http://www.businessweek.com/stories/2002-03-31/commentary-andersen-the-heavy-hand-of-justice

Magazine

Commentary: Andersen: The Heavy Hand of Justice


The indictment for which Arthur Andersen was arraigned on Mar. 20 barely stretches to eight pages long. In sweeping outline, the slender document charges that the firm obstructed justice by shredding tons of paper related to the firm's audit work at Enron Corp. Details are few, no individual defendants are named, and there's no hint of the frantic days of fruitless negotiation between Andersen lawyers and prosecutors that preceded the charge. When those talks collapsed, so did any hope for Andersen's survival.

This exercise in prosecutorial machismo has only hastened clients' and staffers' rush for the exits. That's plain wrong, whatever Andersen's ultimate culpability in Enron's downfall. The charge kills former Federal Reserve Chairman Paul A. Volcker's efforts to turn the firm into a role model for the accounting profession. Tens of thousands of Andersen staffers who had nothing to do with Enron will be forced to search for new jobs. And it leaves, at best, a shell of a firm too feeble to satisfy even a fraction of the billions of dollars in claims sought by aggrieved shareholders and ex-staffers of Enron.

By strangling Volcker's reform efforts, prosecutors ignored crucial public-policy goals that would have been better served had they gone after individuals rather than the whole firm. And it cut off any opportunity for a settlement with the Securities & Exchange Commission in which Andersen would have paid stiff fines. In the race to resolve the Andersen mess, Justice Dept. cops beat out the SEC reformers. That's too bad.

How much better it would have been if Justice had targeted individual wrongdoers rather than the entire firm. That could have permitted Andersen to reach a deal with the SEC--and allowed Volcker's plans to go ahead. Volcker wanted a reformed Andersen to serve as a role model for the industry. He would have severed auditing from consulting, removing the blatant conflicts that have long festered. And he sought to bar firms from doing such work for audit clients as internal audits and tax consulting. With Andersen's demise now a given, rival firms will be under little pressure to adopt those practices.

And that's just the start of the wider damage. Of Andersen's 85,000 employees, only a handful had anything to do with Enron. Though individuals may yet be targeted, Justice decided to pursue the firm as a whole, tarring every Andersen staffer and forcing all to scramble to find new jobs.

Then there are 2,300 audit clients, which include some 17% of U.S. publicly traded companies. They now are racing to find new auditors and educate them about their businesses. But changing auditors is often difficult, since accounting firms--like other professional-services outfits--can't handle directly competing businesses. What's more, each of the Big Five has differing strengths. And building their expertise in areas such as old-line manufacturing--a core specialty of Andersen's--will be expensive and time consuming.

Perhaps worst off are the Enron shareholders and ex-staffers who had seen Andersen as the only deep-pockets defendant left after Enron's plunge into bankruptcy. Their talks to pry loose as much as $750 million from Andersen likely would have led to some cash for these aggrieved litigants. Even under a sale of the firm, legal experts say, they could have been provided for, perhaps by sequestering some of the revenue generated by Andersen partners. But that's unlikely now.

That leads to another key flaw in Justice's move. Negotiations for both a settlement with litigants and a sale of the company might have continued had it not been for the indictment. With the exception of KPMG's talks to buy Andersen's foreign operations, negotiations to sell parts of the firm to rival Big Five firms fell apart the day before Justice released word of its indictment. Now, if Andersen slips into bankruptcy amid an exodus of clients, there will be little, if anything, for claimants but a messy and complex legal pursuit of ex-partners.

Of course, Justice has plenty of reason to go after Andersen. Only last June, the firm had agreed to pay a $7 million fine, plus much of a $220 million class action settlement, to resolve charges that it botched audits for Waste Management Inc. (WMI) While not admitting fault, Andersen accepted an injunction promising it would hew to the law. The Enron shredding episode seemed to flout that agreement.

There were earlier problems, too. Andersen had failed to call Sunbeam Corp. (SOC) on alleged accounting gimmicks that inflated its results. The firm paid $110 million to settle shareholder litigation. And as recently as Mar. 1, Andersen agreed to pay $217 million to settle claims brought in the failure of another client, the Baptist Foundation of Arizona. Says Joseph E. diGenova, a former U.S. attorney: "Arthur Andersen has come to be viewed by federal law enforcement as a scofflaw."

The main job of the Justice Dept., moreover, is to prosecute wrongdoers so that others don't break the law. If it goes easy on big companies on the grounds that the broader economic or public policy effects of bringing charges would be too great, large companies could easily conclude that they can brush aside the law with impunity. "The Justice Dept. is ultimately in the business of generating general deterrence," says Columbia Law School professor John C. Coffee Jr.

Critics of Justice's heavy hand point to the course that the SEC generally takes to discipline wrongdoers. The commission's approach is to move against individuals--even banning them from such work as securities-trading or other licensed activities--while pushing for any firms involved to improve their behavior. "Why didn't Justice treat this as a public policy matter rather than a matter for prosecution?" asks former SEC head David S. Ruder, who now teaches law at Northwestern University. "I can only guess that it was a matter of prosecutorial pride."

Indeed, the prosecutors appear to have wanted to nail the firm at all costs. They refused to let Andersen argue its case before the Houston grand jury that handed up the indictment, an accepted practice in such cases. The case will soon move to trial--though it's far from clear that Justice will win. If it does, let's not forget at what cost: thousands out of work, lost financial resources for victims, and a squandered opportunity for real reform. By Joseph Weber

With Andrew Park in Houston and Kerry Capell in London


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