U.S. indicts Enron auditor

Andersen is charged with obstruction in shredding of files

Big blow to faltering firm

March 15, 2002|By Marego Athans | Marego Athans,SUN NATIONAL STAFF

WASHINGTON - In the first indictment of the Enron scandal, the giant Arthur Andersen accounting firm was charged yesterday with obstruction of justice in the shredding of "tons" of Enron-related documents last fall while the U.S. Securities and Exchange Commission was investigating the failed energy company.

The federal indictment naming Andersen was returned by a grand jury in Houston last week and unsealed yesterday. It is a monumental blow to the 94-year-old firm, which has been hemorrhaging clients while seeking unsuccessfully to merge with another Big Five accounting firm.

Federal prosecutors had given Andersen a deadline of 9 a.m. yesterday to plead guilty in the case. Instead, Andersen's attorneys fired off a letter accusing the U.S. Justice Department of "gross abuse of government power" and of using "flimsy" evidence to subject the firm to a "death penalty."

Deputy Attorney General Larry Thompson said prosecutors considered the possible repercussions of charging Andersen, including the firm's demise.

"It shouldn't be a surprise to anyone that serious charges have serious consequences," Thompson said. "It would be unfortunate for a criminal justice system if any individual or any entity could say that he or she or it was too big or too important so as it couldn't be indicted."

The accounting firm, which prized Enron as one of its biggest and most lucrative clients, has been drawn further into the scandal in recent weeks as several former and current Enron executives have testified before Congress that Andersen had approved unorthodox accounting practices and offshore partnerships that concealed large debts and inflated income - tactics that led to Enron's bankruptcy once they were revealed.

Pleading guilty would have precipitated another set of problems for the firm, barring it from performing audits and preparing financial statements required by the SEC - its core function - unless it could obtain a waiver from the regulatory agency.

Andersen's disappearance would force thousands of clients to find new accountants at the same time, a flood of new business that competitors might not be able to immediately handle, experts say. The only comparable case occurred in 1990, when Laventhol & Horwath, then the nation's seventh largest accounting firm, went bankrupt and dissolved while fending off malpractice suits.

Andersen has admitted that Enron-related documents were destroyed but said the activity was limited to the Houston office and that the firm's senior management in Chicago was unaware of what was going on. The government challenged that assertion.

"The obstruction effort was not just confined to a few isolated individuals or documents," Thompson said. "This was a substantial undertaking over an extended period of time with a very wide scope."

Once among the most respected firms in the profession, Andersen has been embroiled in a welter of lawsuits in recent years, challenging its integrity and alleging that it misled investors. Earlier this month, it agreed to pay $217 million to settle lawsuits involving the Baptist Foundation, which bilked investors of more than half a billion dollars in a Ponzi scheme. Earlier, it had made other multimillion dollar payouts to settle suits over its auditing practices - $110 million for Sunbeam, $95 million for Waste Management and $90 million for Colonial Realty.

Its potential liability in the Enron case is so great - the firm offered $750 million to settle with investors but was turned down - that two major suitors, Deloitte Touche Tohmatsu and Ernst & Young, announced yesterday that they had broken off merger talks.

Meanwhile, the exodus of clients continues, among them such companies as Federal Express, Merck & Co., Freddie Mac, Delta Airlines and Kerr McGee.

The seven-page indictment charges that between Oct. 10 and Nov. 9, Andersen partners ordered the destruction of documents that the firm knew might relate to imminent civil litigation and government investigations.

Andersen had been well aware of the accounting problems that led to Enron's public announcement last fall of a $618 million net loss for the third quarter and a reduction of shareholder equity of about $1.2 billion, the indictment said. Those announcements sent Enron's stock price plummeting and led the SEC to open an inquiry into Enron.

The indictment described how the firm was privy to allegations by Enron whistleblower Sherron Watkins, whose August memo to then-Enron Chairman Kenneth Lay warned of accounting scandals and possible fraud. The indictment says Watkins reported her concerns to a partner at Andersen, who subsequently disseminated them within the accounting firm.

Within days of learning that the SEC had launched its inquiry, Andersen launched a "wholesale destruction of documents" at the firm's Houston office, the indictment says. Employees were called to urgent meetings and were told to work overtime if necessary.

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