Andersen is drawn into Enron controversy

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Andersen considered dumping Enron a year ago

The scandal surrounding the collapse of Enron, the Texas energy company, threatened to overwhelm the accountancy firm Arthur Andersen, as fresh evidence emerged of the company's complicity in concealing Enron's financial health as well as its own potentially embarrassing ties to the White House.

Andersen's credibility as one of the world's big five accounting firms has already taken a big hit following the revelation the lead auditor on the Enron account ordered the destruction of hundreds of documents in the weeks leading up to the unravelling of Enron's finances late last year.

The auditor, David Duncan, has been fired, three others have been suspended and four senior partners at Andersen's Houston office have been "relieved of their managerial duties". It seems doubtful, however, that the damage to Andersen's reputation will stop there, following testimony by Mr Duncan before a House investigative committee in Washington that he went ahead with the shredding on the recommendation of company lawyers.

According to Mr Duncan, discussions on which Enron-related documents should be destroyed began in September. The shredding started sometime after that – the timing is disputed between investigators and Andersen – and continued until 9 November.

Andersen has sought to portray the debacle as an "error of judgement" by a few of the company's 85,000 employees. In a full-page newspaper advert published on Wednesday, Andersen's chief executive, Joe Berardino, promised "steps would be taken to prevent a recurrence of these events".

The latest congressional testimony, however, suggests company executives discussed dropping Enron as a client as early as February last year because of suspected irregularities.

In August, about the same time as a manager at Enron, Sherron Watkins, was laying out her concerns about the company's finances to Enron's chairman, Kenneth Lay, she also contacted an old friend at Andersen and said there was the possibility of an "elaborate accounting hoax" going on at her workplace.

Despite these warnings, Andersen continued to stand by Enron's published financial reports until November, when it finally emerged that some $600m (£420m) in company debt had been concealed during several years of an elaborate system of semi-concealed overseas subsidiary companies.

Yesterday, it emerged that, with Andersen's help, Enron did not pay a penny in income tax in four of the five past years. It avoided it by creating a web of 881 subsidiaries in such tax havens as the Cayman Islands, Mauritius and Bermuda.

Financial experts have been stunned by the degree of Andersen's complicity in the questionable practices of its client, and have begun questioning Andersen's ability to hold on to its business under a barrage of such negative publicity.

Questions will no doubt be asked, too, about which documents Andersen chose to destroy and why. Much publicity has been given in recent days to the presidential campaign contributions that Enron's chairman Mr Lay gave to George Bush. A report by the Centre for Responsive Politics, an independent group that tracks the money behind political campaigns, pointed out yesterday that Andersen actually gave more to the Bush campaign than even Enron.