Outcome of Andersen trial may hinge on credibility of chief prosecution witness

As the trial of Andersen enters its second week, the outcome for the once-mighty audit company hinges on how the jury interprets the motive of chief prosecution witness Mr David Duncan.

Mr Duncan (43), the lead auditor on the Enron account, testified yesterday that 19 senior partners at the company discussed irregularities in Enron finances last year, and saw the case as "problematic" for the audit firm.

In his second day on the witness stand, Mr Duncan said Andersen partners were worried about more scrutiny by regulators, who had already placed Andersen on probation for sloppy audit practices.

On Monday, the accountant admitted he shredded documents last November to thwart a federal investigation into Enron's collapse. "I obstructed justice, I instructed people on the Enron engagement team to follow the document-retention policy, which I knew would lead to the destruction of documents," he told the court in Houston, Texas.

However, Andersen's defence lawyer, Mr Rustin Hardin, argued that the company did not break the law and that Mr Duncan shredded documents out of fear that he might be dismissed by Andersen for shoddy work on his audit at the Houston energy trading company.

To counter this, US Justice Department prosecutor Mr Andrew Weissmann asked Mr Duncan about his importance at the accounting firm. Mr Duncan testified that he was ranked in the top 10 per cent in performance reviews and earned $700,000 (€775,451) last year. He had been placed in charge of the audit at Enron, one of Andersen's top five clients, and was on the chief executive's advisory board.

Mr Duncan's own future depends on how well he performs in making the case that his former employer was guilty of obstruction of justice. Having pleaded guilty to the same charge, he faces 10 years in prison but any sentence could be erased or reduced on the basis of his co-operation.

The outcome of the trial before Judge Melinda Harmon also depends on the interpretation of Andersen's document retention policy, which is at the heart of the case.

Prosecutors claim that an unusual e-mail advising strict adherence to the policy and distributed company-wide by in-house lawyer Ms Nancy Temple on October 12th, amounted to an implicit order to destroy documents.

It was issued five days before a Securities and Exchange Commission inquiry into Enron's collapse, which would have required production of all materials relating to the energy firm's account.

The defence argued that the policy merely instructed staff to keep germane material and discard redundant or unnecessary papers and computer files.

Ms Temple refused to testify last week, exercising her Fifth Amendment against self-incrimination. However Andersen partner Ms Amy Ripepi gave evidence that it never crossed her mind that document destruction was being ordered by the e-mail or that anyone in the firm believed an SEC inquiry was imminent.

If found guilty, Andersen faces a bar on auditing publicly-traded companies and a fine of up to $500,000, as well as a penalty of up to twice any gains or damages the court determines were caused by the firm's action at Enron.

Meanwhile, the crisis of confidence in the integrity of the US energy sector sparked by Enron's collapse has deepened following the admission by another Houston energy company, Reliant Resources, that it had used Enron-type counterfeit trades to bolster earnings by 10 per cent last year. Dynegy and CMS energy made similar admissions last week.

Reliant's share value dropped 17 per cent on the news. The SEC is investigating trade practices at all 150 US energy companies.