News > Companies  
DOJ indicts Andersen
Andersen calls charge "extraordinary abuse of prosecutorial discretion."
March 15, 2002: 9:25 AM EST
By Luisa Beltran, CNN/Money Staff Writer

NEW YORK (CNN/Money) - The Justice Department charged Arthur Andersen LLP with obstruction of justice Thursday for shredding Enron Corp. documents, the first indictment related to the collapse of the energy trader.

The indictment, which was handed down last week by a federal grand jury in Houston but announced Thursday, alleges that Andersen personnel engaged in the wholesale destruction of documents, shredding literally "tons" of Enron documents, and purging volumes of information.

graphic graphic
"The destruction of evidence extended far beyond the Houston base," Larry Thompson, Deputy Attorney General, said. "The destruction was not confined to a few individuals but was a substantial undertaking over a period of time."

The Justice Department did not officially charge any individuals or partners at Andersen but said that its investigation continues.

Andersen, which was Enron's auditor for 16 years before it was fired in January, reacted swiftly to the indictment Thursday, calling the DOJ's actions "an extraordinary abuse of prosecutorial discretion."

"The Department has refused to allow the firm to tell its story to a grand jury, in violation of both Department policy and the basic precepts of fundamental fairness," Andersen said in a statement.

Andersen officials are scheduled to make an initial court appearance on the charges in Houston next Wednesday at 10 a.m. (11 a.m. ET) before U.S. District Court Judge Calvin Botley.

If convicted, Andersen would face five years probation and a fine of $500,000. The conviction would also trigger an Securities and Exchange Commission rule that would prohibit the company from auditing public companies.

Andersen can still audit -- for now

The SEC said late Thursday it will continue to accept audits from Andersen, but will require certain conditions.

The Commission said issuers "of audits completed by Andersen after March 14, 2002 must obtain from Andersen certain representations concerning audit quality controls, including representations regarding the continuity of Andersen personnel working on the audit, the availability of national office consultation, and the availability of personnel at foreign affiliates of Andersen to conduct relevant portions of the audit."

graphic graphic graphic
Larry Thompson, Deputy Attorney General, announces Andersen's indictment for obstruction of justice.

Play video
(QuickTime, Real or Windows Media)

Andersen has also told the SEC it will notify the Commission immediately if it is unable to continue to audit financial statement in accordance with generally accepted accounting standards or quality control standards.

Companies who are unable to be audited by Andersen, or choose not to be, may submit unaudited financial statements, but will generally be required to amend their filings within 60 days, the SEC said.

Chicago-based Andersen refused to plead guilty earlier Thursday. The accounting firm, as Enron's auditor, signed off on the company's financial statements and later admitted to destroying Enron documents. Houston-based Enron, which filed the largest bankruptcy in United States history last December, allegedly used off-the-books partnerships to inflate profits and hide nearly $1 billion in debt.

The charge against Andersen

The one-count indictment claims that Enron alerted Andersen of an SEC inquiry on Oct. 19 and four days later Andersen partners launched a wholesale destruction of documents at Andersen's offices in Houston.

"The shredder at the Andersen office at the Enron building was used virtually constantly and, to handle the overload, dozens of large trunks filled with Enron documents were sent to Andersen's main Houston office to be shredded," the DOJ said in its indictment.

Andersen personnel in Portland, Ore., Chicago and London were also directed to destroy documents, the DOJ said. Only on Nov. 8, when the SEC served Andersen with a subpoena, did the shredding stop, the indictment said.

Andersen continued to claim Thursday that its senior management did not know or consent to the shredding and that the acts of destruction were entirely limited to the Houston office. The accounting firm said that once it found out that documents were being shredded it immediately notified the DOJ and SEC. The firm has since dismissed lead partner David Duncan, who was in charge of the Enron engagement, and has placed various personnel on administrative leave.

Duncan is reportedly in negotiations with the DOJ to testify against senior Enron executives in exchange for immunity. An attorney for Duncan called the indictment against Andersen "groundless and irresponsible" but an indictment against Duncan would be even more baseless, attorney Barry Flynn said.

Andersen has tried to place the blame for the document destruction primarily on Duncan and the firm claims he orchestrated the shredding.

"Real people denied under oath that Duncan ordered a massive destruction of Enron documents," Flynn said. "David Duncan did nothing criminal."

The criminal charge against Andersen is expected to cause more audit clients to drop the firm. Andersen, once the most powerful accounting firm in the world, has lost many clients recently including Merck, FedEx and Freddie Mac.

The loss of so many customers could lead to Andersen's collapse and reports of a bankruptcy filing loomed Thursday. But the Justice Department seemed unfazed at the possible results .

"It shouldn't be a surprise to anyone that serious charges have serious consequences," Thompson said. "It would be unfortunate if any individual or entity [said] it was so big or so important that it couldn't be indicted."  graphic

-- additional reporting by CNN/Money's Kim Khan