Revisiting Arthur Anderson's Death Sentance

The firm of Arthur Anderson was put to death by government prosecutors.  Unlike human beings, Anderson was killed without ever receiving a trial, and was dead long before any appeal was mounted.  Many a media tear have been shed for Enron employees who lost their savings in the Enron 401-K, where they invested in Enron by choice, but I have seen few people sympathizing with the tens of thousands of people who lost their savings in the AA collapse, the vast vast majority of whom never touched the Enron account.

Mary Morrison has a nice analysis (pdf) of why Anderson was probably killed unfairly.  Her central argument is that the main fraud at Enron was perpetrated in the off-balance sheet special purpose entities, or SPE's, when third parties put up capital that the SPE called equity, but was in fact really a loan with a verbal (non-written) promise to repay by either the entity or Enron.  By disguising a loan as equity, and by by disgusing related parties as arms-length investors, Enron was able to avoid consolidation of the SPE's with its financial statements.

Ms. Morrison argues persuasively that since Anderson was not the auditor for any of these SPEs, it had no way to uncover the true nature of these sham financing agreements, since these SPEs were effectively different corporations with different auditors.  AA had to rely on signed statements by each deal's principals that the financing for the SPE was as described (which is standard practice in this type situation and is considered to represent adequate due dilligence).  Anderson had no way to know what was going on in the SPE's, and since the SPE's were separate legal entities from Enron, it had no legal right to poke around in these entities and of course no subpoena power.  It had no way to know about the hidden verbal second part of the financing agreements.  She argues AA was a victim of the fraud and of false statements by Enron and the SPE managers and investors. 

It is interesting to note that the prosecution of the Enron case is prosecuting Enron managers right at this minute for making such fraudulent statements to AA and for hiding the nature of the SPE's from AA.  In other words, the prosecution team that first gave AA the death penalty for allegedly conspiring with Enron to hide their problems is now prosecuting Enron managers on the legal theory that AA was innocent and duped by the managers, which was AA's defense before they were wiped out.

Tom Kirkendall has more on AA's martyrdom here.  He also continues his scary series of articles on prosecutorial abuse here.  The pressure brought to bear to prevent defense witnesses from testifying is particularly frightening.  When you read this, you are really left wondering how the auditors for the SPE's, which may include KPMG, escaped unscathed (in fact escaped richer, since they got their share of the now-defunct Anderson's clients) when Anderson was put to death.

  • http://www.donothaveone.com TC

    "The pressure brought to bear to prevent defense witnesses from testifying is particularly frightening."

    Scince when does a court of law have the ability to decide which evidence is worthy or not worthy? Do they know which will sink or float a case ahead of time?

    Have they already pre-judged the case prior to hearing testamony?

    It's really too bad the justic system died, I don't know when it died, but I for sure know it has died! Too bad we don't rename the Justice department to the legal deparment so they can at least be on equal verbage for the general public to KNOW that they will not be getting JUSTICE, but legal manuvering instead!

  • http://www.kipesquire.com KipEsquire

    It's Andersen, not Anderson.

  • http://dfriedman.typepad.com Dave

    And here I was about to comment on the spelling of Andersen but KipEsquire beat me to the punch...

  • http://www.linesinthesand.net Doug Murray

    Maybe the punishment is too severe for the Enron incident, but when you throw in WorldCom, Sunbeam, Global Crossing and others, could it just be karma catching up?

    When I started my accounting career in the '70s, I was amazed to learn that auditors were doing as much consulting as they were auditing. If Enron was paying more to Andersen Consulting than to AA, as has been reported, where would Andersen Worldwide's allegience really lie?

    It is sad, though, that the damage of such wrongdoing does spread far beyond the relatively small circle of actual wrongdoers.

  • Max Lybbert

    I have to admit that I met an accountant just before Enron tanked that said "We used to do enough work that if the company went bankrupt we wouldn't get sued, now we know we'll get sued no matter what we do, so if the company's too big to go bankrupt we don't really audit them; but I feel sorry for those small companies because we really make them work for their audit." It was pretty clear that attitude was leading to a bad future.

    I don't have a solution, although I think a good starting point would be to refuse to buy stock in companies (like Enron, or even Google) that routinely don't give out important financial statements.

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