Abstract

Arthur Andersen is all but gone. The accounting firm’s undoing follows the collapse of Enron—a major Andersen client—in the first of an unparalleled series of corporate financial fraud scandals. This Article critically examines the legal strategy Andersen pursued to save the firm. Part I explores why the government felt constrained to prosecute Andersen despite dire warnings that an indictment would deal the firm a fatal blow. Andersen’s history of serious regulatory woes, its refusal to learn from its past, its insistence that it would not admit guilt as a firm, and its reasons for destroying Enron-related documents all combined to make a strong case for criminal prosecution. In addition, the threat of prosecution was one of the few remaining incentives for Andersen to change what had become a culture of noncompliance. But Andersen did too little and did it too late. Part II analyzes Andersen’s challenges to the legal adequacy of the indictment. The analysis reveals that Andersen relied on contrived arguments that both lacked support in the case law and contradicted the text of the statute under which the firm was charged. Yet its unfounded legal claims helped to mold public opinion in support of Andersen’s cause. Part III examines concerns Andersen raised about the government’s procedures and tactics. Andersen claimed that the government abused its power by continuing the grand jury investigation after the firm was indicted and claimed that prosecutors arbitrarily denied Andersen an opportunity to present its case to the grand jury. Like the challenge to the legal adequacy of the indictment, these claims had little to recommend them. Andersen’s arguments invited the court to intervene in matters over which it had little supervisory power, based the abuse of power claim on sheer speculation, and publicly cast the government’s handling of grand jury matters in a plainly false light. Part IV focuses on the tactics Andersen used to get its message across. Simply put, Andersen orchestrated an aggressive, high-profile public relations campaign to sway public opinion. In addition to portraying the firm’s employees as “emotionally and financially crippled” by the indictment, Andersen cast the government’s actions as “unjust,” politically motivated, and a “gross abuse of government power.” Although the thematic material varied from time to time, the constants that tied it all together were Andersen’s heated rhetoric and calculated distortion of the truth. Putting the firm’s handling of the case in a broader context, Part V considers some potentially harmful implications of Andersen’s coordinated legal and public relations strategies, including potential harm to the justice and regulatory systems. On a more practical level, the Andersen experience has influenced regulatory and legislative agendas and led to reforms that will preclude the future use of Andersen’s principal defenses.

Keywords

Accounting, Criminal liability of juristic persons, Securities fraud, Corporate governance, Arthur Andersen LLP, Indictments, Obstruction of justice, United States