Arthur Andersen was up to its green eyeshades in the Enron mess. Yet a spokesman for what little remains of the defunct accounting giant claims the firm was vindicated Tuesday when the U.S. Supreme Court overturned its 2002 obstruction of justice conviction.
That’s hogwash. The justices did not, by any stretch of the imagination, excuse Andersen’s failure to protect the public from some of the worst corporate wrongdoing in American history. But stretching the imagination of public accountancy was what got Andersen in trouble.
Andersen was convicted after employees in its Houston office shredded documents that may have been relevant to looming legal action against Enron Corp., one of its biggest clients. The high court tossed that conviction on a technicality. The federal judge that presided over the case should have told jurors they had to find that the firm’s employees acted dishonestly or destroyed documents in anticipation of a pending legal case. But the fact that the high court affirmed a legal principle doesn’t let Andersen off the hook.
As Enron’s outside auditor, Andersen was supposed to ensure that its client was following established accounting precedents and that its books correctly represented the company’s financial situation. Andersen failed miserably at this basic duty. Enron finances were built on a house of cards and the energy giant used multiple spin-offs to hide hundreds of millions of dollars in debt.
Andersen claimed that it couldn’t have uncovered Enron’s massive deception, given the complex ruses Enron used. But if the auditors didn’t know what was going on, they shouldn’t have signed Enron’s financial reports. Andersen accountants were located at Enron’s headquarters.
The consequences were enormous. Shareholders lost their shirts and Enron employees lost their jobs and retirement funds. The total cost is difficult to calculate but Enron was worth $1 billion before its 2001 collapse.
The most charitable explanation was that Andersen was asleep at the wheel, but the harsher reality is that Andersen was conflicted: Just in 2000, the last full year Enron was in business, it paid Andersen an eye-popping $52 million in fees. Andersen’s role in the Enron scandal became the poster child for the need for corporate and accounting law reforms.
Most of Andersen’s 28,000 employees (including 550 in Denver) surely were honest souls, yet after the firm shut its famous doors, only 200 were left nationwide to mop up the mess. Whether the U.S. Department of Justice should have indicted the firm rather than individual employees is debatable. But corporate indictments are a common federal tactic.
The Enron debacle sent Andersen’s other clients scurrying to find new auditors: No company could have Andersen’s name on its annual report without risking its own good name.
For generations, Andersen’s primary asset was its credibility. When it sacrificed its reputation for short-term gain, it sacrificed everything.
