Answer & Explanation:LP3 Assignment: Case Study – Anderson: An Obstruction of Justice?This assignment will assess the following competency:ASSESS the importance of effective internal controls over financial reporting and how the control structure and environment can mitigate the fraud risks.DirectionsRefer to the case study on page C1 (attached) and write a paper to address questions at the end of the case. Your paper should be 400-500 words and written in the APA format citing your references.See attached.
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Anderson: An Obstruction of Justice?
Problem
Most students are familiar with Arthur Anderson as a CPA firm that failed to detect fraudulent
financial activities in the audits of several companies including Sunbeam, Waste Management,
Enron, and WorldCom. Although much has been written about the quality of these audits an how
increasing the firm’s revenues from both audit and nonaudit services may have supplanted audit
quality as the main objective of Andersen’s demise and findings that have occurred since
Andersen ostensibly closed its doors as an audit and accounting firm.
In effect, Andersen had already received the maximum penalty even before the trial began. Once
Anderson had been indicted, most of its clients had decided that an audit by a firm under
indictment would be of little value even if allowed by the Securities and Exchange Commission
(SEC). During the shareholder proxy season in early 2002 company after company announced it
would no longer retain Andersen as its auditor. Whether the firm was able to defend itself or not,
the days of Andersen as a viable audit firm had come to an end.
ANDERSEN GOES TO TRIAL
In May 2002, Arthur Andersen LLP was tried for obstruction of Justice in connection with the
destruction of documents during a time period prior to a formal SEC investigation of Enron, one
of Andersen’s largest clients. The main witness for the prosecution was David Duncan, a former
Andersen partner in charge of the Enron audit, who had already pleaded guilty to obstruction of
justice. The guilt or innocence of Andersen hinged on the question of corporate direction. If
Duncan had acted illegally on his own in an effort to save himself from consequences resulting
from SEC investigation of Enron, then Andersen as a firm would not likely be found quilty of
obstructing justice. However, if Duncan had acted illegally on the direction of Andersen’s
management within the scope of his position in an attempt to save Andersen from the
consequences of Enron, the firm as a whole would be held liable. Therefore, the issues to be
determined were (1) whether illegal acts had been committed and (2) if they had been committed
on behalf of Duncan or on behalf of Andersen.
The Prosecution’s Case
The chief prosecutor for the government was Samuel Buell. The main points in Buell’s case
follow:
Top partners in Arthur Andersen’s Chicago’s office had permitted Enron to use
aggressive accounting practices that were very questionable given the nature of Enron’s
business.
In late September through early October 2001, Andersen’s legal department had begun
creating a strategy designed to protect Andersen from regulators and litigants.
A major part of the strategy was to invoke Andersen’s document retention policy, which
according to prosecutors, was an obscure policy that its employees seldom read or
followed on its audits, in addition, the policy had been revised in 2000 by an Andersen
partner who had been disciplined by the SEC for his involvement in the Waste
Management audits. According to Buell, management had known that invoking the
policy would lead to the destruction of tons of papers and tens of thousands of computer
files that would be of interest to investigators,
The prosecution presented notes from a October 9 conversation between Nancy Temple,
Andersen’s legal counsel, and attorneys in Andersen’s legal department. This
conversation indicated that Temple had believed an SEC investigation was imminent and
that such an investigation could have devastating consequences for Andersen. Andersen
was still operating under a court order signed in 2000 (due to a settlement of the Waste
Management lawsuit) that could trigger a suspension of its license to audit publicly
traded companies if it was found to have engaged in additional securities law violation.
Duncan had admitted to destroying documents to keep them out of the investigation and
that his actions were taken under direction and with the consent of Andersen management
in Chicago.
Finally, C.E. Andrews, an Andersen partner, in his testimony before Congress in January
2002, had said that Duncan had given every appearance of destroying documents in
anticipation of requests for documents from federal investigators.
Andersen’s Defense
Andersen’s attorneys, led by Rusty Hardin, defended Andersen against all charges brought by
the government.
The government’s case had fallen short of proving Andersen’s guilt or even proving that
a crime had occurred.
Duncan had shredded documents prior to any formal investigation (Andersen was not
subpoenaed until November 8, 200100 and the elimination of unnecessary documents
was a normal audit procedure.
It was clearly sound business practice to consult with the corporate attorneys with regard
to potential litigation and the firm’ rights and obligations with regard to that
investigation. In fact, Duncan, at Temple’s request, had saved many documents that could
have proved detrimental to Andersen.
Hardin argued that Duncan was innocent and that the government had overstated its case
against him in order to pressure him to cooperate with its investigation in exchange for a
reduced sentence.
While the prosecution focused on the part of the document retention policy that instructed
auditors on the documents that could be destroyed, parts of the retention policy indicated
which documentation was required to be retained in the audit files
THE CASE GOES TO THE JURY
Although the prosecution and defense presentation were very contentious, possibly the most
contentious part of the case focused on the instructions that Judge Melinda Harmon gave to the
jury. The instructions hinged on the wording of the statute that makes it a crime to
Knowingly use intimidation or physical force, threaten, or corruptly persuade person… with
intent to …. Cause that person to withhold documents from or alter documents for use in an
official proceeding,
Although both sides believed that the jury needed instruction that clarified the meaning of the
statute in question, two issues were paramount in the argument concerning the instructions:
1. The phrase knowingly… corruptly persuade had been discussed at length. The
government hand contended that the word knowingly was not meant as a modifier of the
term corruptly persuade. The jury had been instructed that
Even if the petitioner honestly and sincerely believed that the conduct was lawful, you
may find the petitioner guilty.
2. The government had contended that the word corruptly needed to be defined for the jury.
Prior rulings in the 5th district court (the same court district that was trying the Andersen
case) had stated that corruptly was
Knowingly and dishonestly, with specific intent to subvert or undermine the integrity of
the proceedings
The government had insisted on exchanging the word dishonestly and adding the word
impede to the phrase “subvert and undermine”. The instruction provided to the jury had
not included the word dishonestly and included the phrase “subvert, undermine, or
impede” government fact finding
Having heard the testimony and been given these instructions, the jury convicted Andersen of
obstruction on the basis of flawed instructions to the jury. In writing the opinion, Chief Justice
William Rehnquist cited the following arguments:
Merely providing a person with information regarding a course of action cannot be
construed as persuading another person… with intent to … cause that person to withhold
documents
It is not necessary corrupt in persuading another person … with intent to … cause that
person to withhold documents. It may be proper for an attorney to persuade client to
withhold documents under attorney-client privilege from an investigation. In this
circumstance, such persuasion would not be corrupt. Therefore, the withholding of
documents from an investigation cannot by itself be presumed to be a corrupt action.
Document retention are created to keep documents from being obtained by certain
individuals and organizations, including the government. These policies are common in
business and it is not wrongful for a manager to instruct employees to abide by such a
policy.
The term knowingly does modify the term corrupt both linguistically and per the intent of
the statute. The jury instructions did not convey the requisite consciousness of wrong
doing that should be required for conviction
Substituting the term impede in place of dishonestly in the jury instructions removed the
requirement that the action be with knowledge and forethought of wrongdoing. The term
impede has a much broader concept. Anyone who innocently persuades another to
withhold information might be considered to impede an investigation. Clearly, the term
corruptly was included in the statute to exclude such innocent behavior from being
consisted unlawful.
A knowingly corrupt persuader cannot be someone who persuades others to shred
documents under a document retention policy that was not enacted with regard to any
particular proceeding in which those documents might be material. A series of events is
not efficient to indicate an intent to obstruct am investigation
CONCLUSION
The headlines following the Supreme Court decision were telling:
“A Posthumous Victory,” USA Today, June 1, 2005.
“Arthur Andersen’s Hollow Victory,” The Economist, June 4, 2005
“Too Late for Andersen,” Legal Times, June 6, 2005
“A Bittersweet Court Victory for Andersen,” Legal Times, June 6, 2005
Although Arthur Andersen’s verdict had been overturned because of faulty jury instructions, it
was far from a vindication that what Andersen had done was correct. In addition, such a decision
came much too late to provide anything but normal victory to Andersen’s former employees.
It is unlikely that the government will retry Andersen. First, there is a little to gain in terms of
either financial or other penalties. Andersen has already received the “death penalty” (and is no
longer a viable entity), whether guilty or innocent. Second, should Andersen be retired and be
found not guilty, the Department of Justice and the SEC would suffer severe blows to their
reputation and receive a multitude of criticism from the business community. On the other hand,
a retrial might be what the government needs to fend off criticism of being overzealous and
overreaching in its prosecution of Andersen. But it does appear that risks outweigh the rewards.
Third, the government has received everything that it wanted with regard to Enron, WorldCom,
and Andersen with the passage of the Sarbanes-Oxley Act. Most notably, a result of the
Andersen case is a stricter document retention policy with more severe penalties for not
following that policy
It is interesting to note that many legal experts believe that Department of Justice and the SEC
tool a vastly different attitude toward the 2005 tax-shelter problems of KPMG because of the
lessons learned from the Andersen prosecution. Clearly, in the Andersen case, there had been no
winners and the elimination of another international CPA firm would cause additional harm to
innocent employees and create additional chaos in the business community.
Finally, in March 2007, a federal judge gave final approval to $72.5 million settlement between
Arthur Andersen and investors who used the accounting firm over its role in Enron’s cpllapse.
This finally put to rest the case of Andersen and Enron, but the repercussions may live on
indefinitely.
Discussion Questions
1. Lookup the term corrupt in the dictionary, what is it definition? Was corrupt
appropriately applied to the actions of Arthur Andersen?
2. The issues that overturned the Andersen verdict were based on faulty jury instructions,
not on whether Andersen was in fact guilty or innocent. Based on the information in this
case and other information you know, do you believe Andersen violated the law?
3. Although Andersen’s conviction was overturned, do you believe that its employees acted
in an ethical manner?
4. Comment on the actions of David Duncan and Nancy Temple. Which of these parties do
you believe was more responsive for Andersen saga?
…
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