Was Andersen Really an Innocent Bystander?
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What does the Supreme Court's decision to overturn Andersen's conviction mean? And will it change the outlook for other executives in trouble with the law?
By Bethany McLean
FORTUNE WEB EXCLUSIVE
fortune.com
"Today's verdict is wrong...The reality here is that this verdict represents only a technical conviction." So reads a statement Arthur Andersen issued back on June 15, 2002, just after a Houston jury found the accounting firm guilty concerning its actions in the Enron affair. Technical though it may have been—Andersen was convicted not for abetting accounting fraud at Enron, and not even for destroying documents, but rather for the actions of the firm's general counsel, which the jury ruled had "corruptly persuaded" another employee to destroy evidence—the decision effectively put Andersen out of business.
Fast forward three years to yesterday, when news broke that the U.S. Supreme Court, in an unanimous and remarkably rapid decision, has overturned Andersen's conviction. Chief Justice William Rehnquist wrote that the judge's instructions to the jury "simply failed to convey the requisite consciousness of wrongdoing" and "diluted the meaning of 'corruptly' such that it covered innocent conduct." In other words, the Supreme Court ruled that to be found guilty, Andersen officials had to know they were doing something wrong. That is contrary to the instructions Judge Melinda Harmon originally gave the Houston jury. She told them the firm could be convicted even if it believed its conduct was lawful.
Although in a very practical sense, the decision is meaningless—it's too late to revive Andersen—there's lots of speculation about what the decision means in more abstract ways. Does it mean trouble for the upcoming trial of Enron's former chairman Ken Lay and former CEO Jeff Skilling? Will it help other convicted executives—such as Frank Quattrone and Bernie Ebbers—reverse their guilty verdicts? (In a filing yesterday, Quattrone's lawyer said the ruling has an "important bearing" on arguments he's raising.) Is it a setback to the attempts to cut down on corporate crime? Most legal seers are saying that there's at least a small "yes" component to each of those questions, because the Supreme Court's ruling makes it so crystal clear that to prove white-collar crime, you have to prove criminal intent. While defense lawyers will be scouring the ruling, the issues—and the evidence—in every case are different. The most important question of all is, does this mean that Arthur Andersen was actually an innocent bystander to the events at Enron? And that's where things get really complicated.
Even Andersen's original conviction didn't go to the heart of the role Andersen played at Enron. That's because Andersen was never charged with, much less convicted of, getting Enron's accounting wrong. On the part of some Enron faithful, that's proof that the accounting wasn't wrong. (This is aside from a few large errors that Andersen admitted even before Enron's bankruptcy.) Indeed, Rick Causey, who was Enron's chief accounting officer, is scheduled to stand trial with Skilling and Lay in early 2006. Causey says he's innocent of any wrongdoing. And the truth about Enron is that a lot of its accounting did follow the rules. It just totally violated the spirit of the rules, and because of that, the numbers Enron put forth to the world didn't represent economic reality.
Yet there's little doubt that Andersen accountants knew that in commonsense terms, Enron's accounting was, as Andersen put it in various memos, "high risk." There's also little doubt that they kept going along with what Enron wanted because they didn't want to lose Enron's business. (Enron paid Andersen $52 million in fees in 2000, the last year before the company went bankrupt.) And most importantly, there's little doubt that one "no" from the Andersen accountants could have changed the course of history at Enron. Does all of this make Andersen criminally guilty? That would have been a very difficult case for prosecutors to make—and part of the difficulty would have been keeping jurors awake through arguments of accounting minutiae. Which perhaps explains why prosecutors chose to focus on what they thought would be an easier case to make.
It's hard to argue, at least in an ethical sense, that Andersen was innocent in the Enron affair. Plus, there's Sunbeam, Waste Management, and WorldCom - other companies involved in fraud for which Andersen was the accountant. This is why you'd hear people say of Andersen's original conviction that it was a bit like getting Al Capone for income tax evasion. And did Andersen's hard fall deter other would-be criminals? We'll never know. But it's also hard to argue that putting Andersen out of business—and causing its 28,000 employees, most of whom had had zero contact with Enron, to lose their jobs—was the right outcome. In other words, it's complicated. |
