A Hollow Victory against Andersen

Imposing the death penalty on Arthur Andersen LLP is a troubling precedent that raises serious ethical, public policy, and economic issues. No doubt the aggressive pursuit and conviction of the accounting firm by the Justice Dept. will throw a scare into other companies contemplating playing fast and loose with the law. But the cleanup under way in Corporate America would probably have benefited more had Andersen been reformed rather than killed. The furious lobbying effort in Congress by the remaining Big Four to water down reform legislation shows that making an example of Andersen is not nearly enough.

Better to have let former Federal Reserve Chairman Paul A. Volcker remake Andersen into a model firm for the entire accounting profession. Volcker promised to revamp the company's leadership and improve its corporate governance. He proposed splitting the auditing and consulting functions, thus removing the temptation to go easy on companies Andersen audited in hope of selling services. Had Volcker succeeded in transforming Andersen, other accounting firms might have followed suit. This could have restored investor confidence in the credibility of financial statements and the equity markets.

Instead of encouraging reform, the Bush Administration chose to prosecute Andersen for obstructing justice. It indicted not the individual partners but the firm itself. Yet only a small number of top Andersen managers are responsible for Enron Corp.'s long history of accounting disasters. Before Enron, the firm was fined $10 million by the Securities & Exchange Commission for not doing a proper job in auditing Waste Management Inc. It also failed with Sunbeam, Boston Chicken, and the Baptist Foundation of Arizona. Clearly, a culture of impropriety existed at Andersen. Yet punishing 26,000 employees for the sins of the top few strikes us as unfair, especially since the partners themselves appear to be shielded from personal liability.

In the end, Justice barely won against Andersen--and on a technicality, at that. The jury rejected the heart of the government's case, deciding that employees can't be held criminally liable for following corporate guidelines on shredding documents. This poor showing may be a blow to the government's case against Enron. Indeed, show trials against companies that generate few if any guidelines for reform are of little economic value. The Justice Dept. believes that destroying Andersen will further the cause of corporate reform. We fear it may not.

Reforming Corporate America will require new rules. The private sector is writing them for CEO behavior and corporate governance. The government has to write them for accounting. Whether they come out of the SEC or Congress doesn't matter. The Bush Administration should move beyond prosecution to reform.

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