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.
8 thoughts on “Too Late”
Every … (and law firm) uses a shredder.
I have been a lawyer for a very long time. I have excaveted a large number of files. I have never seen any evidence that a lawyer has ever thrown away anything. Not even old sandwich wrappers. They know they should, but they don’t. Once a matter is closed, they don’t want to spend time tyding up the files.
Your “key question” is really not even THE key question.
The real question is whether the firm should be held responsible for the acts of a band of hooligans on the payroll. In other words, assuming there were illegal acts, was the problem systemic? That is, were the policies & procedures, compensation & reward structures so flawed as be be criminal? Were the firm’s compliance efforts criminally negligent, or actively attempting to subvert the law?
I am an Arthur Andersen alumn from NYC. My group was above-board. In fact, the partners leading my group were risk-averse to a fault. They went above and beyond legal and ethical guidelines. But the conviction basically said that they are partly to blame for the acts of some jerks in Dallas and Chicago.
In this case, I think the appropriate action would have been aggressive convictions of individual partners and a civil action against the firm.
Both questions are important.
I’m acquainted with someone who was an AA partner and is now retired. This individual, like Stephen W. Stanton, worked in a part of the firm that had nothing to do with any illegal acts, and is now basically screwed. If the partnership consisted of a few people I would say: too bad but when you became a partner you accepted the risk that something like this would happen. But what if there are so many partners, and the company is so big, that no individual partner can possibly even be aware of every potentially malfeasant employee? Perhaps partnership is ultimately an unworkable organizational form for large, big-liability enterprises.
(BTW, and ironically, the same impossibility of achieving perfect oversight also exists for executives of large public companies, which is one reason why Sarbanes-Oxley is such a bad law.)
Veramente bravi i ragazzi di Chicago!
Non sapevo che Enrico Fermi fosse uno di loro. Ne sono entusiasta.
Long John Smith
Being an Andersen alumn, every interview I’ve been on since Andersen’s collapse, the people have known that it was a few bad apples vs institutional corruption. My present employer has granted political asylum to quite a few Andersen alumni. It hasn’t hurt me professionally. If anything it’s a free punchline on my resume for the more jovial prospective employers. “Why yes, I did work in the Houston office… in the energy sector…”
I do feel sorry for the retired Andersen partners. As I understood it, the pension was funded in-house. Therefore as went Andersen, so went their pensions. I knew only a handful of the partners obviously, but they were by and large upstanding, good people. I didn’t quite appreciate it at the time since I was young and naive, but it was a great place to work for kids straight out of college.
Whether it is “fair” that innocent people lost jobs at Andersen because of the misdeeds of a few is somewhat beside the point. Plenty of people lost jobs at Enron, too, who had nothing to do with what Skillings, Lay, et al. were doing. Ditto for Laventhal & Horwath some years back, and since that was before the LLP form of organization, many of them were utterly ruined.
I know many Andersen alumni who are very good accountants, careful and honest. Looking at one bad audit after another (Enron, WorldCom, Global Crossing), though, makes me think there was something systematically wrong at the top. I wonder if the long internicine war against their former consulting business partners (now Accenture) had something to do with it. I’m reluctant to let the top Andersen management off the hook.
My running joke at the time was, short the Andersen client roster.
Us grunts may never know if AA was rotten at its core. I bet the Accenture partners were glad they got out. Their plan is vindicated.
Conviction or no conviction, Andersen was the auditor for Sunbeam, Waste Management, Baptist Foundation, McKesson HBOC, Global Crossings, Enron and WorldCom. Draw your own conclusions.
Did you know – Andersen raised the capital contribution from $2000.00 to $50,000.00 in 2000 for all new (and existing) non-equity partners and that Andersen admitted 800 new partners in 2001? Do the math. There were obvious cash problems. No wonder they didn’t drop Enron as a client.
Andersen knew the train was in run away mode but the leadership could do nothing to stop it.
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