Andersen's guilty verdict puts chill on other boardrooms
The decision worries many by penalizing the whole firm for one worker's deed.
The guilty verdict against Arthur Andersen this weekend sends a stark signal to the accounting profession and to corporate America at large: The excesses of the 1990s are over.
Especially troubling to companies is verdict's confirmation of government's position that the actions of a single employee can leave the whole firm criminally liable.
The conviction, for obstructing justice in the federal inquiry into the Enron bankruptcy, hastens the collapse of Andersen, long one the nation's premier accounting firms, and leaves other firms worrying that actions by employees could prove similarly damaging if new scandals emerge.
While it took the largest corporate bankruptcy in US history to spur the Justice Department into action, it's clear that other companies will be at risk if they engage in similar business practices. This represents a sharp climate change after a decade when American business was flying high and few people paused to questions their bookkeeping.
"One of the primary reasons the government refused to settle this case is because it wanted to send a message to corporations and the community at large," says Christopher Bebel, a former federal prosecutor who specialized in securities fraud. "It wanted to make clear that firms which are unduly aggressive and continually push the envelope are going to be held accountable if they go too far; that they will pay the price even if it means the death knell for their company."
Mr. Bebel, now with Shepherd, Smith & Bebel in Houston, says that with Saturday's guilty verdict and the government's continued probing into both Andersen and Enron, overly aggressive companies will get the message and pull back.
"In the past, a huge firm like Andersen could not be brought down by the actions of a single person, but by the combined actions of many people," says Bala Dharan, an accounting professor at Rice University in Houston. "This is going to put a real chill in many companies' minds."
He sees it as a positive and necessary step given the excesses of the 1990s. "It should cause a lot of companies to really rethink what is it that is ... acceptable behavior, both in financial reporting as well as normal businesses practices."
Whether or not Andersen wins on appeal, experts agree the damage to the 89-year-old accounting firm has already been done. So far, almost 800 of its 2,300 clients have fired Andersen, and the company has resigned itself to losing its auditing business entirely. It informed the Securities and Exchange Commission Saturday that it would cease auditing public companies by Aug. 31 unless the SEC requests a different date. Thus, the Oct. 11 sentencing will be a mere formality: The company faces up to five years probation and a fine of up to $500,000.
Andersen's workforce has gone from 26,000 employees in March to 10,000 today, and the company says more pink slips are on the way.
"This was not a victimless crime," says Bebel, noting that Houston has "felt so much pain over the collapse of Enron, with the loss of jobs and savings of retirees wiped out." In closing its case, the government said Andersen's paper-shredding would make Enron harder to prosecute.
But in the end, jurors said they did not believe Andersen's destruction of documents or e-mails was illegal. They did find obstruction by an in-house lawyer Nancy Temple, when she requested that lead Enron auditor David Duncan remove her name from a memo related to the company because it would increase "the chances that I might be a witness, which I prefer to avoid."
The fact that the case was won on the basis of this seemingly insignificant action, not on the expected evidence regarding Mr. Duncan's document destruction, may add to trepidation in offices beyond Andersen.
Experts say charges against Enron, for one, are not far off. They will most likely focus on the limited partnerships and special-purpose entities. The government's will likely try to turn some Andersen executives into witnesses against Enron.
But the government's Andersen victory may not translate into further wins.
The issues at Enron are very different, says Dr. Dharan. And, it's easier for average citizens on a jury to understand the altering of memos than whether complex asset transfers were valued properly.