Catch-43

The untimely demise of Andersen

Of course, one of the biggest victims in the Enron debacle was Arthur Andersen - the king of the accounting firms. What Enron Task Force lawyers initially though would be an easy takedown became a widely publicized legal battle which ended with the indictment and conviction of an entire firm.

Why did this happen? For starters, the case against Enron was probably dead in the water without the help of Andersen accountants. The government figured that it would bring pressure to bear on the firm for a large settlement, possibly indict some of the top partners on the Enron account, and that Andersen would cooperate fully with the investigation. However, the leadership at the firm was unable to agree with the government on the terms of the settlement, choosing to fight instead. Rarely has there been so much pressure on the prosecution to produce a victory. By late 2002 no criminal sentences had been handed out to an American public eager for blood.
During the course of the trial, the myth of the sinister accountant with a Masters in Shredding embedded itself in the public consciousness (and the minds of the jury). Andersen was alleged to have smelled trouble brewing at Enron and shredded everything they could - even as they knew an investigation was coming. Background:

Andersen’s conviction arose out of its destruction of evidence pertaining to its
audit work for Enron just as the Enron scandal was emerging. In August of 2001,
shortly after Enron’s CEO, Jeffrey Skilling, resigned, Enron’s senior
accountant, Sherron Watkins, warned newly reappointed CEO, Kenneth Lay, and two
Andersen partners of looming accounting problems. By August 28, 2001, potential
improprieties at Enron were reported in the Wall Street Journal and an informal
investigation was opened by the SEC. By early September, Andersen had formed a
"crisis-response" team including in-house counsel, Nancy Temple, and by October
8, Andersen had retained outside counsel in connection with potential
Enron-related litigation. The next day, Ms. Temple’s notes reflect that an SEC
investigation was "highly probable."
Nevertheless, on October 10, one of the
two Andersen partners who was warned by Ms. Watkins spoke at a general training
meeting that included personnel on the Enron engagement team and urged
compliance with Andersen’s document retention policy. This
partner expressed
the view that destruction of evidence under the policy would be "great" if
litigation were to be filed the next day. Two days later, Ms. Temple sent an
e-mail to the same partner indicating that he should "remind the engagement team
of our documentation and retention policy."
One day after Enron’s October 16
announcement that it would take a $1.01 billion charge to earnings, the SEC
notified Enron of the investigation and requested documents. The SEC’s request
was forwarded to Andersen on October 19. The same day, Ms. Temple sent an
internal e-mail attaching a copy of Andersen’s document retention policy. During
a call with the crisis-response team the next day, Ms. Temple instructed
everyone to "make sure to follow the . . . policy." Three days later, Mr. Lay
declined to answer questions during an analyst call because of "potential
lawsuits, as well as the SEC inquiry." After this call, the head of Andersen’s
audit engagement team for Enron instructed other partners on the team to ensure
that team members were complying with the policy. Substantial destruction of
paper and electronic records ensued. Even after the SEC opened a formal
investigation on October 30, the destruction continued until one day following
service of a subpoena by the SEC.

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A funny thing happened on the way to crucifying an entire firm for the sins of a few: the jury was given instructions which made it impossible to acquit!

The jury was instructed that Andersen could be convicted even if it honestly and
sincerely believed that its conduct was lawful. The Supreme Court held that it
was improper to convict Andersen without instructing the jury that a conviction
requires knowledge of the wrongdoing.

The Supreme Court overturned the conviction in 2005. Cold comfort to the thousands of Andersen employees who had nothing to do with Enron but lost their jobs. What a shameful debacle, and very illustrative of how a treacherous political environment can destroy lives.

As a side note, the length and the complexity of the trial slowed down the Enron investigation immensely, and is the main reason that Lay and Skilling are only now in a courtroom on trial.

posted by JM @ 5:50 PM