Arthur Andersen & Enron

After its client, Enron, filed for Chapter 11 bankruptcy in December 2001, Arthur Andersen was indicted for obstruction of justice by the Justice Department. Deputy Atty. General Larry Thompson accused Andersen of shredding “literally tons” of documents after learning that the SEC had started an investigation into the aggressive accounting practices of Enron.

In seeking the indictment against Andersen, Thompson said they were swayed because of Andersen’s history of wrongdoing as well as the hope that by making an example out of Andersen they could deter others from doing the same thing. Andersen employees were ordered to work overtime to destroy 26 trunks and 26 boxes of documents that Thompson said impeded the investigation into Enron to get at the truth.

David Duncan, the Enron audit partner at Andersen, had supposedly ordered the destruction of the documents based on the instructions received from Nancy Temple, an attorney for Andersen. It seems that Duncan had also ordered the destruction of documents in Portland, OR, London and at the Chicago headquarters. The indictment suggested that the destruction was ordered to cover up accounting mistakes that Andersen had made.

Andersen later stated that Enron failed to follow the advice of Duncan regarding a disclosure that was misleading in a quarterly earnings report. Nancy Temple did not want the information in the work papers to show that Enron failed to follow the advice of Andersen and ordered the work papers first to be altered and then later shredded.

Andersen was later found guilty in June 2002 and on August 31, 2002 surrendered its license to practice accounting in all 50 states. As a result of the collapse of Enron and Arthur Andersen’s conviction, 85,000 employees were put out of work and 2,300 companies were left without an auditor. The conviction was overturned, in a unanimous decision of the US Supreme Court, in 2005 based on a procedural error in the instructions the judge gave the jury.

Do you think that it was fair that all of these employees at Andersen lost their jobs based on this one failed Enron audit? Was the conviction the real reason that Andersen had to close?