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Good ruling

The US Supreme Court today overturned the obstruction of justice conviction of the Arthur Andersen accounting firm. This comes too late, of course, to save Andersen, which was largely destroyed by the conviction, but it nonetheless injects some common sense back into the rules around withholding information from the government (it can be legal, you know, a fact which the SCOTUS felt the feds needed to be reminded of) and document disposal (a topic on which I spend far too much of my time).

In a unanimous opinion, justices said the former Big Five accounting firm’s June 2002 obstruction-of-justice conviction – which virtually destroyed Andersen – was improper. The decision said jury instructions at trial were too vague and broad for jurors to determine correctly whether Andersen obstructed justice.

. . .

[I]n his opinion, Rehnquist noted that it is not necessarily wrong for companies to instruct employees to destroy documents, even if the intent is in part to keep information from the government.

Like a mother who advises a son to invoke his right against compelled self-incrimination out of fear he might be convicted, “persuading” an employee to withhold information is not “inherently malign,” Rehnquist wrote.

“The instructions also diluted the meaning of ‘corruptly’ so that it covered innocent conduct,” Rehnquist said.

The Andersen case was of a piece, really, with Martha Stewart’s conviction. Both were convicted, essentially, of failing to cooperate in their own prosecution. Give Martha cred for serving her time, but I wonder if she wouldn’t have won out on appeal. Eventually.

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4 comments to Good ruling

  • toolkien

    I worked in public accounting for 7 years and there was a standing policy to destroy all records that did not become part of the final working papers for the very reason that they could be subject to subpeona.

    And that is what Andersen did. They didn’t destroy any working papers (no auditor would ever want to do that since it establishes their substantive test to substantiate their opinion) but secondary info subject to destruction anyway. Granted, they sped up the process that remained sluggish due to complacency, but it was prior to an actual subpeona being issued (as I understand it).

    So what they did wasn’t savory but it wasn’t illegal in my opinion.

    But, anyway, I didn’t think that Andersen was found guilty of obstruction due to the shredding, but due to the coverup surrounding an editted email sent by internal attorneys.

  • Jacob

    I’m not familiar with the case. My question is: did Anderson commit fraud ? Was their accounting in any way irregular ?

    I’m not interested in the question of cover-up. That’s not the main issue. The main issue is that Enron commited fraud on a gigantic scale. Aren’t accountants supposed to discover such fraud and hinder it, or report it correctly ?

    Was it possible for Enron to commit it’s fraud without Anderson being accomplices, or at least finding out about it ?

    Maybe a cover up charge is all that the prosecutors could find, but since this fraud was commited without Anderson reporting it, it seems they deserved their ruin.

  • Johnathan Pearce

    I am glad you mentioned the Martha Stewart case, one of the nastiest public stonings of a successful businessperson to have happened in many a year. I wrote about it on this blog here.(Link)

    The A.Anderson case is not quite in the same bracket. A group of people in the firm clearly turned a blind eye to some appalling fraud and deserved to be harshly punished.

  • Jacob, you are wrong.
    Under the revised “GAAP” (Generally Accepted Accounting Principles) it was entirely legal and OK.
    Please note the word “revised”.
    Revision committees under Bush 41 and Clinton came up with the new rules that under certain cercumstances certain parts of the actual books could be witheld. (actually, the committee was seated under Bush 41 but never had turned in any prospective rules or changes before the administration change and Clinton approved the new rules in spite of admissions that there were loopholes that could be misused to prevent accurate analysis of company reports, ie: Enron)

    Basically the new rules had loopholes that said under certain circumstances certian parts of the truth did not have to be revealed.
    It is like I could sell you a checking account and let you see all the deposit slips but not all the checks that had been written against the account (or vice versa if I were going to keep one and sell one)
    And the new GAAP had set up rules as to when and how this concealment was OK.
    Anderson certifying books as meeting the new standard was not fraud, or the concealing of fraud, in spite of those books being, under any honest standard, cooked and blatantly dishonest.
    The lynch mob wanted heads at Enron and Anderson for activities that were, and are currently, perfectly acceptable under the revised GAAP.
    Nobody is talking about going back to an honest GAAP, just a fear that if a company is caught going to far, like Enron, then legal or not the company and the executives will be hounded to the ends of the earth.