Losses actually had been mounting for at least a year and had been wrongly recorded, Chicago-based partner Ben Neuhausen told a federal jury in the firm's obstruction-of-justice trial.

"It was a balance sheet error that Arthur Andersen didn't correct," said Neuhausen, whose arm of the firm reviews and advises auditors in Andersen offices. "A billion dollar debit needed to find a home. It was classified as an asset incorrectly."

Federal prosecutors contend that Andersen employees in Houston, knowing a federal investigation of Enron's finances was imminent, shredded crucial documents in October and November.

But under cross-examination from defense attorney Rusty Hardin, Neuhausen said that in discussion and correspondence between Chicago and Houston, the prospect of a federal probe was never raised. There was also no communication about the shredding of key papers, and Neuhausen said he had no idea that documents were being destroyed last fall in Houston relating to Enron.

Neuhausen has worked for 17 years in Andersen's professional standards group. He said last September there were "extensive discussions" with Andersen auditors in Houston about Enron's dramatically poor third-quarter earnings.

Chicago partners disagreed with counterparts on the Enron account who wanted to paint the loss as "non-recurring" on Enron's balance sheet. The distinction is crucial to investors and analysts, who follow the company's performance and look for signs of longtime problems that can send stock prices plummeting.

"The term non-recurring was misleading," Neuhausen said.

Still, last fall Enron classified its loss that way after David Duncan, an Andersen partner and lead Enron auditor, stretched the limits of Andersen's standard accounting practices, Neuhausen said.

"He pushed to excess on aggressive interpretation," Neuhausen said.

Duncan, the government's star witness, is expected to testify in a few days. He pleaded guilty in April to an obstruction charge and has admitted to shredding papers while knowing of a pending federal investigation.

But in reviewing the work of Duncan's team and Enron's balance sheet, Neuhausen's group became especially concerned about the finances of four partnership entities.

-- E.A. Torriero