Commentary

Arthur Andersen Conviction Overturned: Too Little Too Late.

The Supreme Court overturned the 2002 conviction of accounting firm Arthur Andersen ("Andersen") related to destroying documents from their audit of Enron Corporation. The ruling unanimously stated that the jury instructions were too broad. The Justice Department's investigation led to just one guilty plea, from David Duncan, Andersen's former partner overseeing the Enron Corporation's audit. The original conviction of Andersen led to having its' accounting license revoked; preventing Andersen from conducting public audits. Over 25,000 global employees were let go as a result.

The reversal of the conviction is a bittersweet symbolic victory for the 25,000 employees that were let go as a result of the original jury verdict.

Chief Justice William H. Rehnquist, writing the opinion for the Supreme Court, stated the former Big Five accounting firm's obstruction-of-justice conviction was improper because the instructions at trial were too vague for jurors to determine correctly whether Andersen obstructed justice.

The Supreme Court written opinion stated it was not necessarily wrong for companies to instruct employees to destroy documents. Andersen's legal defense team argued that employees who shredded documents followed the firm policy and there was no intent to thwart the SEC investigation or obstruct the law.

Andersen spokesman Patrick Dorton stated "We pursued an appeal of this case not because we believed Arthur Andersen could be restored to its previous position, but because we had an obligation to set the record straight. We are very pleased with the Supreme Court's decision.".

The Justice Department said it was disappointed and was reviewing its options, including retrying the case. "We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law," said acting assistant Attorney General John C. Richter.

What are the ramifications of this outcome ?

Government officials now have hindsight on their side when viewing the outcome of the original conviction. The Sarbanes-Oxley Act was to help protect shareholders, employees and the public at large. After seeing how 25,000 employees lost their jobs and the reduction of public accounting firms that are capable of performing audits on publicly held corporations, it is unlikely that the Justice Department will prosecute public accounting firms with such vigor. By prosecuting specific individuals only, entities such as Andersen, will be able to survive as a result of possible future litigation.

With the "Big Eight" now the "Big Four", there won't be many companies left to perform audits. What would investor and public confidence be like if more public accounting firms had their licenses revoked? Imagine if there were only the "Big Two" or the "Only One" left. Regulators have. Which is precisely why the Justice Department has recently negotiated settlements between and public accounting firms KPMG and Price WaterHouse Coopers instead of prosecuting those firms.

In addition, corporations that have formal document retention policies will have more latitude to destroy documents without fear of potential prosecution. Of course, with more documentation now stored electronically, companies may not realize that the files still exist in storage.

Disclosure: Nelson Chin worked at Andersen from 1986 - 1989, before any of the legal issues arose.
 
© 2005 Nelson Chin.
To inquire about consulting or speaking engagements, e-mail: Nelson Chin