Arthur Andersen, one of the nation’s Big Five accounting firms, admitted this week that it destroyed a “significant” number of documents related to its audit of Enron, the Houston, Texas-based energy trading giant that collapsed spectacularly into a pile of worthless securities late last year, wiping out $30 billion worth of shareholder value — but not before top executives bailed out early.
The Enron practice of shifting liabilities off the books to more than 3,500 subsidiaries raised so many red flags that you’d think you were in a military parade somewhere in China.
As the criminal investigation geared up this week, Attorney General John Ashcroft and the entire staff of the U.S. Attorney’s office in Houston recused itself from the investigation. The whole bunch has been conflicted out. The investigation is going to be headed by Michael Chertoff, head of the Justice Department’s criminal division.
Whether justice can be had in a case where both Enron and the accounting industry has marinated Washington in campaign cash is unclear.
What is clear is that Enron and the accounting industry were so drunk with their corporate power that they mistook a modest proposed rule that might have prevented the Enron collapse for threat to their profits and nuked it.
In the summer of 2000, Securities and Exchange Commission Chair Arthur Levitt sought to pass a rule that would have said to accounting firms — if you are going to audit a client, you can’t take consulting fees from that client.
The accounting industry went bananas. Why? Because they see audits as a way to get a foot in the door of big companies. First audit the company, then ream the company for exorbitant management fees.
But Levitt insisted that auditors be “independent” of the clients they audit. How can an auditor be independent if at the same time it’s auditing the company, it’s raking in millions in consulting fees?
With Levitt’s proposed rule, the accounting industry saw a booming profit center threatened, and it began to marshal its friends — both Democratic and Republican alike — in Washington to beat back the Levitt rule. And beat it back they did. Congressional leaders told Levitt, in no uncertain terms, that if he proceeded, they would slash the SEC’s budget. Levitt backed down.
Last year, while Andersen was paid $27 million for its audit work at Enron, it received $28 million in management consulting fees from the same Enron.
Let’s say that Andersen’s audit partner in Houston saw the red flags, and began to raise questions. Are Andersen executives going to risk losing the lucrative consulting contract by offending the company with a harsh audit? Probably not.
As for the destruction of documents, let’s put it this way — much of the history of corporate crime and violence in this country has never seen the light of day because of corporate executives who follow closely the advise of corporate counsel — when in doubt, shred it.
Corporate lawyers have become so cavalier about the subject that they publicly discuss destruction of documents.
Andersen was apparently following to the letter advice often dished out by white collar defense lawyers, including that of Harvey Pitt, the accounting industry star defense lawyer until he became chair of the Securities and Exchange Commission. (Pitt will probably have to recuse himself from the Andersen investigation because he did work for the firm when in private practice.)
White collar defense lawyers like Pitt often advise corporate clients to implement flexible “document retention” programs so that incriminating documents are destroyed before they see the light of day.
In 1994, Pitt co-authored a law review article (“When Bad Things Happen to Good Companies: A Crisis Management Primer”).
“At the crux of many corporate crises, there are typically a handful of key documents,” Pitt wrote. “Corporate counsel must take every available opportunity to imbue company executives with the understanding that their documents will take on separate lives when they enter the treadmill of litigation. . Ask executives and employees to imagine all their documents in the hands of a zealous regulator or on the front page of the New York Times. . Each company should have a system of determining the retention and destruction of documents,” Pitt wrote. “Obviously, once a subpoena has been issued, or is about to be issued, any existing document destruction policies should be brought to an immediate halt.”
Former Securities and Exchange Commission enforcement chief John Fedders, writing in a 1980 law review article titled “Document Retention and Destruction: Practical, Legal and Ethical Considerations,” took this advice one step further.
“On occasion, counsel will be shown a document which could expose the corporation to liability if it became available to adverse parties,” Fedders wrote. “If the document is not yet scheduled for destruction under the terms of the program, management may advocate a waiver of the program to allow the document to be promptly destroyed.”
Things are destined to get worse before they get better. The SEC has the accounting industry’s pit bull as its chair. In addition, Bush has nominated two new SEC commissioners, both of whom are former partners of big five accounting firms — Paul Atkins, a partner with PricewaterhouseCoopers, and Cynthia Glassman of Ernst & Young.
That gives the accounting industry absolute control over what was once the top cop on the corporate crime beat. Get ready for more Enrons.
Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor. They are co-authors of Corporate Predators: The Hunt for MegaProfits and the Attack on Democracy (Monroe, Maine: Common Courage Press, 1999)