Posted by Mitch Townsend on May 31st, 2005 (All posts by Mitch Townsend)
Arthur Andersen received a bit of posthumous vindication yesterday when the US Supreme Court overturned their conviction on a charge of obstruction of justice. The jury, in later interviews, cited the destruction of documents as evidence of wrongdoing. Andersen was far from innocent, but I believed at the time that they had been convicted of the wrong crime. At the end of an audit, every bit of paper must be either (a) put in a workpaper binder, signed, reviewed, and put into storage; or (b) destroyed. Preliminary drafts and CYA files are not permitted in any accounting firm. The firm must stand behind its work product and have the “sufficient competent evidential matter” to document its audit opinion, and be able to support its reasoning. Alternative arguments and preliminary drafts are subject to discovery in legal proceedings, and keeping them undercuts the final decision. Every accounting firm (and law firm) uses a shredder.
The key question, which was not settled at the trial, was whether Andersen continued to destroy documents after it believed they would be used in an investigation. At some point, Enron was known to be a “busted audit” and an investigation was inevitable. The shredding should have stopped then.