Patrick Probst                                                                                                 

 

Morality

 

April 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arthur Andersen and the Fall of Enron

 

           

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

            On June 15, 2002 the accounting firm Arthur Andersen LLP (Limited Liability

 

Partnership) was convicted by the Department of Justice of obstructing justice by

 

shredding papers related to their audits of Enron. Prior to this business scandal, Arthur

 

Andersen was one of the Big Five international accounting firms. With this conviction,

 

the company surrendered its license practice. Although the Supreme Court overturned the

 

conviction of Arthur Andersen, the firm lost nearly all of its employees and clients.

 

Arthur Andersen still, however, employs nearly 200 people in its lone office in Chicago

 

to handle the lawsuits against the firm.

 

            Andersen, Delaney and Co. was founded in 1913 by Arthur Andersen, a

 

Norwegian immigrant, and Clarence Delaney. The company was headed by Andersen, a

 

young enthusiastic graduate of Northwestern University’s business school, and began to

 

grow in clientele and branch offices. Andersen’s primary focus was honesty and argued

 

that the company’s responsibility was to investors not their clients. Beginning in the

 

1980’s the reputation of Arthur Andersen LLP began to slip. With competition from other

 

firms, Andersen sacrificed honesty for a profit. As a result, the auditing firm tripled the

 

per-share revenues of its partners, making it a part of the top accounting firms on the

 

globe. With the dilemma of balancing its faithfulness to accounting standards with its

 

clients' desire to maximize profits, particularly in the era of quarterly earnings reports, the

 

company began to stray from its roots in order to maintain its prestige and power, even if

 

it mean dishonesty.

 

            Beginning in 2001, Enron incorrectly valued themselves at $106.5 billion.[1] In the

 

following six months, the value of the Houstan based company dropped $70 billion.

 

According to Robert Bryce the cause of this drop was due to “key leaders at Enron who

 

lost their moral/ethical direction and at the same time were making multi-billion dollar

 

bets on fatally flawed projects.”[2] On June 30, before the CEO abruptly resigned and the

 

stock price began its terminal decline, 64 percent of Enron’s 744 million shares were

 

owned by institutional investors, mainly pension funds but also mutual funds in which

 

families have individual accounts.[3] At the beginning of the third quarter, the price of

 

Enron’s shares was virtually zero and the company had lost American families $70

 

billion in savings. The fall of Enron took with it the jobs and pension savings of

 

thousands of workers and inflicted losses on millions of individual investors. At the heart

 

of Enron's demise was the creation of partnerships with shell companies. These shell

 

companies, run by Enron executives who profited richly from them, allowed Enron to

 

keep hundreds of millions of dollars in debt off its books. But once stock analysts and

 

financial journalists heard about these arrangements, investors began to lose confidence

 

in the company's finances. The results: a run on the stock, lowered credit ratings and

 

insolvency. Wanting to maintain their power and standing with their client, Andersen

 

didn’t report the loses of the company earlier in that year. Following the plummet of

 

share value, Arthur Andersen became more involved in Enron’s status in order to protect

 

themselves. In the fall of 2001, Arthur Andersen directors ordered their employees to

 

destroy any documents that showed the truth of the Enron financial situation or the cover

 

up happening within their offices.

 

            According to John Coffee, professor of corporate law at Columbia University,

 

prior to their bankruptcy, “Enron had overstated its income for more than four years, The

 

question is whether this was the result of negligence or an intent to defraud.”[4]

 

Investigators believed that Andersen shredded papers and destroyed computer files

 

proving their guilt in the scandal. Even employees at the accounting firm and David

 

Duncan, director of the Enron auditing team, admit to taking part in the shredding of

 

important documents. However, the decision for the jury was whether this was a crime or

 

not. Earlier, Arthur Andersen signed a consent decree growing out of fraud at Waste

 

Management, failed to catch major fraud at Sunbeam and paid $217 million to settle a

 

case involving the Baptist Foundation of Arizona. It also faced huge liability for the

 

collapse of Global Crossing.[5] The overwhelming presence of unpunished scandal within

 

the business world brought up the question, at least to the defense attorney Rusty Hardin,

 

of whether what Andersen was doing was a crime or not. Differing from most

 

prosecutors and even employees within the accounting firm, Rusty Hardin said that “the

 

firm was disappointed by the verdict.” He said it would file an appeal but had to wait

 

until after the sentencing date to do so. He even added that, “this company did not

 

commit a crime.”[6]

 

            The key leaders within Arthur Andersen who orchestrated the efforts to shred

 

important documents and computer files were David Duncan and Nancy Temple. The

 

crucial piece of evidence that caused the premature conviction of Arthur Andersen LLP

 

was the October 16 memo between these two directors. In this memo, Nancy Temple

 

says, “I recommend deleting reference to consultation with legal group and deleting my

 

name on the memo. Reference to the legal group consultation arguably is a waiver of

 

attorney-client privileged advice and if my name is mentioned it increases the chances

 

that I might be a witness, which I prefer to avoid.”[7] Duncan and Temple combined efforts

 

to purge the firm of any liability for Enron by ordering their employees to, “Instead of

 

being advised to preserve documentation so as to assist Enron and the SEC,”[8] the

 

indictment says:

 

                        “Andersen employees on the Enron engagement team were instructed by Andersen partners and others to destroy immediately documentation relating to Enron, and told to work overtime if necessary to accomplish the destruction. During the next few weeks, an unparalleled initiative was undertaken to shred physical documentation and delete computer files. Tons of paper related to the Enron audit were promptly shredded as part of the orchestrated document destruction. The shredder at the Andersen office at the Enron building was used virtually constantly and, to handle the overload, dozens of large trunks filled with Enron documents were sent to Andersen's main Houston office to be shredded.”[9]

 

            As a result of the Enron scandal of 2002, both Enron and Arthur Andersen lost

virtually all of their clients, employees, and offices. As for all of the share holders in

Enron, they lost $70 billion due to the lies and deceit of both Enron and Arthur Andersen.

The employees of Enron who were not aware of the failing financial status of their

company lost not only their jobs but all of their 401k plans and other retirement savings.

            The United States Supreme court overturned the conviction of Arthur Andersen in

2005 after reviewing their case. The courts felt that the jury convicted the accounting

firm without proving that they had committed a crime or that there had been a link

prohibiting the destruction of documents. Maureen Mahoney, attorney for Andersen, told

the justices “the government used improper legal definitions that made it impossible for

the defendants to get a fair verdict.”[10] The case came down to the legal statutes which

said that the case must be corruptly persuading which according to Chief Justice William

Rehnquist is “in itself innocuous.”[11] Although the firm’s conviction was overturned, the 

verdict came three years too late, thus transforming Arthur Andersen LLP from a thriving

Big Five accounting firm with twenty-eight thousand employees to a single office with

few clients and a staff of two hundred.

           

Notes