Commentary: The Lingering Lessons of Andersen's Fall
By Joseph Weber
Was it all worth it? An acrimonious six-week trial. A guilty verdict that turned on a single troubling e-mail. Disruptions for hundreds of corporations in the middle of audit season. Maybe a jail term for the lone individual targeted--so far--by the government. And the fall of one of the world's leading accounting firms, shuffling or eliminating thousands of jobs. Are we better off after all the grief wrought by the prosecution of Arthur Andersen LLP?
In a word, yes. The government's decision to go for the jugular was overkill, but its win will have far-reaching, beneficial effects. The next time an attorney hints that staffers shred documents as investigators close in, only a fool will follow the suggestion. When an overbearing corporate client urges an auditor to sign off on dubious financial statements, even the most obliging will likely stiffen their spines. And auditors and clients whose relationships have gotten too cozy are now on notice that they have to take steps to put some professional distance between one another. By pushing for criminal charges, the Justice Dept. has raised the stakes too high for anyone to ignore. (For a different view, see the editorial in this week's issue, "A Hollow Victory against Anderson".)
Of course, the verdict could still be thrown out on appeal. But the lessons of Andersen's fall go well beyond the government's narrow victory. Consider the root problem: Andersen brought its woes on itself with a series of sloppy audits for Sunbeam, the Baptist Foundation of Arizona, and most damningly, Waste Management (WMI ). Those botch-ups cost investors hundreds of millions of dollars. The Waste Management Inc. errors led to a crucial antifraud injunction against the company and a promise to avoid poor practices--a promise prosecutors claimed Andersen broke with Enron Corp. audits. The lesson: Redouble efforts to ensure every audit is flawless. Don't slight auditing in favor of lucrative lures, such as consulting.
If that sounds obvious, well, that's just the point. Clearly, the Andersen debacle shows how deeply the accounting industry has lost its way. The same can be said for the legal profession. Think attorney-client privilege gives you the right to aid in a coverup? Nope. As the jury made unequivocally clear, Andersen attorney Nancy Temple had no business telling auditor David B. Duncan to delete critical language in a memo on an Enron earnings statement last fall.
It's now obvious that Temple, who cited the Fifth Amendment as she declined to testify, shouldn't have told Duncan to mute hints that the statement was misleading. As the government showed, she had reason to believe investigators were hot on the trail. Minor technicality? Routine legal editing? Hardly--it was a blatant effort to avoid Securities & Exchange Commission scrutiny. "It's rudimentary," says Joseph E. diGenova, a former U.S. Attorney for the District of Columbia. "This is a simple issue of honesty. It's almost an Aesop's fable."
To be sure, the Andersen case was messy. Short of evidence to pursue individuals beyond Duncan, the government took the broadest swipe possible and indicted the entire firm, tarring innocent staffers. And ultimately, the jury set aside most of the government's accusations, even largely disregarding the shredding efforts the government had made so much of.
Yes, the government could have prosecuted more skillfully. But that doesn't change that misdeeds were done and laws broken. Serious audit failures and a subsequent inability to correct what led to them were followed by the misguided acts of a few staffers desperate to hide misdoings.
It's too bad the entire firm had to pay for such errors. But its leaders lacked the discipline, gumption, or insight to fix Andersen's flaws. With any luck, the ex-partners and staffers won't take the bad habits with them as they move on. Prosecutions are vicious affairs, but stiff penalties are sometimes the only way to force people back onto the straight and narrow.
Chicago Bureau Chief Weber covers Andersen.