Auditors Begin Duke Power Investigation

The Charlotte Observer
Ted Reed

After a month-long debate over just how much access they would have to company records and employees, auditors have begun reviewing Duke Power's accounts.

Letters between lawyers for Duke and an outside accounting firm detail the utility's effort to set tight parameters on the unprecedented two-state investigation.

The auditors, working on behalf of N.C. and S.C. regulators, are investigating a whistleblower's claim that Duke underreported roughly $100 million in profits from 1998 through last year. Duke's 2 million Carolinas customers could get a rate cut or a refund if auditors find the accounting changes that led to the underreported profits also resulted in overcharges.

In recent weeks, attorneys for the energy company and investigators have debated three overarching questions. At issue was whether auditors could copy documents without permission from Duke, whose computer software would be used, and under what circumstances Duke employees could be questioned.

While most points were resolved in time for auditors to start work Jan. 16, the correspondence, made public by the N.C. Utilities Commission, illustrates the natural tension between regulators and the corporations they monitor.

As a public utility, Carolinas regulators limit Duke Power's profits. If profits rise too high, the states can reduce consumer rates.

N.C. and S.C. regulators hired the Chicago-based firm of Grant Thornton last fall for a joint audit into the Carolinas' largest utility. They're hoping Grant Thornton will tell them why the underreporting happened, and whether deception was intended.

To do that, the accountants need Duke's help.

For its part, Duke says it is cooperating and already has welcomed auditors to Charlotte and given them 5,600 documents to peruse. Duke says it found no intentional wrongdoing in its own internal review.

The company wants to aid auditors, but also needs to protect its corporate interests, said spokesman Tom Williams.

"Confidentiality agreements in audits such as this when proprietary information is being shared are very common," Williams said. "We mutually agreed to the confidentiality agreement Jan. 14, and the audit is now well underway.

"The agreement in no way limits the auditors access to any information they want to review. It only limits their ability to share that information with others."

Two outside accounting experts, however, said the conditions Duke sought seemed more restrictive than typical audits.

That's because unlike typical regulatory reviews, this is more an investigation than a routine accounting check. Grant Thornton's roster of auditors working in Charlotte includes several accountants who specialize in forensic work.

In its initial records request, Grant Thornton asked for all ledgers, spreadsheets, payroll registers, e-mails and internal memos related to the 1998 accounting changes. Auditors also asked for transcripts of all calls made to Duke's ethics hotline over the last five years.

Edward Ketz, an associate accounting professor at Penn State, said state-mandated audits such as this tend to involve more negotiations about access and procedure than routine audits. But he noted that the conditions sought by Duke were "the most restrictive I've ever heard about."

Paul Chaney, a former analyst, said Duke's position may reflect suggestions from cautious company attorneys.

"If you look at this as an individual would, it seems like they are hiding things, when in reality there may be no problems at all, said Chaney, now an associate accounting professor at Vanderbilt University.

In a routine audit, accountants agree to a strict code of confidentiality with their clients. In exchange, they expect complete access, said Chuck Landes, director of audit and attest standards for the 330,000-member American Institute of Certified Public Accountants.

"In an audit conducted under generally accepted auditing standards, there should not be any restrictions placed on the auditor. If restrictions were placed, that would be a red flag," Landes said.

"Recognize, though, that this audit sounds like something very, very different than an audit of historical financial statements."

Citing the need to protect corporate interests, Duke lawyers originally sought a blanket confidentiality agreement over documents - an agreement that regulators and outside experts say could have made it difficult for Grant Thornton to do its job.

"Clearly to try to assume that everything is a trade secret is not something Grant Thornton could live with," said Gary Walsh, executive director of the S.C. Public Service Commission. "If they'd taken ...the original proposal, Grant Thornton would have been doing an investigation and then, when they turned something up, there's a chance they couldn't have told us."

Walsh said some of regulators' early negotiations with Duke over the conditions of the audit were "very difficult."

"We've never really had an audit like this, so it's hard to know what's standard," Walsh said.

Early disagreements centered on these points: o How many people have access to records: In its first letter on the subject, dated Dec. 14, Duke proposed that all documents provided to auditors be treated as confidential.

Access would be limited to five Grant Thornton representatives, who could not copy documents or show them to other people without Duke's approval.

Auditors rejected this. In a Dec. 20 letter, Grant Thornton lawyer Stephen Higgins said the company "isn't in any position to be executing any confidentiality agreements," since the N.C. and S.C. utilities commissions had both "already rejected Duke's request for a confidentiality agreement."

(The commissions rejected complete confidentiality with Duke last fall in responding to a public records request from The Observer.) According to the compromise signed Jan. 14, a few select categories of documents - including claims settlements, confidential contracts, non-nuclear insurance premiums and computer server addresses - will be kept secret.

All Grant Thornton employees working on the audit will have access to Duke records. Auditors will be able to copy whatever they chose.

- Use of computers: Duke also resisted giving investigators the right to download information from its files. Grant Thornton wanted the ability to run Duke's numbers through its own auditing software.

A compromise allows Grant Thornton to run its software using a Duke terminal, but not to retain a hard copy of Duke's accounting ledger.

- Access to employees: Initially, Duke said a single employee would be available to answer Grant Thornton questions. As to other employees, "Grant Thornton may not interview or otherwise question any Duke Power employee outside the presence of Duke Power's counsel," wrote Duke lawyer Homer Deakins.

That's a sticky point. Regulators learned of the accounting irregularities from a whistle-blower, whose identity remains unknown to most Duke officials.

After several rounds of negotiations, Duke agreed to allow Grant Thornton to interview employees without a Duke lawyer in the room.

But if a Grant Thornton lawyer is present, a Duke lawyer must be too, said Duke's Williams.

Also under the agreement, Grant Thornton must contact a designated Duke official to arrange access to employees, a restriction Walsh said is common.

The auditor and regulators have retained the right to depose employees if they can't arrange more formal access.

Auditors began their work on Jan. 16, in a conference room in the First Citizens building, a few blocks away from the accounting offices in the Duke Power building.

In an early conversation with Duke, Grant Thornton auditors asked for a tour of the accounting department.

In a letter, Duke lawyer Deakins said they could walk through the department, with two conditions: only two auditors could visit, and two Duke employees must accompany them. They would not be allowed to speak to any Duke employees except for those accompanying them.

The auditors haven't asked to schedule a tour of the accounting department yet, Williams said.

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