Arthur Andersen Indicted in Enron Case

ByABC News

W A S H I N G T O N, March 14, 2002 -- The U.S. Justice Department today announced the indictment of embattled accounting firm Arthur Andersen on one count of obstruction of justice relating to the collapse of former energy giant Enron Corp.

A federal grand jury actually filed the indictment on March 7, but it was unsealed today.

"The firm sought to undermine our justice system by destroying evidence," said Deputy Attorney General Larry Thompson at an afternoon news conference, saying the firm has intentionally disposed of "tons" of evidence after a government inquiry began last October.

He added: "At the time, Andersen knew full well that these documents were relevant."

Andersen, however, has made it clear it will not plead guilty to the charge, having already rejected a plea bargain deal with the government.

The company released a vigorous response to the announcement this afternoon, calling the Justice Department's actions "without precedent and an extraordinary abuse of prosecutorial discretion," and "a gross abuse of government power."

Charge Based on Shredding

The obstruction charge is based on claims that Andersen employees shredded important documents about Enron's finances, even though they knew the Securities and Exchange Commission was formally looking into Enron. The Justice Department also alleges Andersen employees deleted relevant computer files.

Andersen's basic line of defense is that the shredding was conducted in the company's Houston office under the supervision of David Duncan, the firm's lead partner in charge of Enron's audits, and was not ordered by executives at Andersen headquarters in Chicago.

An Andersen internal report, written by two law firms and obtained today by ABCNEWS, emphasizes this point.

At the time of the shredding in October, says the report, "Duncan and the other partners on the Enron engagement knew that the SEC had made an informal request to Enron for documents and information relating to partnerships involving Enron's former CFO, Andrew Fastow, and that private civil lawsuits had also been filed."

But the indictment charges the document destruction was widespread and involved employees at multiple locations, including Andersen's London office.

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

Duncan's lawyers released a statement this afternoon saying that he "continues to cooperate with all of the ongoing investigations" and would not comment on Andersen's indictment.

On Jan. 10, Andersen acknowledged it had destroyed thousands of Enron-related documents and e-mails last fall, as investigations into the events that ultimately led to the company's bankruptcy were under way. Enron, after filing the largest-ever U.S. bankruptcy on Dec. 2, fired Andersen on Jan. 17.

The maximum potential punishment for the charge is a five-year probation term for Arthur Andersen and a $500,000 fine.

Multiple Reasons for Indictment

In another letter released Wednesday night by Andersen, the firm defends itself and strongly criticizes the Justice Department's line of inquiry into the Enron matter.

"The Department has refused to allow the firm to tell its story to the grand jury, in violation of both Department policy and the basic precepts of fundamental fairness," reads the letter from the Washington, D.C., law firm of Mayer, Brown, Rowe & Maw. "The Department proposes an action that could destroy the firm, taking the livelihoods of thousands of innocent Andersen employees and retirees."

However, sources close to the investigation have told ABCNEWS that Justice Department officials concluded that the entire company should be criminally charged for a number of reasons, including:

That a senior management official, Duncan, allegedly oversaw a large portion of the document destruction.

The sheer volume of the documents that were destroyed, estimated at 32 trunks worth of material by one Andersen employee. In addition, the destruction of the documents would have helped to mask Enron's financial difficulties and the financial advice given by Andersen.

Those actions could have conceivably helped Enron remain viable as a paying customer to Andersen.

Guilty Plea Could Wreck Company

The 89-year-old accounting firm with 85,000 employees faces a variety of threats to its survival. Experts say a guilty plea by Andersen in the case could bar the company from carrying out audits for companies filing with the SEC.

The New York Times reported today that the SEC has secretly begun talks with the rest of the "Big Five" accounting firms on how to handle a possible collapse of Andersen. On Wednesday, two firms — Deloitte Touche Tohmatsu and Ernst & Young — announced that they were not interested in buying Andersen.

With around 2,300 publicly traded companies in the United States using Arthur Andersen as their accountant — about one-fifth of the total — the collapse of Andersen could create large-scale problems in the U.S. capital markets.

"If all of these companies are combing the streets for another accountant, there would be chaos," said Arthur Bowman, editor of accounting industry newsletter Bowman's Accounting Report.

This evening, the SEC announced temporary measures concerning Andersen, including a potential 60-day extension for clients of the firm and guidelines for Andersen's ongoing audits.

"So long as Andersen continues to be in a position to provide those assurances, the Commission will continue to accept financial statements audited by Andersen in filings," stated an SEC press release.

Both the Justice Department and SEC have been investigating the Enron collapse since last fall, when Enron announced it was worth $1.2 billion less than it had previously acknowledged in its financial reports. As Enron's auditor, Andersen was responsible for approving Enron's financial statements.

ABCNEWS' Pierre Thomas, Linda Douglass and Betsy Stark contributed to this report.