Document Shredding By Enron's Auditors Not Uncommon Practice

Pittsburgh Post-Gazette
Pamela R. Winnick
D-4 (Copyright 2002)

On Oct. 23, just one day after Enron announced it was being investigated by the Securities and Exchange Commission, a partner at Arthur Andersen ordered employees to destroy over 1,000 documents and e-mails relating to its audit of Enron.

Although Arthur Andersen was not itself served with a subpoena until Nov. 8, some experts say the firm could be prosecuted for obstructing justice, depending upon what documents were destroyed and whether the firm intended to evade the law.

"Once an accountant is on notice that there's an investigation, there's no acceptable basis for destroying documents," said Mark Gleason of Gleason & Associates, a midsized public accounting firm in Pittsburgh. "I think destroying documents is totally unacceptable from a professional point of view."

Leon Rodriguez, a former first assistant U.S. attorney in Pittsburgh who now practices law in Washington, D.C., said Arthur Andersen may have destroyed the documents because they were relevant to the SEC probe.

"A party who destroys or conceals documents they anticipate will be sought by an investigator may certainly be subject to a charge of obstruction of justice," he said. "But we don't have all the facts yet. What was their purpose? Did they have a wrongful purpose?

"A prosecutor would have to prove criminal intent."

Arthur Andersen and the other four major accounting firms that comprise the so-called Big Five declined comment.

But some accounting experts say that it's not unusual for documents to be destroyed after an audit.

"It's not unusual that you might have extraneous documents that you destroy in the course of an audit," said John McMurtry, managing partner of KFMR, a public accounting firm in Pittsburgh. "Without knowing what kinds of documents they destroyed, we can't tell whether they did anything wrong."

"Generally you prepare your audit findings in work papers and keep anything directly referenced in there," said Robert Crum, associate professor of accounting at Penn State's Smeal College of Business. "Anything else you discard."

"The only issue I see here is that if there was an attempt on Arthur Andersen's part to avoid a legal subpoena."

Frederick Thieman, a former U.S. attorney in Pittsburgh who's now in private practice at Thieman & Kaufman, a Pittsburgh criminal defense firm, said there's not enough information to know what happened and why.

"Until you know all the facts it's dangerous and virtually impossible to reach conclusions," he said.

In its public audit of Enron, Arthur Andersen attributed hundreds of millions of dollars of the Enron debt to an outside partnership, thereby keeping this liability off Enron's balance sheet and leading shareholders to believe the company was profitable.

Is Arthur Andersen guilty of fraud?

"Once there's a perception of wrongdoing, it's easy to take every morsel of evidence and look at it in the wrong context," said McMurtry. "Accounting rules are very complex."

Crum says Arthur Andersen's reporting of the debt falls into a "gray area" and added that footnotes in the company's balance sheet mentioned the debts of the outside partnership, although "they didn't go into much detail."

The bigger issue -- and one likely to plague all of the major accounting firms in the coming months -- is the dual role that Arthur Andersen played by serving as both a financial consultant to Enron and then auditing the very structures it helped set up.

Under these circumstances, is it possible for a firm to perform a truly independent audit?

"That's an old problem," said Crum. "It depends what kind of consulting role the firm has played. I'm sure some other firms do just as much consulting work as Arthur Andersen did for Enron."

"They're certainly not alone in providing a variety of services to clients," said McMurtry.

"As a consultant, they were assisting Enron in developing strategies for tax and financial purposes that were creative ways of reporting assets and liabilities off the balance sheets," Gleason said. "There's a conflict when the people doing the audit are also involved in tricking the auditors."

At a news conference Wednesday, SEC Chairman Harvey Pitt said he didn't think the dual role played by Arthur Andersen was a problem.

He also declined to recommend government jurisdiction over accounting practices, although he did announce that a new private entity would be formed to draft new "tough, no-nonsense" rules for auditors.

"We simply cannot afford a system like the current one that facilitates failure rather than success," he said.

While all accounting firms will be coming under scrutiny in the coming months, Arthur Andersen is likely to be the fall guy, experts say.

"Whenever someone loses money they look to the deep pockets," Crum said. "Arthur Andersen's going to be the scapegoat here."

But Gleason says the punishment may be well-deserved: "It's an embarrassment to the accounting profession."

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REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu .

Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

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