Duncan: I knew shredding would kill off Andersen

David Duncan, Arthur Andersen's former lead auditor on the Enron account, told a court yesterday he knew last June that his firm was in effect on probation after two other irregular audits – and that a further offence could bring heavy punishment from regulatory authorities.

Mr Duncan, who admits shredding Enron-related documents over a three-week period last autumn, was testifying on the sixth day of Andersen's federal trial in Houston on obstruction of justice charges, at which he is the star witness for the prosecution.

After being fined a record $7m last year for approving inflated profits at Waste Management and facing a inquiry into another client, the appliance maker Sunbeam, for similar reasons, Andersen knew it faced "more serious penalties if the firm did something similar," Mr Duncan said.

He confirmed the existence of an internal Andersen memo sent in June 2001, which admitted that "Our reputation has been damaged" by what had happened.

The testimony of Mr Duncan, 43, is designed to buttress the US government's contention that the accounting firm had clear motive to launch a systematic effort to destroy potentially compromising Enron-related documents, as the giant energy group's arcane finances unravelled last autumn.

After being forced to restate previous quarterly earnings and write down shareholder equity in October, Enron filed for bankruptcy on 2 December 2001. The collapse is now the subject of a Justice Department investigation for criminal fraud.

The details provided by Mr Duncan yesterday dovetailed with the assertion in court last week by a senior official of the Securities and Exchange Commission, the stock market watchdog, that Andersen knew it could afford no further slip-ups. When the $7m Waste Management fine was levied, Andersen had accepted a "permanent injunction" barring it from future wrongdoing, Thomas Newkirk, an SEC enforcement official, said.

Mr Duncan also confirmed that as early as February 2001, 14 Andersen partners held a conference call to discuss whether to keep Enron as a client, amid doubts about some of its activities and the aggressive accounting techniques which the company insisted upon.

Mr Duncan's testimony, which is certain to be followed by a ferocious cross-examination by the lead defence attorney Rusty Hardin, is likely to throw new light on the dubious financial practices that led to the Enron collapse. As such it may have a bearing on any future criminal charges against senior Enron executives.

For Andersen, however, what matters right now is the credibility of Mr Duncan. If the jury is convinced the destruction of Enron audit material was ordered by head office in Chicago, as Mr Duncan will maintain, its prospects will be grim.

Mr Hardin's task is to undermine this theory and show that Mr Duncan was running a rogue operation in Houston. After Enron fell apart, he changed his story and made a deal with prosecutors to save himself from a prison sentence of up to 10 years. If Mr Hardin fails and Andersen is convicted, it faces a $500,000 fine and five years suspension.

The picture of Mr Duncan that has emerged so far is of an Andersen high-flyer, in charge of the lucrative Enron account, which in the year to 31 August 2000 generated $58m of revenues in auditing and consulting fees. He was among the partners regularly consulted by Joseph Berardino, Andersen's chairman until he resigned in March.

His testimony came as courtroom tempers continued to flare. Yesterday's proceedings began with prosecuting attorneys asking Judge Melinda Harmon to order the flamboyant and outspoken Mr Hardin to stop referring to them as out-of-town lawyers from Boston and New York.

Matt Friedrich, for the government, accused the unmistakably Texan Mr Hardin of trying to ingratiate himself with home state jurors. But Mr Hardin, who has accused his opponents of being "whiners", remains unrepentant. "These guys never understood the First or Sixth Amendments," he said as he left court on Monday evening, referring to the US Constitution's guarantees of free speech and a fair trial.