Workers at four Andersen offices in the U.S. and Europe toiled around the clock for two weeks to destroy “tons” of documents after federal regulators launched a probe into Enron’s accounting, the U.S. Justice Department charged Thursday.
Andersen’s destruction of documents was “a substantial undertaking over an extended period of time,” said Deputy Attorney General Larry Thompson. The alleged destruction of documents goes far beyond what Andersen has acknowledged took place.
The indictment of Andersen for obstruction of justice marked the first criminal charges in the four-month-old Enron scandal and could lead to the demise of the 89-year-old, Chicago-based accounting firm, as many of its 2,000 clients worldwide continue to flee. The company called the charges “baseless” and vowed to fight them.
Also on Thursday, the accounting firm said it has no plans to file for bankruptcy protection, although most experts believe it could be Andersen’s best hope to stop an exodus of clients and employees and find a buyer to salvage its operations.
The Justice Department said Andersen offices in Houston, Chicago, London and Portland, Ore., worked overtime to shred and destroy documents that the Securities and Exchange Commission was seeking in its probe of Enron’s accounting problems.
The SEC launched its inquiry into Enron (ENRNQ: news, chart, profile) on Oct. 17, the day after Enron restated its financial reports to reflect a third-quarter loss of $618 million. Two days later Andersen launched a “wholesale destruction” of documents at the firm’s offices in Houston, where Enron is headquartered.
According to the indictment, shredding machines worked around the clock from Oct. 22 until Nov. 8 – the day Enron was subpoenaed by the SEC. Andersen employees and partners “worked overtime” to destroy documents.
The destruction was so extensive that “dozens of large trucks filled with Enron documents” were sent to Houston to be shredded, the indictment noted.
Andersen’s actions were an attempt to subvert justice, Thompson said.
“Arthur Andersen is charged with a crime that attacks the justice system itself by impeding investigators and regulators from getting at the truth,” he said.
The indictment was handed up by a federal grand jury in Houston last week and unsealed Thursday after discussions between Andersen and the Justice Department to settle the charges fell apart.
Only the company was named in the indictment, though Justice Department officials said charges against Andersen executives might be forthcoming.
In a statement, Andersen called the charges “factually and legally baseless.”
“The department’s action ignores the fact that Andersen discovered these activities and brought them to the attention of the Department of Justice and has cooperated fully with the investigation,” Andersen’s statement said.
The SEC said Thursday it would allow Andersen to continue to do auditing work while the criminal case proceeds.
“The commission is closely monitoring these developments, particularly with respect to Andersen’s public company clients who are in the process of having their financial statements audited,” said SEC Chairman Harvey Pitt, in a prepared statement. “Any effects [on capital markets] of the indictment are expected to be temporary.”
The SEC announced it had received assurances from Andersen on Thursday that it will continue to audit financial statements in accordance with auditing standards.
Also, the SEC said it is requiring that companies whose audits are completed by Andersen after Thursday obtain assurances from the firm that the same auditors will continue to work on the company’s statements and in other areas.
The SEC also said that companies whose books are audited by Andersen and that choose not to have Andersen complete audits in process still must file financial statements by the normal deadlines. However, the SEC will accept filings from those companies that include unaudited statements.
Andersen attorney Stanley Brand said that the government’s use of its prosecutorial powers in its investigation of Andersen have been “draconian” and will have a devastating impact on the company. He said Andersen intends to fight the charges, but that the company may have already suffered irreparable damage.
Andersen tried to stop the indictment, telling the government in a letter late Wednesday night that the government’s evidence was “flimsy” and called the government’s threat of indictment a “gross abuse of governmental power.”
Andersen said pleading guilty would be the death of the company.
The company faces a $500,000 fine and a five-year probationary period. But the real punishment has already occurred in the marketplace, where potential buyers have walked away from any deal to rescue the firm.
“Andersen has got to be on the brink of bankruptcy because of this,” said Vincent Love, a certified public accountant and director of the New York State Society of CPAs.
Andersen, the smallest of the Big 5 accounting firms, admitted in mid-January that Enron-related documents were shredded in its Houston office unbeknownst to the firm’s top executives.
In the letter, Andersen’s lawyers sought for the Justice Department to defer prosecution of the firm and adopt any remedy crafted by the SEC directed at its Houston office. The SEC is looking to impose civil penalties on Andersen.
“None of the destruction occurred with the knowledge, much less the consent, of senior firm management,” wrote Richard Favretto, an attorney with Mayer, Brown, Rowe & Maw, one of the law firms representing Andersen.
“Indeed, even as to those few people who engaged in document destruction, there appears to be a dearth of credible evidence that they acted with the willful criminal intent to obstruct a governmental investigation.”
Future in question
With Andersen’s chances for finding a buyer dwindling, the struggling auditor may be forced to declare bankruptcy, industry analysts say.
This week PricewaterhouseCoopers, Deloitte Touche Tohmatsu and Ernst & Young said they wouldn’t pursue a business combination with Andersen, leaving KPMG as the final Big 5 firm in a position to buy the firm. KPMG has declined to comment if it would do so.
Andersen’s rivals are reluctant to buy the company, despite its list of prestigious clients, because of concern about the company’s potential liability for its role as Enron’s auditor.
That leaves Andersen in a quandary as the federal indictment and the threat of private lawsuits makes it an unattractive merger target. Without a merger partner, the audit firm may not be able to stanch the flow of clients leaving the firm.
Andersen spokesman Charlie Leonard said that bankruptcy won’t be an option.
“There is no plan for bankruptcy,” he said in a conference call with reporters, but said the indictment is going to hurt the company. “We’re looking at a significant hit to the business,” he said.
A Chapter 11 filing would enable the Chicago-based company to convert the more than three dozen lawsuits filed against it into bankruptcy claims. Its earlier-rejected offer of as much as $750 million to settle all claims might get new consideration, since claimants would otherwise be faced with waiting in line in bankruptcy court behind banks and other secured lenders.
If Andersen goes bankrupt, “It will be a very difficult transition,” for the industry, said Jim Castellano, chairman of the American Institute of Certified Public Accountants. But he is confident the marketplace will adjust. Listen to more from Castellano.
Clients, industry will feel impact
With Andersen’s name becoming inextricably linked to Enron, high-profile and high-revenue clients, including FedEx (FDX: news, chart, profile), Merck (MRK: news, chart, profile) and Delta Air Lines (DAL: news, chart, profile), have dropped Andersen as their auditor in recent weeks.
But Andersen still has more than 2,000 clients, whose fate remains in question. Following the indictment, Andersen needs to get a waiver from the SEC to continue to audit its clients.
“They’ve always done very good work for us,” said Reesa Staten, vice president of Robert Half (RHI: news, chart, profile). “But…we’re watching everything going on and certainly want to act accordingly.”
Natural gas company Keyspan (KSE: news, chart, profile) also uses Andersen as its auditor.
“Right now, Keyspan is assessing its alternatives,” said Andrea Staub, a spokeswoman for the company.
Love said Andersen’s bankruptcy would be a “tremendous disruption” to the market and the SEC might decide it’s more harmful to the market than beneficial to keep Andersen from auditing its clients.
Bob Willens, a tax and accounting analyst for Lehman Bros., said that if Andersen is forced to shut its doors, its clients will most likely be parceled out to the final four large accounting firms.
“It will be a very difficult undertaking,” he said, explaining that it would take time for clients to get acclimated to their new auditors and vice versa.
Both Love and Willens, a former partner at KPMG, said it’s painful to watch what has happened to Andersen.
“It’s actually gut wrenching for me personally,” Willens said. “Andersen was universally acknowledged as the finest firm in the industry and always led the field in virtually every facet of accounting.”
“It’s really sad to me as a CPA,” Love said. “I think it should be sad for the profession that it has come to this.”
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