Andersen's Dark Day -- and No White Knight


Claiming that they are victims -- first of renegade staffers and now of overzealous prosecutors -- the top managers of Arthur Andersen LLP are planning to fight the Justice Dept.'s indictment of the firm for obstruction of justice in the Enron document-shredding case.

Rather than cop a plea that would involve admitting firmwide fault, Andersen CEO Joseph Berardino and his top partners issued a statement shortly after the indictment was released on Mar. 14. It said Andersen is determined to battle a prosecution that the accounting firm says "is both factually and legally baseless" and "a gross abuse of government power."

Does Andersen have any chance of surviving? Justice signaled that it doesn't care. At a press conference to announce the indictment, department officials dismissed the argument that the indictment could amount to Andersen's death blow. Their contention: Serious charges deserve serious penalties, even if what amounts to a death penalty goes well beyond the legal maximum of a $500,000 fine and five years of probation.

HARMING INNOCENTS? Justice rejected the contention, made in a Mar. 13 letter from Andersen lawyer Richard J. Favretto, that the department's action "could destroy the firm, taking the livelihood from thousands of innocent Andersen employees and retirees" and reducing the chances that Enron shareholders and ex-employees will recover anything from Andersen in their lawsuits.

The trickle of client defections could become a torrent

The accounting firm now plans to mobilize on every front in a bid to seek a rapid resolution of the charges. Andersen lawyers say they want to go to trial within 90 days -- or secure a dismissal ruling by a judge even quicker than that. If Andersen can pull that off, the firm maintains it can salvage itself even while taking a "significant hit" to the business, says spokesman Charles Leonard.

But already, the trickle of defections of big-name clients is becoming a gushing stream. And with the indictment, the defections are now likely to surge into a torrent, as audit committees and managers study the damning criminal complaint.

GROWING CLAMOR. Andersen staffers who have been hanging on to see if a deal could be worked out with Justice and the Securities & Exchange Commission are now far more likely to bolt. Coupled with the already growing clamor from Enron plaintiffs for hundreds of millions of dollars in damages, these defections could bring the 89-year-old firm to an ignominious end.

The charges are especially painful for a firm that once prided itself on its integrity. Justice's criminal complaint -- filed on Mar. 7 in Houston and unsealed on Mar. 14 in Washington -- alleges that Andersen partners in Houston launched "a wholesale destruction" of Enron-related documents on Oct. 23, 2001. It says the company began shredding literally tons of documents two weeks after Andersen officials first anticipated litigation and government investigations, and four days after learning from Enron that the SEC had begun an inquiry.

Employees were told to work overtime if need be, and "the shredder at the Andersen office at the Enron building was used virtually constantly," the indictment charges. It says Enron-related documents were destroyed in Andersen offices in Portland, Chicago, and London. The effort in London, it says, was "a coordinated effort by Andersen partners and others, similar to the initiative undertaken in Houston..."

TAKING A SCALP? Andersen officials were so worried that the indictment could prove fatal that they began seeking a white knight a week before it was handed down. But their talks with rivals Ernst & Young and Deloitte Touche Tohmatsu came a cropper on Mar. 13, when the potential acquirers bowed out, citing Enron-related litigation as well as other legal problems facing Andersen. The indictment now makes a deal -- at least a quick one -- all but impossible.

As the Andersen executives see it, Justice is determined merely to take a big scalp -- regardless of the consequences -- and won't settle for individual indictments of some Andersen staffers in Houston. The accounting firm insists that any misdeeds were confined to Houston, where it fired the lead Enron partner and disciplined others. "None of the destruction occurred with the knowledge, much less the consent, of senior firm management," Andersen said in its Mar. 14 statement, adding that there was at best "weak evidence on the criminal intent of the small number [of] people involved."

Andersen is especially galled that government lawyers refused to allow the firm to "tell its story" to the Houston grand jury "in violation of both department policy and basic precepts of fundamental fairness." The jury was not permitted, for instance, to hear that two law firms hired by Andersen had conducted an internal investigation that exonerated all but the Houston staffers. Justice officials declined to comment on the grand jury proceedings.

HERCULEAN TASK. Now, Andersen will be forced to make its case outside the courtroom as well. It will be a Herculean task. Company execs need to convince corporate clients that the firm is hardly the corrupt entity that Justice suggests. And the only way to do that may be to beat the government in court.

But with bitterness about Enron raging and Andersen cast in the role of the auditor that couldn't count right -- and worse, destroyed its handiwork with reckless abandon -- the firm's battle for survival may be more difficult than ever. By Joseph Weber in Chicago


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