Mini Case 2-Andersen: An Obstruction of Justice? (Due in 24h)

Arthur Andersen is the CPA firm that failed to detect fraudulent  financial activities in the audits of several companies, including  Sunbeam, Waste Management, Enron, and WorldCom. Many articles and papers  have been written about the quality of these audits and how increasing  the firm's revenues from both audit and nonaudit services may have  supplanted audit quality as the main objective of Andersen as a firm.  However, we should not lose sight of the facts that led to Andersen's  demise and the findings that have occurred since Andersen ostensibly  closed its doors as an audit and accounting firm.

In effect, Andersen had already received the maximum penalty even  before its trial began. Once Anderson had been indicted, most of its  clients had decided that an audit by a firm under indictment would be of  little value even if allowed by the Securities and Exchange Commission  (SEC). During the shareholder proxy season in early 2002, company after  company announced it would no longer retain Andersen as its auditor.  Whether the firm was able to defend itself or not, the days of Andersen  as a viable audit firm had come to an end.

ANDERSEN GOES TO TRIAL

In May 2002, Arthur Andersen LLP was tried for obstruction of justice  in connection with the destruction of documents during a time period  prior to a formal SEC investigation of Enron, one of Andersen's largest  clients. The main witness for the prosecution was David Duncan, a former  Andersen partner in charge of the Enron audit, who had already pleaded  guilty to obstruction of justice. The guilt or innocence of Andersen  hinged on the question of corporate direction. If Duncan had acted  illegally on his own in an effort to save himself from consequences  resulting from an SEC investigation of Enron, then Andersen as a firm  would not likely be found guilty of obstructing justice. However, if  Duncan had acted illegally on the direction of Andersen's management  within the scope of his position in an attempt to save Andersen from the  consequences of Enron, the firm as a whole would be held liable.  Therefore, the issues to be determined were (1) whether illegal acts had  been committed and (2) if they had been committed on behalf of Duncan  or on behalf of Andersen.

The Prosecution's Case

The chief prosecutor for the government was Samuel Buell. The main points in Buell's case follow:

• Top partners in Arthur Andersen's Chicago office had permitted Enron  to use aggressive accounting practices that were very questionable  given the nature of Enron's business.
• From late September through early October 2001, Andersen's legal  department began creating a strategy designed to protect Andersen from  regulators and litigants.
• A major part of the strategy was to invoke Andersen's document  retention policy, which, according to prosecutors, was an obscure policy  that its employees seldom read or followed on its audits. In addition,  the policy had been revised in 2000 by an Andersen partner who had been  disciplined by the SEC for his involvement in the Waste Management  audits. According to Buell, management had known that invoking the  policy would lead to the destruction of "tons of papers and tens of  thousands of computer files" that would be of interest to  investigators.1
• The prosecution presented notes from an October 9 conversation  between Nancy Temple, Ander- sen's legal counsel, and attorneys in  Andersen's legal department. This conversation indicated that Temple had  believed an SEC investigation was imminent and that such an  investigation could have devastating consequences for Andersen. Andersen  was still operating under a court order signed in 2000 (due to a  settlement of the Waste Management lawsuits) that could trigger a  suspension of its license to audit publicly traded companies if it was  found to have engaged in additional securities law violations.
• Duncan had admitted to destroying documents to keep them out of the  investigation and that his actions were taken under the direction and  with the consent of Andersen management in Chicago.
• Finally, C. E. Andrews, an Andersen partner, in his testimony before  Congress in January 2002, had said that Duncan had given every  appearance of destroying documents in anticipation of requests for  documents from federal investigators.2

Andersen's Defense

• Andersen's attorneys, led by Rusty Hardin, defended Andersen against all charges brought by the government.
• The government's case had fallen short of proving Andersen's guilt or even proving that a crime had occurred.
• Duncan had shredded documents prior to any formal investigation  (Andersen was not subpoenaed until November 8, 2001), and the  elimination of unnecessary documents was a normal audit procedure.
• It was clearly sound business practice to consult with the corporate  attorneys with regard to potential litigation and the firm's rights and  obligations with regard to that investigation. In fact, Duncan, at  Temple's request, had saved many documents that could have proved  detrimental to Andersen.
• Hardin argued that Duncan was innocent and that the government had  overstated its case against him in order to pressure him to cooperate  with its investigation in exchange for a reduced sentence.
• While the prosecution focused on the part of the document retention  policy that instructed auditors on the documents that could be  destroyed, parts of the retention policy indicated which documentation  was required to be retained in the audit files.

The Case Goes to The Jury

Although the prosecution and defense presentations were very  contentious, possibly the most contentious part of the case focused on  the instructions that Judge Melinda Harmon gave to the jury.

The instructions hinged on the wording of the statute that makes it a crime to

knowingly use intimidation or physical force, threaten, or corruptly  persuade another person with the intent to cause that person to withhold  documents from or alter documents for use in an official proceeding  [emphasis added].3

Although both sides believed that the jury needed instructions that  clarified the meaning of the statute in question, two issues were  paramount in the argument concerning the instructions:

• The phrase knowingly corruptly persuade had been discussed at  length. The government had contended that the word knowingly was not  meant as a modifier of the term corruptly persuade. The jury had been  instructed that

"Even if the petitioner honestly and sincerely believed that the conduct was lawful, you may find the petitioner guilty" .4

1 Alexi Barrionuevo and Jonathan Weil, "High Noon: Andersen's  Criminal Case Goes to the Jury," The Wall Street Journal, June 6, 2002,  pp. C1, C20.

2 Ibid.

3 18 U.S.C. § 1512 (b)(2)(a) and (b).

4 William Rehnquist, "Flawed Instruction Led to Andersen Verdict," Chicago Daily Law Bulletin, June 1, 2005.

Andersen: An Obstruction of Justice?   C3

The government had contended that the word corruptly needed to be  defined for the jury. Prior rulings in the 5th District Court (the same  court district that was trying the Andersen case) had stated that  corruptly was knowingly and dishonestly, with specific intent to subvert  or undermine the integrity of the proceedings [emphasis added].

The government had insisted on excluding the word dishonestly and  adding the word impede to the phrase "subvert and undermine." The  instruction provided to the jury had not included the word dishonestly  and included the phrase "subvert, undermine, or impede" government  fact-finding.5

Having heard the testimony and been given these instructions, the  jury convicted Andersen of obstruction of justice after deliberating for  10 days.

ROUND TWO

On May 31, 2005, in a unanimous decision, the U.S. Supreme Court  overturned the Andersen conviction on the basis of flawed instructions  to the jury. In writing the opinion, Chief Justice William Rehnquist  cited the following arguments:

• Merely providing a person with information regarding a course of  action cannot be construed as persuading another person with intent to  cause that person to withhold documents.
• It is not necessarily corrupt in persuading another person with the  intent to cause that person to withhold documents. It may be proper for  an attorney to persuade a client to withhold documents under  attorney-client privilege from an investigation. In this circumstance,  such persuasion would not be corrupt. Therefore, the withholding of  documents from an investigation cannot by itself be presumed to be a  corrupt action.
• Document retention policies are created to keep documents from being  obtained by certain individuals and organizations, including the  government. These policies are common in business, and it is not  wrongful for a manager to instruct employees to abide by such a policy.
• The term knowingly does modify the term corrupt both linguistically  and per the intent of the statute. The jury instructions did not convey  the requisite consciousness of wrongdoing that should be required for  conviction.
• Substituting the term impede in place of dishonestly in the jury  instructions removed the requirement that the action be with knowledge  and forethought of wrongdoing. The term impede has a much broader  concept. Anyone who innocently persuades another to withhold information  might be considered to impede an investigation. Clearly, the term  corrupt was included in the statute to exclude such innocent behavior  from being considered unlawful.
• A knowingly corrupt persuader cannot be someone who persuades others  to shred documents under a document retention policy that was not  enacted with regard to any particular proceeding in which those  documents might be material. A series of events is not sufficient to  indicate an intent to obstruct an investigation.

CONCLUSION

The headlines following the Supreme Court decision were telling: "A Posthumous Victory," USA Today, June 1, 2005.

"Arthur Andersen's Hollow Victory," The Economist, June 4, 2005. "Too Late for Andersen," Legal Times, June 6, 2005.

"A Bittersweet Court Victory for Andersen," Legal Times, June 6, 2005.

Although Arthur Andersen's verdict had been overturned because of  faulty jury instructions, it was far from a vindication that what  Andersen had done was correct. In addition, such a decision came much  too late to provide anything but a moral victory to Andersen's former  employees.

The government has chosen not to retry Andersen. First, there was  little to gain in terms of either financial or other penalties. Andersen  had already received the "death penalty" (and was no longer a viable  entity), whether guilty or innocent. Second, if Andersen was to be  retried and found not guilty, the Department of Justice and the SEC  would have suffered severe blows to their reputation and received a  multitude of criticism from the business community. On the other hand, a  retrial might have been what the government needed to fend off  criticism of being overzealous and overreaching in its prosecution of  Andersen. However, because the government did not retry the case, it  appears that the risks outweigh the rewards. Third, the government  received everything that it wanted with regard to Enron, WorldCom, and  Andersen with the passage of the Sarbanes–Oxley Act. Most notably, as a  result of the Andersen case, a stricter document retention policy with  more severe penalties for not following that policy was enacted. It is  interesting to note that many legal experts believe that the Department  of Justice and the SEC took a vastly different attitude toward the 2005  tax-shelter problems of KPMG because of the lessons learned from the  Andersen prosecution. Clearly, in the Andersen case, there had been no  winners, and the elimination of another international CPA firm caused  significant harm to innocent employees and created substantial chaos in  the business community.

Finally, in March 2007, a federal judge gave final approval to a  $72.5 million settlement between Andersen and investors who sued the  accounting firm over its role in Enron's collapse.6  This finally put to rest the case of Andersen and Enron, but the repercussions may live on indefinitely.

DISCUSSION  QUESTIONS

Part 1

1. Analyze the ethical implications of Andersen's document retention  policy. How might this policy have conflicted with the firm's  professional responsibilities?
2. Evaluate the legal concept of "corrupt persuasion" in the context of  this case. How does this interpretation impact auditors' communication  practices and document retention policies?
3. Compare and contrast the potential liability of the engagement  partner, other partners, and the firm as a whole in light of the  Andersen case.
4. Critically assess the impact of time constraints and understaffing  on audit quality. How might these factors have contributed to Andersen's  situation?

Part 2

1. Examine the role of professional skepticism in the Andersen case. How might a more skeptical approach have altered the outcome?
2. Analyze the potential conflicts of interest arising from providing  both audit and non-audit services to clients. How has regulation evolved  since the Andersen case to address this issue?
3. Evaluate the adequacy of Andersen's quality control procedures in  light of this case. What improvements could have potentially prevented  this situation?
4. Discuss the long-term implications of the Andersen case for the  auditing profession. How has it influenced current audit practices,  regulations, and public perception?