Andersen's Fall from Grace

Abstract

Arthur Andersen's obstruction of justice conviction closed the last chapter in the history of the firm. Once considered the gold standard for public accounting firms, Andersen ended its auditing practice with its reputation in ruins.

Although Andersen sought to blame its downfall on the Justice Department's decision to prosecute, the obstruction of justice indictment was not the first serious blow to the firm. No stranger to legal controversy, Andersen had presided over a string of failed audits, had recently paid hundreds of millions of dollars to settle SEC fraud charges and class action fraud litigation, and had narrowly escaped criminal prosecution for fraud in its accounting work for another client. By the time Enron - one of Andersen's largest clients - stunned Wall Street by announcing a $618 million loss that accounting irregularities had helped to conceal, Andersen was living on borrowed time. Within months, other major Andersen clients - including WorldCom, Dynegy, Global Crossing, Qwest, McKesson and Freddie Mac - had become subjects of SEC and Justice Department probes into financial accounting fraud.

This article analytically joins several important strands of Andersen's cautionary tale: (1) the government's decision to prosecute Andersen for shredding Enron documents despite dire warnings that an indictment would bring the firm down; (2) Andersen's culture of noncompliance and its effect on the firm's plea negotiations with Justice Department officials; (3) Andersen's flawed legal strategy and why it failed; and (4) implications of Andersen's coordinated legal and public relations campaigns and their impact on regulatory and legislative reforms, including the Sarbanes-Oxley Act.

Keywords: Arthur Andersen, Department of Justice, document destruction, Enron, enterprise liability, fraud, grand jury, indictment, obstruction of justice, plea bargain, prosecution, Sarbanes-Oxley, SEC, subpoena