Trial, Day 5: Sharpening the corporate pencil

Defense lawyers in the Ken Lay/Jeff Skilling trial kept trying to undermine the credibility of Mark Koenig, the first government witness, Tuesday.

Daniel Petrocelli, Skilling's lawyer, grilled Koenig about his testimony that Skilling OK'd artificially inflating Enron's earnings in 1999 to meet investors' and analysts' expectations. Petrocelli tried to get Koenig to admit that increasing earnings by one cent wasn't wrong:

Petrocelli said earnings estimates are just that: estimates. And that management can sometimes go back and "sharpen its pencil" to make adjustments.

Koenig disagreed.

"That is wrong," Koenig said. "Based on the fact that a consensus estimate has changed it’s wrong (for management) to go back and sharpen the pencil."

Petrocelli asked Koenig if he knew how the accounting department made up for the one penny difference, which, if not adjusted, would have caused a drop in the company's stock price.

"I was not in accounting when they were adjusting the number, no," Koenig said.

Petrocelli had Koenig read the following phrase out of the company's annual report: "Some amounts are based on the best estimates and judgments of management."

Koenig testified last week that Enron changed its earnings estimate so it could meet analysts' expectations. Houstonist is no expert on corporate finance, but it seems to us that changing earnings reports simply to meet expectations falls short of the "best estimates and judgments of management." If things were really that loose, why would any company ever report that it wasn't meeting expectations?

Petrocelli also zeroed in on Koenig's testimony about a 2001 analyst conference call concerning Enron's wholesale business, which sold three power plants in the second quarter of 2001 for a profit of about $418 million. Koening said the company didn't report how much the sale contributed to its bottom line because the profit "was not consistent with the story" that Enron was giving investors. When asked how much Enron earned from the sale, Skilling told analysts, "We don't even track that." Koenig said Skilling was lying.

On cross-examination, Petrocelli asked Koenig if he "knew for a fact" that Skilling knew he was lying when he said that.

"There's no way I can know for a fact what he had in his head," Koenig said.

"So you made an assumption that he knew because of availability of information you had?" Petrocelli asked.

"That I and others had," Koenig said.

Koenig is expected to remain on the stand for cross-examination the rest of the week.