look at finding ways to prod just such changes.

MR. HERDMAN: Congressman Pitts, since the time he's assumed office, has been
talking about modernization of the financial reporting system including more
current information. Congressman, if you would like I could ask our General
Counsel, David Becker, to respond to the question about --.

REP. ROYCE: Certainly, I would be happy to hear from the general counsel,
thank you.

MR. HERDMAN: -- remedies and recoveries.

REP. BACHUS: Thank you, Mr. Herdman.

MR. BECKER: Congressman, on remedies, we do have a variety of remedies in
cases in which we can go to court and get disgorgement of ill-gotten gains. If
the folks who misbehave still have the proceeds of the fraud we'll get them --

REP. ROYCE: Can you lean a little closer to the microphone?

MR. BECKER: Sure. If the folks who violated our anti-fraud rules still have
the proceeds of the fraud, we'll get them, and we'll make them give it up.

REP. ROYCE: Well, I would suggest that besides changing the ground rules so
that we can get this information to investors on a more timely basis, that the
other part of the equation is to aggressively pursue just such actions, so that
there will be a deterrent affect in the future. And I thank the gentleman for
his answer.

MR. BECKER: I agree with you, very much, Congressman.

REP. BACHUS: I thank the gentleman.

Lady from Ohio?

REP. TUBBS-JONES: Thank you, Mr. Chairman. Lots of questions, not enough
time.

You stated in your -- earlier that -- we should not overreact to a situation
such as Enron. What would be an overreaction, sir?

MR. HERDMAN: I, you know -- an overreaction might be to say that financial
reporting is not trustworthy in this country. I think that that would be an
overreaction.

REP. TUBBS-JONES: What should we say then, if -- based on Enron's financial
reporting, then this country is?

MR. HERDMAN: You should say that financial reporting in this country is
challenged, and appropriate steps need to be taken to learn what needs to be
done to improve it, and that should be done quickly.

REP. TUBBS-JONES: Okay. The filings that we were talking about on the chart
over there on insider trading, these insider and Form 145 filings, how often
are
they filed, sir?

MR. HERDMAN: I'm not an expert at that. I believe that they're filed on a
transaction basis. In other words, if an insider sold --

REP. TUBBS-JONES: Can your general counsel answer that question for me?

MR. BECKER: I hope so. On the 144A transactions, they have to be filed,
fundamentally, contemporaneously, on the -- on general sales of stock. They
have
to be filed, I believe, monthly or within 10 days.

REP. TUBBS-JONES: Say that again, please, I didn't hear you?

MR. BECKER: Fundamentally, they all have to be filed within 30 days.

REP. TUBBS-JONES: Is there a level of insider trading that would cause the
SEC to say, "oohoo"?

MR. BECKER: Well, I -- the short answer is, depending on what else is going
on, yes. If there's an extraordinary transaction, and folks are trading, we
want
to know why. Yes --

REP. TUBBS-JONES: Okay, I'm company Outlock, so you don't have to talk about
Enron. And in January I had $180 billion -- million -- dollars worth of insider
trading. Would that make you go "oohoo"?

MR. BECKER: I suspect that that's something that we would look at. I will
tell you, though, that the fundamental philosophy of the federal securities
laws, is get the information out, and have investors evaluate the wisdom of
their investment decisions. We do look at a variety of sources, including
unusual patterns of trading to see if there is any fraudulent conduct going on.

REP. TUBBS-JONES: What -- those goal and purpose -- in my reviewing Mr.
Herdman, the chief accountant, U.S. Securities and Exchange Commission, is you
have an oversight obligation over all these different accounting firms, and
auditing firms, and the OAB, which lists the Office of the -- the POB, excuse
me, the Public Oversight Board, to sit with them and give advice and counsel on
the standards, or what becomes appropriate accounting procedures. Wouldn't
something like that be part and parcel of something that you would say to the
world, "Well."

MR. BECKER: This information -- our fundamental mission is to see to it that
information relevant to investors is out in the public, and that financial
statements and disclosures are fully transparent to the public. And this type
of
information is information --

REP. TUBBS-JONES: You know what? You could sit down if you like.

MR. BECKER: Thank you.

REP. TUBBS-JONES: Okay.

MR. BECKER: Mr. Herdman has got his briefcase here, so I wouldn't. But I -
okay. So, in fact, this type of information is information that's pushed out to
the public quickly. One of the paradoxes, I'm not talking about Enron in
particular, one of the paradoxes, and this is where the role of analyst comes
in, is that often that there is information out in the public, but that people
don't necessarily focus on it and take it as seriously as, in hindsight, they
should.

REP. TUBBS-JONES: Let me ask this, then. Okay, we've got a -- I called myself
Outlock, and Outlock, my company not only is showing $180 million worth of
insider trading, but is -- let me back up. Is there an obligation to also show
how many subsidiaries, or partners, that you have as they become partnerships
under your -- or become, what are you all calling it, SPEs or something?

MR. BECKER: I think this is one for Mr. Herdman. But the question -- but the
basic answer is --

REP. TUBBS-JONES: Okay, I'll take him.

MR. BECKER: Sometimes yes, sometimes no.

REP. TUBBS-JONES: Okay.

MR. BECKER: SPEs sometimes are accounted for as subsidiaries, in which case
there would be information about them. And sometimes, if they meet the
appropriate standards, that aren't accounted for as subsidiaries, in which case
there wouldn't be information about them.

REP. TUBBS-JONES: Based on what we know about my company Outlock, and perhaps
it would not be an overreaction for us to look at how do we let the public know
that there are a number of small -- a number of SPEs, or SBEs operating within
a
company that could, in fact, camouflage the economic condition of a company
such
that poor little me, who doesn't know anything about this area, and I'm
investing, might think twice before I would invest my money in Outlock company?

REP. BAKER: The lady's time has expired.

REP. TUBBS-JONES: Thank you, Mr. Chairman. Can I get a quick yes or no on
that question? Can I get a quick yes or no on that question?

REP. BAKER: I'm sure that that's something that the FASB, when they finalize
their rules on SPEs, will take into consideration.

REP. BACHUS: Thank you. Mr. Herdman, there's been some disturbing allegations
with respect to the failure of the board of Enron to monitor the activities of
management, and particularly related to the special purpose entities, SPEs, as
you've referred to them, and the related party transactions. What would you
recommend to increase board oversight for these kinds of transactions and
entities?

MR. HERDMAN: Congressman, there have been significant developments in the
various strictures and -- about audit committees, about boards, in recent
years,
particularly about audit committees. And the commission really has no plans to
do anything further with respect to rule making in that regard. And, once
again,
this is an area where I believe that if we learn something as a result of our
investigation, that should be applied more broadly, we'll move ahead
aggressively with that.

But at this point, there have been significant changes in what audit
committees do, and the amount of their interaction with auditors, et cetera.
And
those are all fairly recent, within the last year or two, and that's -- I don't
-- right now, there's no indication that that's an area that needs something to
be done with it.

REP. BACHUS: Okay. What about -- what if a board -- how should a board react
when they think that generally accepted accounting principles, or GAAP,
complaint disclosures are inadequate?

MR. HERDMAN: One of the conditions today to be a member of an audit
committee, and these are encompassed in rules, as I said, that were not that
long ago enacted by both the New York Stock Exchange and NASDAQ, is that
members
of audit committees have to be quote/unquote "financially literate."

They need to understand enough about accounting, and about financial
reporting, and financial statements, to be able to critically engage management
and the auditors in discussions about the accounting principles that are used,
the disclosures that are made, et cetera.

The -- that being the case, when these discussions occur, if there are
instances where the financial statements, or that were -- or management doesn't
intend to follow generally accepted accounting principles for some reason, or
doesn't want to make a disclosure that's required by generally accepted
accounting principles, among the players in the discussion have to be the
members of the audit committee, if discussions just between management and the
auditors haven't yet resolved the problem. That's not to say that if the right
accounting doesn't get used, and the right disclosures don't get made, that the
accountants would give a clean opinion. But there are dialogues that occur,
they
sometimes are reiterative of -- and the audit committees do have an important
role in those types of matters.

REP. BACHUS: Thank you. Yesterday, Chairman Pitt called for a self-regulatory
organization through CPAs. Does the commission intend to issue a rule proposal
for public comment on this? Or do you know what the time line is?

MR. HERDMAN: Actually, Congressman, the article today indicated that Chairman
Pitts called for a self-regulatory organization. I think misspoke.

REP. BACHUS: Okay.

MR. HERDMAN: And where the chairman, and where the commission are at this
point is either -- we've begun a dialogue with the accounting profession, with
the major firms and the AICPA. They've indicated that they're going to take a
look at what changes are needed to the self-regulatory processes. We're eager
to
continue to work with them on that. And we're not predisposed, at this point,
to
either a continuation of the current system of self-regulation, or to a
statutory self-regulatory organization.

REP. BACHUS: Okay.

MR. HERDMAN: If that were to go in the direction of an SRO, I believe, that
in order to be enacted, it would have to be a matter that was put out for
notice
and public comment.

REP. BACHUS: Now are you also considering something like an enhanced FASB or
an enhanced AICPA or something like that, or are you talking about just an
entirely new body?

MR. HERDMAN: What we're talking about is the self-regulatory structure that
currently is housed within the AICPA and it's division for firms and is
overseen
by the Public Oversight Board which is comprised of individuals of high
integrity that are not practitioners of accounting, and what have you. That's
the structure that exists today. It does certain activities that are outlined
in
my testimony and the questions have to do with, are those activities
sufficient,
does more need to be done, does discipline need to be more transparent, et
cetera? Those kinds of issues.

REP. BACHUS: Okay, thank you.

Mr. Mascara?

REP. MASCARA: Thank you, Mr. Chairman.

Mr. Herdman, when did the SEC suspect that there was a problem at Enron and
what action did the SEC take, and how soon afterwards? I heard you mention in
an
earlier question, the third quarter October of 2001. Was it?

MR. HERDMAN: The first action that was taken, congressman, was a letter that
was sent to Enron on October 17th, 2001.

REP. MASCARA: What action did you take?

MR. HERDMAN: We sent them a letter requesting that they provide more
information about the losses that had been reported in their earnings press
release the prior day.

REP. MASCARA: What role does the SEC play in SPE filings? I would imagine
there's some kind of a filing someplace and that someone's required to file.
And
did you say earlier, that these liabilities do not appear if they have 3
percent
invested in the total offering? On a consolidated statement, do these numbers
appear there?

MR. HERDMAN: What I said earlier was, they do not appear in the consolidated
financial statements if the owner of the special purpose entity has invested in
equity capital of that entity in an amount that's equal to 3 percent or more,
of
its total capitalization. And its total capitalization would include the
amounts
that the entity borrowed from various sources.

REP. MASCARA: It's my understanding that Enron had a plethora of SPE filings,
so if they invested a minimum of 3 percent, they would not be required to place
that liability on their balance sheet? I think that's outrageous if the answer
is yes.

MR. HERDMAN: It's not, as I said earlier, congressman, this is very
complicated, but it's not how much Enron has invested in the SPE -- or another
sponsor, let's not talk about Enron -- when a sponsor of an SPE invests it's
because they can't invest anything, it's how much is invested in -- by
independent third party investors.

REP. MASCARA: So if any independent investor invests at least 3 percent,
Enron, or any other company, would not be required to list the liability on
their balance sheet, on a consolidated balance sheet?

MR. HERDMAN: That's correct, congressman. The market place before the 3
percent requirement was put in place, was quite willing to lend 100 percent of
the capitalization of SPEs, in order to effect these transactions.

REP. MASCARA: How's your staffing at the SEC, is it sufficient to oversee the
financial world that's at risk many times out there? Do you have enough
employees to oversee those activities?

MR. HERDMAN: I certainly have enough employees in the Office of the Chief
Accountant.

With respect to the other divisions, we're constantly looking to see whether
and how we can use our resources better and to redeploy resources to particular
issues that are worthy of attention, at a particular point in time.

REP. MASCARA: While I have an accounting license, I'm asking you this
question because I can't answer it. Does any of this have to do with what went
on recently in the dot-coms where people were looking at anticipated revenues,
rather than anticipated earnings? Is there any similarity between the --

MR. HERDMAN: Based on what I've read about Enron, congressman, I don't see
any similarity at all to the dot-coms. The dot-coms were speculative entities
that generally didn't have much history in their business. They frequently had
enough cash to carry out their money losing activities as a result of the
public
investing the cash with them. Notwithstanding the fact that there was clear and
transparent disclosure, that these companies were brand new, that they didn't
have any revenues, et cetera. That was all out there on the table and yet a lot
of people bought those stocks and I guess they wished that they hadn't.

REP. MASCARA: Well thank you, Mr. Herdman. I think we've just tipped the tip
of the iceberg. I'm afraid what's coming, but I thank you and I thank you, Mr.
Chairman.

REP. BACHUS: Thank you, Mr. Mascara.

We intend to recognize Mr. Inslee and then Ms. Jackson-Lee. There's probably
about seven minutes left on the floor, so such time as we have, I will yield. I
mean I'm going to recognize Mr. Inslee first then Ms. Jackson-Lee.

REP. JAY INSLEE (D-WA): Thank you, Mr. Chairman.

I represent a district up in the State of Washington. I can tell you that my
constituents have a lot of real hard questions here. And the reason is that
they
think of Enron as sort of a financial octopus, with tentacles not only just
into
the investor community, but it touches Americans in a lot of different kind of
ways.

And one of those kinds of ways is in the energy field, the energy prices and
the like. And I heard one of my colleagues say something, and I guess I'll take
a little issue with, to say that somehow Congress should not get to the bottom
of the question of how this company hi-jacked America's energy policy. Because
it appears from the press reports that I'm reading that there's good reason to
believe that Enron's fingerprints are all over the American energy policy that
exposed my constituents, in the State of Washington, to millions of dollars of
overcharges last year in the electrical market and have led us into the
situation where the country has huge failures in our energy policy.

And there are questions that I think, and I hope you and others, help us
answer. Like, is the reason that we're giving Enron $254 million dollars in tax
relief, instead of investing clean energy. Is the answer Enron? We'd like an
answer to that question. Is the reason that the administration is doing nothing
about global climate change, is the answer Enron? Is the reason the federal
government's not taking action to improve automobile mileage standards, is the
answer Enron? Because there's a lot of evidence that at least we've been
hearing
about, about the ability of Enron to affect our government's policy and we're
very concerned about that.

And there's a relationship between this financial world and the energy world.
I was just reading one account, I think it's in the LA Times, there's talk
about
Mr. Lay's role in the replacement of one of the FERC Commissioners.

And it says, as the New York Times reported, "Hbert had barely settled into
his new job this year, when he had an unsettling telephone conversation with
Kenneth Lay, in which Mr. Lay prodded him to back a faster pace in opening up
access to electricity transmission grid to companies like Enron. Lay admits
making the call, but in an unctuous defense of his influence, Perlane (ph)
said,
'the final decision on Hbert's job was going to be the president's, certainly
not ours.' Soon after Hbert was replaced by Texan Pat Wood who is favored by
Lay."

I think that there's a lot of questions here that are going to be related to
the abuse of stockholders, to also the abuse of energy payers, consumers and
those who care about our whole energy world. And we encourage you, and others,
to engage in trying to answer those questions that Americans have. And I want
to
ask you one specific question about abuse of stockholders and employees. And I
know you can't comment on the investigation, so I'll ask you in a hypothetical
form.

If a company, on October 17th, the very same day the SEC announced it was
investigating that company, volitionally chose to change plan administrators of
their 401(k) which thereby automatically locked in their employees so they
couldn't sell their product, and then the insiders including some of the
executives that were partially, in my view, responsible for the pathetic energy
policy we have in this country, to go on this binge of selling their stocks to
jump ship and leave their employees in a sinking ship, is that number one,
legal? Number two, is there disclosure required for that activity?

MR. HERDMAN: Congressman, I think that the -- what happened to the employees
at that 401(k) plan is just one of the most terrible things I can imagine.
However, that -- nothing about 401(k) plans comes under the jurisdiction of
the Securities and Exchange Commission. Those are matters that have to do with
the Department of Labor, and as to whether there would be a need for disclosure
in SEC documents, I don't believe that there would be.

REP. INSLEE: Well, should we consider requiring disclosure that if executives
are going to treat their employees of essentially getting into the lifeboat and
leaving them on a sinking ship, should we consider requiring disclosure in that
in some regard?

MR. HERDMAN: I don't -- I don't know whether there was disclosure made to the
employees in advance about the fact that the change in administrator was going
to prevent them from changing their investment elections for a period of time.
I
just don't know.

REP. INSLEE: Let me ask you a broader question --

REP. BACHUS: I think the gentleman for his question.

REP. INSLEE: Thank you, Mr. Chairman.

REP. BACHUS: Thank you.

Ms. Jackson-Lee is the -- end of her questioning we're going to recess for 45
minutes.

REP. SHEILA JACKSON-LEE: Thank you very much, Mr. Chairman.

I'm a guest in this committee and I want to thank the chairman, I want to
thank the chairman of the full committee, Mr. Oxley, the ranking member, the
chairman and ranking members of the subcommittees as well. I am here because
Enron is in the 18th Congressional District of Texas, my district in Houston.

They eyes of the nation, Mr. Herdman, are on this particular hearing, and
more specifically, the eyes of Houston are on this particular hearing because,
of course, Enron was a very good civic and corporate citizen. But as well,
there's a lot of pain and anguish in Houston, Texas now, and I believe as it
moves across the nation, in the nation.

Quickly I just want to say to you factually, as the SEC's responsibilities,
if for example a company had, in 2000 December, a stock price of $84, and then
around October of 2001 it had a stock price of $33, why didn't the SEC do more
to -- why wouldn't the SEC do more to address that particular company's
assessment or situation particularly if there was a loss reported of about $600
million?

MR. HERDMAN: Well, ma'am, as I understand it, the loss that you may be
referring to wasn't reported until November when Enron announced that it
planned
to restate its financial statements back to 1997. The -- once again, as Mr.
Becker pointed out earlier, the purpose of the Security's laws is to require
disclosure, to provide disclosure to investors so that they can make informed
decisions about whether to invest, when to invest, when to sell, et cetera.

And the fact that a stock price changes -- we'll look into this, but I'm not
persuaded that that would be an effective means for the SEC to screen filings
and determine whether a particular company's filings should be looked at as
contrasted to some other procedures that are applied in our selective review
process.

REP. JACKSON-LEE: I appreciate your --

MR. HERDMAN: But we'll certainly look into that.

REP. JACKSON-LEE: I appreciate your assessment on that. I would think with
the overwhelming impact, would you -- you just answered my question. Wouldn't
you think it's now time to reassess or to look into what might be additional
resources, regulations and laws that might assist in that review, on behalf of
the SEC.

MR. HERDMAN: We'll be taking a look at ways to improve our processes as well.

REP. JACKSON-LEE: Let me close on this question, because my other duty is to
cast my vote on the floor of the House, and I will return for the second panel,
and I thank the chair. But with respect to the off-ledger companies, the
difficulty that they provide in camouflaging the assets of a particular
company.
How do we address that in truth and lending, if you will, I'm not using the
correct terminology, but truth and information, that is not truthful.

MR. HERDMAN: Ma'am, I don't think you can conclude that it's always not
truthful. This is why we have the Financial Accounting Standards Board, to
develop the appropriate criteria as to when those assets and liabilities should
be part of the consolidated financial statements and when they should not be
part of the consolidated financial statements. And we will urge them on to the
swift completion of that task.

REP. JACKSON-LEE: Let me leave you just with this. Maybe we will heighten the
standards on the utilization or the posturing of those kinds of companies. It
may not be a question of truth in information, but maybe there needs to be a
higher bar.

MR. HERDMAN: Perhaps.

REP. JACKSON-LEE: Thank you very much. I --

REP. ROYCE: Thank you, Congresswoman Sheila Jackson-Lee.

We are now going to dismiss this panel. We want to thank the witness for
testifying today and we also want to give the members of the Congress 30 days
in
which to put together any additional questions that they might want to ask you,
so I'd like to acknowledge that for the record.

We are going to reconvene with a second panel at 2:15 after this vote is
over. So thank you again for your testimony here today.

(Vote recess.)

REP. BAKER: I'd like to call this session of the Capital Markets Subcommittee
to order by way of advisory members, we will be returning momentarily.

I thought it would be helpful to proceed with receipt of testimony, so that
by the time we have a full complement and get to our questions, there will be
sufficient members here to engage our panel.

Our first participant this afternoon is Mr. Joseph Berardino, Chief Executive
Officer, Arthur Andersen and before I recognize you for your comments, I just
want to by way of personal acknowledgement express my appreciation to you on
the
manner in which you have responded to the committee in this difficult matter. I
wished all officials who had similar participation in the issues before the
committee had exercised your judgment and express your willingness to cooperate
with the committee in seeking a commonly beneficial resolution to this matter.
So I do appreciate your openness and your willingness to be here today. Thank
you, sir.

MR. JOSEPH F. BERARDINO: That's very kind of you, Mr. Chairman.

Good afternoon, thank you for inviting me to appear before you today. I'm
here because faith in our firm and the integrity of the capital market system
has been shaken. What happened at Enron is a tragedy of many levels. We are
very
aware of the impact this has had on investors and the pain this business
failure
has caused for Enron's employees and others. Many questions need to be
answered.
Some involve accounting in all of them. I will do my best today to address
these.

I ask you to keep in mind that the holding and accounting issues are very
complex and are part of a bigger picture. None of us yet know all the facts.
Today's hearing is an important step in enlightening all of us. If there's one
thing you can take away from my testimony, I hope it is this. Andersen will not
hide from its responsibilities. That's why I am here today. The public's
confidence is of paramount importance. If my firm has made errors of judgment,
we will acknowledge them. We will make the changes needed to restore
confidence.

In my written testimony, I've addressed two issues that go to the heart of
concerns about our role as Enron's auditor. Did we do our job? Did we act with
integrity? To aid the committee in its inquiry, I've provided detailed answers
to these questions in my written statement and I'd like to touch on a few of
the
key points.

On the accounting issues, Enron had said it will restate its financial
statements back to 1997 as a result of issues with two special purpose entities
or SPEs. These are sophisticated financing vehicles used by many companies.
They
are well known to the investment community. On the larger of these, which was
responsible for 80 percent of the SPE regulatory statement, it appears
important
information was not revealed to our team. We've notified the audit committee of
possible illegal acts within the company.

On the smaller of the SPEs responsible for 20 percent, we now believe, based
on a second look, that our team has made an error in judgment. An honest error,
but an error nonetheless. But I do believe we did a professional job overall
and
that this error did not cause Enron's collapse. There have been questions about
the sufficiency of Enron's disclosures. It's true that Enron did not disclose
every transaction or every contingency. It was not required to. Accounting
rules
also don't require companies to disclose remote contingencies, such as the
sudden and rapid decline we witnessed of Enron's stock price and credit
ratings.

Finally, let me spend a minute on fees. We were paid $59 million by Enron
last year, including 25 million (dollars) for our audit. There is a perception
that the remaining 27 million (dollars) was for traditional management
consulting work such as installation of computer systems. In fact, the bulk of
that 27 million was for audit- related work, tax work and work that can only be
done by auditors. Thirteen million was for consulting work done by Arthur
Andersen. Some may assert that even 13 million of consulting work is too much,
that it weakens the backbone of the auditor. There is a fundamental issue here.
Whether it's consulting work or audit work, the reality is that auditors are
paid by their clients.

For a system to work, you and the investing public must have confidence that
the fees we are paid, regardless of the nature of our work, will not weaken our
resolve to do what is right and in the best interest of investors. I do not
believe the fees we receive compromise our independence. Some will disagree and
I have to deal with the reality of that perception. I am very aware that our
firm must restore the public's trust. I don't have all the answers today but I
can assure we are carefully assessing this issue and we'll take the steps
necessary to reassure you and the public that our backbone is firm and our
judgment clear.

Andersen will have to change to restore the public's interest and confidence.
And we are working to identify the changes we need to make. The accounting
profession will also have to reform itself. Our system of regulation and
discipline has to be improved. And others will have to do things differently as
well. Companies, boards, a lot of committees, analysts, merchant bankers,
credit
analysts among others. I believe we can work together to give investors a more
meaningful, relevant and timely information. My firm and I personally as CEO
will do our part. Thank you, Mr. Chairman.

REP. BAKER: Our next participant is Mr. Charles Hill, Director of Research,
Thomson Financial/First Call. Welcome, Mr. Hill.

MR. CHARLES L. HILL: Thank you.

REP. BAKER: And grab that microphone and yank it towards you. It needs to be
pretty close.

MR. HILL: Chairman Oxley, Chairman Baker, Chairwoman Kelly, Ranking Members
LaFalce, Kanjorski and Gutierrez and members of the subcommittee. I welcome the
opportunity to again testify in front of the House Financial Services
Committee.

I believe this committee has been addressing substantive issues that are
important not only to the future health of the investment community but
important to the general public's perception of and confidence in the overall
capitalist system.

The excesses associated with Enron that led to its bankruptcy are more
far-reaching than just their impact on Enron. There is plenty of blame to go
around in the mistakes made in the Enron situation. I am here today to focus on
the role of the broker-analyst in this debacle. Before this committee, I did
not
tread lightly on what I thought were some serious problems in analyst behavior,
that needed to be remedied. I am this afternoon, however, to say that analysts
were, to some degree, victims rather than culprits in the Enron situation. Not
that they were without blame, particularly in the late stages of the Enron
collapse. But they were not the underlying cause of the excessive rise in
Enron stock that later proved to be irrational.

The performance of the analyst should be judged on two fronts. The first is
their analysis of Enron's fundamentals, particularly in regard to earnings.

The second is their valuation assessment and recommendations of Enron's
stock. The thing that stands out most visibly about the analysts' analyses of
Enron is that over the three years up to October 2001, their estimates at the
beginning of each year promote changes. The few changes that did occur were
always upward and usually followed the guidance given by the company when they
reported quarterly earnings. The narrowness of the spread of estimates among
analysts was remarkable, especially for an energy company. The coefficient of
variants for Enron estimates was consistently below the average for the S&P 500
during the same period.

This pattern is highly suggestive that the analysts were being spoon fed as
to what Enron expected earnings were to be. The analysts might have been
willing
to accept company guidance, be it overt or inferred, as long as the company
kept
meeting expectations each quarter. Since at least the beginning of 1998, Enron
has met or exceeded analysts' estimates every quarter. One reason that analysts
may have been willing than normal to accept company guidance for Enron was that
it was becoming increasingly difficult to understand how Enron was achieving
its
revenue growth and profitability. Extensive use of derivatives, particularly
when the company is using mark-to- market accounting, is extremely difficult in
the best of situations.

We now know that a big additional reason for the difficulties in analyzing
Enron's financials was that there were significant parts of Enron's business
that were hidden from the balance sheet. Often the way out for analysts when
faced with a difficult to analyze situation like Enron is to drop coverage. Why
take the risk when there are plenty of companies that are transparent enough to
do meaningful analysis with confidence?

The problem with dropping Enron was that it had become the giant in the
industry. If you were an analyst covering that industry, you essentially had to
cover Enron. That was further reinforced if your firm was one of Enron's
investment bankers or investment banker want- to-be. The real problem though
was
having sufficient information about the off balance sheet items. Whether the
accounting for each of these items was within FASB rules or not, is not yet
clear, although the announced restatement of prior periods earnings is a strong
signal that at least not all was kosher.

But what is clear, is that Enron was not providing what could even be
considered minimum transparency in its financials and that the analysts did not
have all the tools necessary to make a reasonable analysis. In evaluating the
analysts performance on recommending Enron stock, one first has to understand
how the brokerage community's recommendation system really works.

As I've testified before to this committee, the investor needs a two-level
decoder. The decoder gets all the brokers on a common recommendation scale. The
most common scale is five-tiered one where the top category is a strong buy,
the
second is a buyer, the third hold, fourth sell, fifth strong sell. Most brokers
have a five-tiered scale. Some have a four-tiered one and a few have a
three-tier scale. In addition, many have very different terminology. The term
buy, maybe the term used for the top category at some brokers, or for the
second
best category at many brokers, or in at least one case, for the middle
category.

There are more than a dozen different terms used for each of the top three
categories and almost as many for the bottom two. Unfortunately, getting all
the
analysts -- I mean all the firms on a common scale is not the end of the
decoding. Analysts are overly biased on the positive side in their
recommendations. The typical distribution is about 33 per cent of all
recommendations, are in the top or strong buy category, about 33 in the second
or buy category, about 33 in the middle or hold category, and only about one
per
cent in the remaining sell and strong sell categories, combined.

If the recommendations are put in numeric terms where one is a strong buy or
whatever the broker's term is for that top category, two a buy, et cetera,
using
this numerical scale consensus, recommendations can be calculated for each
company. Most of the time the average consensus recommendation for either the
companies in the S&P 500 or for the roughly 5,000 companies that analysts, is a
2.1. Occasionally, the average maybe 2.0 or 2.2. Therefore, the second level
decoder would move the recommendations into three more meaningful categories.
Those in the one or strong buy category, would really be saying buy, at least
in
relative terms. Those in the two or buy category, would really be saying they
were neutral on the stock and those in the three or hold, the four sell, and
the
five strong sell categories, all would be saying sell the stock.

For Enron, the consensus recommendation as shown on a graph that's in the
hand-out about a 1.5 from May 2000 until the end of September 2001. Even if we
had our decoder to compensate for analysts' optimism, it is clear that the
analysts covering Enron were very positive with their recommendations. But
during that same period the analysts had similar or higher consensus
recommendations on competitors like Calpine (sp) and Dynergy. While the
consensus set a recommendation for Enron was much better than the average for
S&P 500 companies, their enthusiasm was not limited to Enron.

In early October 2001, the consensus recommendation spiked up from a 1.5 to a
1.3 as several analysts raised their recommendations ahead of Enron's reporting
its third quarter earnings on 16 October. On the day of the earnings
announcement, one analyst raised their recommendation, pushing the consensus to
a remarkable 1.2. But as the Enron story began to unravel over the next few
days, the recommendation downgrades exploded, plus six of the 17 analysts
dropped coverage.

In these kinds of situations it is easy to point a finger at the analysts for
mistakes made. In my prior testimony and in other forums I have taken the
analysts to task for not performing to an acceptable standard in certain
situations. While the analysts are certainly not without blame on Enron, they
are not the real culprits in this situation. I am not an expert in doing the
actual accounting at a company or in auditing a company's accounting, but
having
been an analyst for 22 years as well as closely observing analysts behavior at
first-call for the last time, I can say without reservation that this was a
situation where either the company or its auditors or both, were at fault, in
not providing investors, especially including the analysts with the tools
necessary to understand Enron's business.

Whether the letter of the accounting rules were met or not, it is patently
obvious that the spirit of the rules were violated and that Enron's financial
statements did not fairly convey enough information for investors to reasonable
analyze the company's operations. In that climate it is hard to be too critical
of the analysts optimism. Enron had a long history of showing consistent and
substantive earnings growth.

If it had been up to me, if I was in that situation, I would have dropped
coverage long before October 2001.

The financial reports and details of operations had become more and more
inscrutable well before that. But as I mentioned earlier most, if not all
analysts, did not have that option. All things considered, they probably did as
well as could be expected until October 2001, although in hindsight it is easy
to say that they could have had at least tempered their bullish recommendations
to some degree. However, once the issues of the off balance sheet items became
an unexplained issue on the 16 October, 2001, conference call on third-quarter
results, it does seem that the analysts could have move quicker, to either
suspend their recommendation or dramatically drop the level of their
recommendation. The unexplained $1.2 billion balance sheet write-down was not a
caution flag, it was a red flag.

But Enron is not the situation in which to challenge analysts' performance.
There are far more significant situations where analysts conflicts and
performance are at issue. The lesson to be learned here is how to ensure that
companies and their auditors can be relied on to openly provide the necessary
tools for investors to meaningfully analyze the company's business.

Thank you.

REP. BACHUS: Thank you very much, Mr. Hill.

Our final participant is Mr. Richard Trumka, Secretary Treasurer AFL-CIO,
welcome sir.

MR. RICHARD TRUMKA: Thank you, Mr. Chairman.

Good afternoon, Chair Baker and Chair Kelly and ranking members of the
committee and subcommittee.

My name is Richard Trumka and I'm secretary treasurer of the AFL- CIO. On
behalf of the AFL-CIO and our 13 million members I would like to commend this
committee and Chairman Baker in particular, for his leadership in calling this
hearing and his foresight in looking at the issue of analysts independence last
Summer.

I'm here, today, first and foremost to make clear who the victims were in the
Enron catastrophe. Let's start with those hurt worst by the conduct of the
board
and officers at Enron. More than 12,000 Enron employees participated in
Enron's 401(k) plan. On October 17, the same day that the SEC announced it was
investigating Enron, the company implemented a plan to switch 401(k)
administrators, knowing that their decision would freeze employees' accounts,
and that freezing took three times longer than is normal in these situations.

Meanwhile, Enron executives continued to sell their stock, continuing a
pattern of inside sales that netted a handful of executives over a billion
dollars. Now, 5,000 of these same employees have been laid off. And Enron has
tried to extract waivers of liability from these laid off workers in exchange
for their severance. Many of the 1,000 members of the International Brotherhood
of Electrical Workers at Enron's subsidiary, Portland Gas and Electric,
suffered catastrophic losses. Members like Roy Ranard (sp), who watched
helplessly, his accounts frozen as 22 years of retirement savings dwindled from
$472,000 to less than $3,500 or Tim Ramsey (sp), a 33-year veteran who lost
$995,000 from his retirement account.

Most pension funds and institutional investors held some Enron stock or
bonds. The AFL-CIO's pension fund held Enron bonds and watched them lose 75 per
cent of their value. Much of this money was going to fund pension benefits for
working families, for the public employees were counting on to protect us
during
this period of national crisis, for the pensions of the iron-workers for
instance, now clearing the rubble at Ground Zero. All of us who have S&P 500
index funds in our 401(k)s or mutual fund portfolios lost money in Enron,
probably about a half a per cent of the total assets in those type of funds.

Much of what happened at Enron, as has been stated earlier, remains murky,
but from what we know this is a story first and foremost about conflicts of
interest, about a long list of people and institutions that were supposed to
look out for workers' retirement savings, and instead looked out for
themselves.

And what do I mean by a conflict of interest? Let's begin with the first line
of defense, when management goes sour. That's the board of directors. At
Enron, most of the board was independent of the company, according to the SEC
filings. But look another layer deeper, and you find some of these, quote
"independent" directors were actually investing in Enron's sponsored limited
partnerships.

Then there were the auditors. Arthur Andersen has testified earlier, it was
the company's long time auditor, that management was funneling lucrative
consulting contracts to Andersen, as was stated, $59 million in fees.

Then we come to the Wall Street analysts. Practically every Wall Street firm
and post-Glasspiegal commercial bank had an interest in courting Enron. So out
of the 13 Wall Street analysts that covered Enron in October, according to
Forbes magazine, 11 were bullish, while the majority of independent investment
newsletters were bears.

Finally, there were money managers. Alliance Capital, a major money manager
for pension funds, shared a director with Enron. Alliance kept buying Enron
shares this summer and this fall, so many shares that Alliance ended up as
Enron's largest holder. Enron was a company that talked about a future of
transparent markets, but the CFO openly bragged that, and I quote, "We don't
want anyone to know what's on those books. We don't want to tell anyone where
we're making money."

Well, Enron's mantra was deregulation and privatization. And now Enron itself
is a demonstration of why workers need both defined benefit pension plans, and
a
social security system safe from the conflicts of interest that appear rampant
in the capital markets.

In response to these causes of the Enron fiasco, the AFL-CIO is today
submitting two rule making petitions to the SEC. These proposals have the
support of the council of institutional investors whose members have nearly $2
trillion in assets. We ask, in these petitions, that the commission act to
ensure that independent directors are really independent.

In the accounting area, our proposals are aimed to keep auditors independent,
and include a prohibition on accountants reviewing transactions they themselves
structured, direct audit committee approval of any audit consulting
arrangement,
as well as the audit engagement itself. These proposals follow efforts in early
November by the AFL-CIO, and the amalgamated bank, a large index manager of
union pension fund assets, to reach out to Enron's outside directors. Mr.
Chairman, we did that immediately upon the announcement of the losses. We wrote
to those independent directors, and "CC'd" all the board of directors. We asked
for more independent directors, and more extensive disclosure immediately, but
we never received a subsequent reply. In fact, independent auditors -- I mean,
the independent directors never wrote back. The company itself wrote back,
saying, "Thanks for your letter."

In the wake of the Enron bankruptcy, the amalgamated bank took the last step
remaining open to investors, bringing suit last week in federal court on behalf
of Enron's shareholders. Our friends will fight as hard as we can to get our
money back. But the truth is, only strong government action led by the SEC and
the Department of Labor, and the support of this committee in Congress, can
ensure that investors are not victimized again in this way.

Mr. Chairman, I and the AFL-CIO, look forward to working with you and this
committee in the coming days on these very, very important tasks. Thank you
very
much.

REP. BAKER: Thank you, sir, for your good testimony.

I just want to make a brief comment before asking my first question. And that
is, I can assure all of you that every member of the committee, regardless of
the philosophic perspective, finds no comfort in the fact that thousands of
people are unemployed, their retirement benefits gone, their 401(k)s vanished.

Regardless of the circumstance and how it came to be, this is the most
unfortunate event over which there is no happiness anywhere. From here forward
is the issue.

How do we preclude it from reoccurring? And in order to do that, we must
understand how this came to be.

I happen to believe that, within the capital markets, most people, as in
politics, get up every morning and try to do the best they can to do the job
they're assigned to do. It appears to me, without knowing all the facts yet
today, that there were a few individuals engaged, at very high levels, within
the corporate structure, that did not provide the disclosures that are
required,
perhaps by law, but certainly by good moral judgment either to the accountants,
to the analyst community, to the journalists or anybody else. And that it
appears, from the disposition of assets over the time preceding the bankruptcy
filing, that their profiteering coincided with the lock-out of the employees'
access to their own funds.

If these facts turn out to be the case, this is a travesty. Now, could a
change in our structural law have precluded it? I don't know. But that's what
we're about. To that end, Mr. Hill, you were making the comment that some
analysts, because of enthusiasm and the pressure of prominence -- take an LTCM.
They were making hand over fist, great sums of money, very bright people, never
had a back-to-back two-day trading loss. Banks were throwing money at them.
Investors were throwing money at them. It was almost as if you had a question
about their methodology, there must be something wrong with you because you
didn't understand the business model.

It would seem from what I know now, that to a great extent the Enron story is
not too dissimilar. The principal difference, however, is that in the closing
days of LTCM, the principals believed in their own philosophy. They were
putting
money in. In this case, the principals were taking money out. That is a
tremendous difference of great public policy consequence, which troubles me
greatly.

But to your point about the independence of the analyst. As of 2:40 today,
December 12th, checking my Yahoo finance page, we have 13 analysts listed
covering Enron. We have two strong buyers. We have one buyer, we have eight
holds, one sell and one strong sell. How do you respond to that today? Is there
something of value that this committee is missing? How can anybody look at
these
events and come to the conclusion that this is a strong buy opportunity?

MR. HILL: I have a problem with the strong buys. Again, if you have your
decoder, you know that the holds are really meaning sell. So, the majority of
them are saying sell now, to those that, as we said last time --

REP. BAKER: But given these circumstances, and the public discussion, and the
pending investigations, and all the other matters that are out there, why not,
for the first time, break the code and say, for goodness sake, to the American
public, "Sell this stuff," if you can.

MR. HILL: I agree. I agree. But this isn't new, you know, this whole thing. I
mean, you brought up long term capital. And I had in my notes here to -- when
we
got into the questions, to mention. So you beat me to it on that one.

You know, back in -- when I -- not long after I got in the business, there
was a company that I was covering called Memorex. It was selling back then at
over a hundred times earnings. I don't remember the exact date, but it was some
time in the early '70s. Larry Spitters (sp), the Chairman of Memorex, came to
Boston to explain to the financial community their lease accounting. And we've
talked this morning about the similarities between off-balance lease
accounting,
and off-balance derivatives. But same idea. There was no transparency.

Part way through the presentation, he was using flip charts -- in those
charts, he got to the point where he threw up his hands and said, "I can't
explain it, I can't answer your questions."

I think a lot of us either drop coverage, or want the sells on Memorex.

REP. BAKER: Let me ask on that point: What's the significance in the market
if someone drops coverage? What's the decoding of that activity?

MR. HILL: Well, it's -- assuming it's not because Alice is leaving or
whatever, but it is interpreted as there's a problem here.

REP. BAKER: So what we also --

MR. HILL: And that -- to me, that was the easy out, was -- would be, at that
point, certainly once that restatement --

REP. BAKER: Are all these actions, the drop coverage, the hold comment, is
this the prominence problem, is that we don't want to downgrade someone because
of the consequences of that to the firm, there are --

MR. HILL: Absolutely. And the conflicts are threefold. First is the obvious
one, that most everyone's aware of, is the investment banking problem. And
until
we change the compensation situation for the analyst, which means we've got to
find some way to go back, for the firms to get paid for research. When I was an
analyst, I got paid -- my bonus was incentivized to do good fundamental
research. But that was when the commissions were high enough, that the firm was
getting paid for research.

REP. BAKER: Let me interrupt here, if I may. I want to get one question in to
Mr. Berardino, my time is expiring, and if we have a chance for a second round,
I really want to come back.

Mr. Berardino, I think what troubles me, I'm making -- standing on the
presumption that the in-the-field auditor has no direct benefit from a
lucrative
contract with the larger firm and that in my view of the operative auditor
function, he has a contractual relationship with the company, certainly he
wants
the company to be profitable, but in the case of Arthur Andersen whose gross
income per year is in the millions and millions and millions of dollars, the
relationship with Enron, I don't view as being a significant factor in the
judgment of an in-the-field auditor looking at the books.

What troubles me I believe, is in this case it appears that individuals who
were responsible for disclosing the books or the activities to the in-the-field
personnel, in most cases, may have not been providing you with the appropriate
information or insight. If that is the case, what do we do about changing the
system to correct for that problem? How do you know the data that the auditor
is
looking at, is the real set of books?

MR. BERARDINO: That's a very complicated question and a very fundamental
question, Mr. Chairman. As you probably know, Enron was an extremely complex
company. They had over 20,000 employees. In fact I recently found out, they had
600 CPAs. So they spent a lot of time trying to keep their books. They had
3,000
subsidiaries all over the world. And as auditors you know, we don't live there.
We do test checks. We do statistical samples to inspect the transactions as the
company presents us the information. And the company does have a legal
obligation to present us information that we require.

REP. BAKER: Let me do the same, because I don't want to run inordinately over
my own time, since I'm trying to keep other folks on the clock. To put a simple
point to it, must we make the consequences of failing to properly disclose to
provide transparencies so severe, that it ain't worth the risk?

MR. BERARDINO: I think that would be very helpful. I will add though, and I
made this comment in my testimony, it is an illegal act to withhold information
from an auditor.

REP. BAKER: Well, I understand that and believe me, in my experience in
Louisiana political life, having something be illegal is not necessarily a
prohibition.

(Laughter.)

REP. BAKER: I think we need to have something a little more strenuous than
just the fact that you get written up in the books. I don't know what that is
in
this case, but it ought to be pretty significant.

Mr. Kanjorski?

MR. BERARDINO: Well, it's worth investigating, sir.

REP. KANJORSKI: You know, I was just thinking to myself as we heard the
dialogue between yourself and the chairman, if this were 1942 Nazi Germany and
people were talking about the death camps, it seems like tremendous
establishment of possible deniability. If you don't know, you don't have to
answer and you're all home free. Maybe -- other than Mr. Trumka, I don't quite
sense -- maybe I'll give you a chance, Mr. Hill, aren't you outraged?

Aren't you outraged? Don't you two gentlemen just think this is horrendous
what happened to the shareholders, what happened to the investors, what
happened
to the employees? I mean, don't we have to say something to the system? I mean
if this system is so broke, that the seventh largest corporation in the United
States can play these silly games and everybody comes and just says, well I
didn't know, or we didn't understand, or we had these complications, are we any
different than any other nations that are having problems with transparency?

MR. HILL: I think when you get into this derivatives issue, why, we're in a
whole new world. And I don't know what the answer is. I don't know whether we
need another class of security or whatever, for people whose business is
essentially driven by derivatives. I don't know what the answer is, but I agree
with you. We have to have some kind of different system because the normal
fundamental analysis really doesn't apply to these kind of companies. I just
don't know how you could really do it.

REP. KANJORSKI: Let me ask something. You know, I thought that corporate
statements were intentional, required to give understanding of what's going on.
And these special purpose entities, I have to confess, I know very little about
them, as to how they operate, or derivatives. We've had hearings on it,
everybody's come in here and said, they're so important, they balance and hedge
the market. Don't worry about it and they get in the trillions and trillions,
it's all okay.

But why not just disclose it? If there is a special purpose entity, why
shouldn't it be disclosed? Unless it's constructed, and I think you gave an
indication to me yesterday when we talked about this, it's particularly
constructed so that it doesn't hurt the disclosure in the company? So here you
all are --

MR. BERARDINO: Congressman, congressman, you're obviously getting right to
the heart of the matter, which I appreciate and there's no great answer to your
question right now. These special purpose entities have been in business for
years. They've been --

REP. KANJORSKI: Yes, but -- I understand that, but by God, didn't the
accounting profession say, hey, by having these things, we're not really giving
a transparency here, in disclosure?

MR. BERARDINO: Well, you know, there's been great debates and there's a great
irony unfortunately, in all this. There's been a great debate within the
accounting profession as to what goes on and off balance sheet. And there are
two schools of thought. If I could just do a little accounting, 101 maybe.

One school of thought is, if you lose control, if you're in Enron and
somebody else has control over these SPEs, simplistically defined as more than
51 percent vote, these transactions go off your balance sheet, assuming these
other tests, 3 percent, et cetera, are passed.

REP. KANJORSKI: In spite of the fact that by doing that you lose transparency
of what's really occurring the company?

MR. BERARDINO: If you just bear with me for a second, congressman. The second
school of thought, which is the school of thought Andersen has always been in,
is that one ought to look at risks and rewards. So even though these
transactions went off balance sheet, Enron could maintain 97 percent of the
risks and rewards.

REP. KANJORSKI: And we're arguing that in the accounting.

MR. BERARDINO: You know, we lost that debate within the accounting
profession.

REP. KANJORSKI: And this has been going on for years?

MR. BERARDINO: These things go off balance sheet. They've been going on for
years, people know about it.

REP. KANJORSKI: Ten years I think you told me yesterday.

MR. BERARDINO: And you know, we need to yell louder and longer about this.

REP. KANJORSKI: And as a result of that not coming to some conclusion, we're
now faced with somebody lost $80 billion and I think a hell of a lot of that
somebody is who Mr. Trumka was talking about that are important, and innocent
investors. And a lot of bad guys who were inside traders, made billions, while
this thing was going to hell in a basket and now you're putting the Congress,
as
representatives of people, in a position that if we've had enough and we're fed
up, you're telling us government better come in and regulate your profession,
the corporations, disclosure.

You really -- the business interests in this country seem to make the most
compelling case in the world that we need heavy regulation and that sort of
offends me because I felt that we could rely on the decency, the honesty and
the
professionalism that the professions aiding these corporations and the
corporate
executives would be using the highest moral and ethical standards. And I just -
-
somebody was in the hen house, and I think it's up to you guys to tell us who
that was. And then let's find out -- are we going to slap them on the wrist
with
$100,000 fine and put them in jail for years, so they can take their billion
dollars in jail and speculate and make two or three billion. Or maybe set up
some more special purpose entities out there?

MR. BERARDINO: Congressman, I'm here voluntarily because I want to be part of
the solution. The points you raise are valid. I understand them. I don't feel
good about where we all are but I think the chairman set the right tone here by
saying we have to learn from this. We are prepared to shed whatever facts we
can
on the accounting and auditing side of this because I think we can get it
better. I'm prepared to do --

REP. KANJORSKI: Mr. Berardino -- and I appreciate it and I want to tell you I
appreciate you had the -- I'm trying to use the right word here -- the nerve --

(Cross talk and laughter.)

REP. KANJORSKI: -- to be here today. But I think my patience at this point,
are fully tested. I applaud the petitions for regulations filed by the AFL-CIO.
I think America's going to go back to a lot of instances of re-regulation when
it will be counter productive to the market if we do that. But it's going to
happen because people aren't going to take it. $80 billion, what that means to
America, where we could go with it and to allow, I don't know whether this is a
"Ponzi scheme" or what the hell it is but when the best analysts from the best
investment banking in the country are, at the time when everything is gone,
still recommending heavily that people buy and put their pensions, their
savings, I think we have to do something and I think that's very unfortunate.

That the business community here, is forcing the Congress on behalf of
representing the people, to get involved with the profession, the accounting
profession on conflicts of interest, with the analysts and the way they get
paid, that shouldn't even be an issue, as you indicated. We've got so many
compromises out there it's amazing anything is working in this system.

I know I have had my time, thank you, Mr. Chairman.

REP. BAKER: Thank you, Mr. Kanjorski.

Ms. Kelly?

REP. KELLY: Thanks, Mr. Chairman.

First of all I want to say thank you, Mr. Trumka, because you represent a lot
of people, not only in AFL-CIO but by your words, today, you represent a lot of
the people out there in the United States who also got involved, not because
they were in the union, but because they trusted. And I think it's important
that your testimony was here -- was heard.

I want to turn to you, Mr. Berardino. I want to follow-up on the mark to
market situation. Do you think that mark to market accounting system has
yielded
a situation where we have misleading information being provided to investors. I
wasn't real happy with what I heard this morning. I'd like to hear it from your
standpoint.

MR. BERARDINO: Well, I think it's an extremely important issue. And I will
hide behind theory to start and then I'll get real life for you, if you don't
mind.

Theoretically, it's a very appropriate way to account for transactions. You
get a more current valuation. I think what you've heard this morning is some of
the difficulties and the methodologies that go in to evaluating something. It's
easier to evaluate something that might be due tomorrow, than something due 30
years from now. We share your concern, by we, I mean the accounting profession.
We issued a statement to five CEOs of the major firms just one week ago, where
we called to the SEC and said, we need more disclosures so people know what's
going on, on this mark to market stuff.

It's hard, it's complex and there are different interpretations as to how to
get there. So, we would certainly -- we think it's a real issue, we think it's
an important issue. It is on the agenda. We have put it on the SEC's agenda and
we are fully prepared, as a profession, to try to get some guidance out for
this
year end, as company's are ending their years December 31, so that there will
be
more clarity this year than there might have been last year.

REP. KELLY: Well, bear with me for a minute, how would you really do that?
What are we talking about. How can you get a type of transparency in that type
of transaction so that people understand why decisions were made, to do the
projections that they've done, and they can evaluate the sensibility of those
projections.

MR. BERARDINO: This is very difficult. It's very difficult because these are
highly sophisticated transactions that require a number of estimates and in
some
cases where there are not active markets day to day, that one can refer to. So,
it's not going to be easy. But I do think it's an area worth exploring and
we're
fully prepared to help in real time, to come up with some more clarity.

REP. KELLY: Did you ever ask the SEC for guidance on the Enron audits?

MR. BERARDINO: I don't remember, I wasn't directly involved --

REP. KELLY: Would there be somebody here who could advise you about that?

MR. BERARDINO: Perhaps. If you don't mind let me just check with my friends
here.

REP. KELLY: Feel free.

MR. BERARDINO: Thank you. The answer's, yes. On mark to market we were
heavily involved with Enron back in the early '90s, in working through with the
SEC how they might do mark to market on their portfolio. Very open
conversations
to try to get to the best answer and there have been consultations on many
different items, not just mark to markets, since then.

REP. KELLY: Did you find them forthcoming? Maybe you want to consult on that
one, too?

MR. BERARDINO: Did I find who forthcoming?

REP. KELLY: The SEC, were they helpful. Did they have guidelines? Were they
able to give you what you needed in order to do something that is complicated
and in bringing the mark to market --

MR. BERARDINO: It was a very -- you know, these are hard issues that you need
a lot of smart people in a room to try to figure out what's right. And that was
-- this was in the early '90s was, nil, and the SEC was very helpful in that
conversation.

REP. KELLY: Do you think the kind of environment exists at the SEC to
encourage public companies to seek their advice?

MR. BERARDINO: Well I think that that has varied over the years, quite
frankly. And in the past there's fortunately more of an adversarial
relationship
and less of a let's work this all out together, relationship, which I think the
current chairman is trying to change, and which frankly, we welcome, because it
is -- you know, many people think accounting is a science, where one number,
namely earnings per share, is the number, and it's such a precise number that
it
couldn't be two pennies higher or two pennies lower.

And I come from the school that says it really is much more of an art, that a
company like Enron, 500 million transactions going through Enron online. Highly
complex organizations where there is no one number. And one of the challenges
we
have and one of the reasons I think we have opportunities for reform here, is
the accounting model has traditionally been historic. And we told you what
happened, 90 days ago or a year ago. And most analysts, most investors, are
really interested in predicting the future. And we don't have an ability in our
present financial reporting model, mark to market is an attempt to get there,
to
give investors more current information on a more timely, real time basis.

I think this is a time for change and I think some of the stresses in the
system we have seen at Enron, not to understate them, will provoke all of us to
be thinking outside the box. So I think your questions are incredibly
appropriate. I wish they were easy to answer and I will tell you we are
prepared
to be part of the solution.

REP. KELLY: Thank you very much. I appreciate your being here.

REP. BAKER: Thank you, Ms. Kelly.

Mr. LaFalce?

REP. LaFALCE: Thank you, very much, Mr. Chairman, and I thank all the
panelists for coming here, especially you, Mr. Berardino, for stepping up to
the
plate.

It's not an easy task to be the number one person at the accounting firm that
is being looked at right now, but I commend you for the integrity of your
comments and the approach you're taking.

Let me just ask a few questions. First of all, any of you. What percentage of
CEOs, CFOs and members of audit committees, have their compensation, in large
part, based upon the market valuation of their stock?

MR. BERARDINO: Quite a few.

REP. LaFALCE: A very high percentage?

MR. BERARDINO: Yes, sir.

REP. LaFALCE: Okay. I would think that that creates a tremendous incentive on
their part, both the officers and the directors, especially the office
committee, to have a good market valuation and therefore to report good
earnings. Is that correct?

MR. BERARDINO: Well, Congressman, this is a paradox, isn't it? The
shareholders --

REP. LaFALCE: It's a fact, I think.

It maybe a subsequent paradox that's coming but --

MR. BERARDINO: It's a fact to some, but to others, the shareholders, don't
you want your CEO to help the stock price go up. I hope you don't want them to
have it go down.

REP. LaFALCE: So long as it's real rather than imaginary.

MR. BERARDINO: Of course.

REP. LaFALCE: That's the difficulty. So that my point is, simply, that there
really is a need, it seems to me for improvements in the system and you've
called for improvements. The question is, where do we start? And it seems to me
we have to start, at the issue of corporate governance. And what do we do to
bring some independence, I don't think you can bring it into the management
itself. But what do we do to bring independence into the audit committee of the
board? Or can there be some audit committee outside of the board? But some
committee that does not have a vested interest in doctoring earnings, because
of
the market valuation that will determine what there compensation is. I mean
it's
an outrageous conflict. My first question is, how do we deal with it?

Let me ask you to come back to that but I do think that's a very good
threshold question.

The second question is -- point, you made the statement, Mr. Berardino, that
it is a violation of the law to withhold information from the accountant
auditor, correct?

MR. BERARDINO: Yes.

REP. LaFALCE: Is that a criminal or a civil violation?

MR. BERARDINO: I'm not sure.

REP. LaFALCE: Okay. Well, in your prepared testimony, you said, "With respect
to the one SPE, the one that accounted for approximately 80 percent, the one
with the far larger impact, our audit team was not provided critical
information."

Now, applying the logic and syllogisms that I learned in my Jesuit days, it
would seem to me that you are therefore saying -- and that therefore Enron
violated the law in their relationship with you.

MR. BERARDINO: Congressman, I also have a Jesuit education --

REP. LaFALCE: That's why I referred to it -- (laughs).

MR. BERARDINO: I'm also taught to believe that we need to have all the facts.
And if I could shed some --

REP. LaFALCE: Well, you did say "it would appear."

MR. BERARDINO: Yes. To shed some color commentary, what had happened was that
the requirement for 3 percent equity from an outsider was met in one end of the
Enron house, and in a completely distinct other part of the house, a
compensating balance was offered to that same investor. And when you look at
the
two together, it flunks the test. Now, we don't know if that was willful or
not,
but once we had all the facts and the company had all the facts, we had to
restate the financial statements.

REP. LaFALCE: Mr. Hill -- my time is about to expire. Most companies who are
doing analysis of stocks use strong buy, buy hold, accumulate, sell, or what
have you, it's my understanding that in the year 2000 only 1 percent of all the
recommendations made by all the research firms were sell recommendations. And
that if you back half a dozen years or so, it was more like 6 percent. That's a
considerable decline. I have recommended to the SEC and others that every
recommendation be accompanied with at least one thing, and that is the number
of
recommendations a firm makes -- they make 200 -- and a statement recommending a
strong buy -- and 150 of our recommendations are strong buys, 25 are buys, 20
are hold and 5 are sell, or whatever it might be, I think that would be a good
idea and I'd like to know your thoughts on that.

Secondly, it took Mr. Baker two seconds to go to yahoo finance and tell you
that there are approximately 20 firms analyzing the stock right now, of which
two are strong buys and one is a buy -- what have you. What about if we
required
that any written recommendation of an analyst firm give you the number of firms
covering it, at least as of close of business yesterday, according to some
criteria, whether it's an SEC or First Call or what have you. And if they're
issuing it as strong buy, it would be interesting to know that there are 12
others that are recommending sells. We would like to know who they are.

REP. BAKER: Mr. LaFalce --

REP. LaFALCE: What are your thoughts on that?

REP. BAKER: Mr. LaFalce, let me suggest this, if I may -- I'm trying to help
members get on the record on this issue, particularly Mr. Bentsen and Ms.
Jackson-Lee before the recess.

REP. LaFALCE: Sure.

REP. BAKER: We have six votes, and I'm afraid we're going to be on the floor
for about an hour, and I feel very badly about having kept our witnesses here
all morning, and then keeping them here another hour into the evening. And I
understand perhaps one has another appearance which can't be missed anyway, at
4:00 o'clock. If it's with the committee's understand, Mr. Shays has waived his
time --

REP. SHAYS: Just one quick question.

REP. BAKER: Yes, Mr. Shays?

REP. SHAYS: I want to thank our witnesses. I understand that we are going to
have more hearings so it makes sense to close this hearing.

But I just want to say to you, Mr. Trumka, that I believe that you are going
to take your retirement funds and not invest them all in Treasury bills, thank
God, and I just have to say I hope with Social Security funds, that we also do
the same.

REP. BAKER: Thank you, Mr. Shays.

I'd like to suggest to the committee, two minutes to Mr. Bentsen, two minutes
to Ms. Jackson-Lee, call the meeting to a conclusion and let our witnesses go,
but with this caveat -- we have to have participation in future hearings. This
matter is too complex to have covered it even in a day. This has been just a
very light introduction to the subject.

Mr. Bentsen?

REP. BENTSEN: Thank you, Mr. Chairman.

I appreciate the panel being here and I have comments for Mr. Hill and Mr.
Trumka, but I'm going to have to do those another time.

Mr. Berardino, In your testimony, there are two things that stick out. One,
when you talk about the SPEs, and particularly the JEDI and Chewco SPEs, you
talk about no prohibition against company employees being involved as
investors.
That seems to me to be pretty closely related parties, and if the law doesn't
address that now it sure as hell ought to address that in the future.

And second of all, it would appear to me, on the issue of the International
Financial Institution, that, and you may not want to answer this, it looks a
lot
like a pretty contrived deal to create an off balanced financing vehicle that
really wasn't one. And if they didn't disclose that to you all as their
auditor,
then I think they got some real problems on their hands, and I think that may
be
a crux. And you may not want to address that.

The other thing which I think is a serious issue is on page 6, where you talk
about some people say we should have required the company to make more
disclosures about contingencies such as accelerated debt payments, which did in
part bring the company down, associated with the possible decline in the value
of Enron stock or changes in the company's credit rating. They ran some very
high octane structured deals, and that that was -- and the credit
consideration,
the credit covenant were critical to that company going, because they were
extremely highly leveraged.

How that could not be a material item for disclosure I don't know. And again,
you may not want to answer it. I assume this issue will come up at other
forums,
but it --

MR. BERARDINO: Well, I'll partially answer it, and there is some disclosure.
I will not say it's in neon lights, but there is some disclosure in the
derivatives area about the fact that this company relies on the confidence of
its trading parties, and frankly, one of the issues was what happens when
you're
treading parties till one trades with you, do you have a business. And it --
there is no requirement to anticipate every possible contingency in terms of
where a company's stock price might go, and we obviously understand your point.
I think it's one worth further exploration.

REP. BENTSEN: Well, my time is up, and I'll just say this. Stock is a pretty
volatile instrument, and to not treat it as such in disclosure -- disclosure is
only as good as in the eye of the beholder, and so I would hope that the
industry would look at that.

Thank you, Mr. Chairman.

REP. BAKER: Thank you, Mr. Bentsen.

Ms. Jackson-Lee?

REP. JACKSON-LEE: Mr. Chairman, I cannot thank you and the ranking members
and the full committee chairs and ranking member enough for your extreme
courtesies to me and to the colleagues on this committee for their extreme
courtesy, very briefly, because we all are learning, and I mentioned earlier
that they eyes of the nation are on us and Houston and particularly the pain
and
anguish that is experienced by those in Houston.

Mr. Berardino, thank you for your presence. Very quickly I just want to know,
as it relates to the information that you thought you got incorrectly or made a
mistake on the SPEs, what could have been done differently? Why did you probe
further when you thought you had the information. Were you just finding out you
had incorrect information when it's first in your testimony?

MR. BERARDINO: Well, thank you for your question, these are not easy issues.
On the 80 percent, where we didn't have all the facts, this is a very complex
company, they do lots of these deals. It's not like there's one a year that
everyone looks at, there are, you know, scores and scores of them. And
unfortunately, we just didn't have the information, and once we and the
company,
the accounting department, had all the information, we all knew what the right
answer was and unfortunately it was altered in every statement.

On the other issue where we made a mistake in judgment, at the time our team
made a very good face reasonable decision in terms of looking at these
transactions, and in hindsight they made an error in judgment. And let me be
clear, you know, in no way do we think this caused the collapse, but it's
unfortunate that, you know, with the thousands and thousands of hours of work
to
--

REP. BAKER: Twenty seconds, Ms. Lee, because we're running out of time to
make a floor vote.

REP. JACKSON-LEE: Thank you very much. Let me just say, Mr. Trumka, thank you
very much for being here. One quick word. How catastrophic is this to working
people?

MR. TRUMKA: We don't know the entire answer, but we can tell you that as far
as Taft-Hartley's are concerned, the Taft-Hartley Pension Funds have probably
lost a minimum of $250 million in stock and another $250 million in bonds. When
you put all of the pension funds together we're talking about 10s of billions
of
dollars. When you look at individuals, many individuals have had their entire
401(k) retirement benefit wiped out -- they are penniless.

REP. JACKSON-LEE: Thank you, Mr. Chairman. We just have a lot of work to do.
Thank you so very much.

REP. BAKER: Thank you.

We will return, after the Christmas recess, to this topic, the analysts
topic, transparency questions -- a long litany of issues. I wish to keep the
hearing record open an unusually long period, 30 days, for all members not only
to formulate further questions, but for interested parties to make comment. I
do
appreciate your courtesies in being here and your long standing patience
throughout the day.

We have to run, we've got less than 2 minutes to make this vote. Thank you.

END