Enron and Andersen: Bad Apples or Bad Barrel?

The Enron scandal took a new turn recently with the guilty plea of Michael Kopper, former managing director of the company’s global finance unit. It now appears prosecutors will use evidence supplied by Kopper to indict and try other individuals further up Enron’s executive ladder, including former CFO Andrew Fastow and perhaps former CEO Jeffrey Skilling and former chairman Kenneth Lay.

As the noose tightens around more corporate necks at Enron, however, one question that arises is why Enron itself is not the target of a criminal case. After all, the Justice Department indicted and ultimately convicted Enron’s auditing firm, Arthur Andersen LLP. Is it possible for an entire auditing firm to be guilty of a crime in connection with an auditing engagement while the client for whom the audit was performed is not guilty of anything?

The answer to this question brings to the surface some of the underlying legal currents in the Enron story and demonstrates the sheer power of government prosecutors to decide the future of both companies and executives once evidence of wrongdoing comes to their attention.

First, a brief review of the facts: Enron unraveled in the fall of 2001 as the full import of its off balance sheet transactions and insider conflicts of interest became known to investors. With its stock price tumbling and business interests collapsing around the world, Enron declared bankruptcy in December 2001.

As Enron investigations were being opened, the company’s auditors at Arthur Andersen began a hurried program of document destruction related to their audit work for the firm. Andersen later claimed that it was simply getting rid of unimportant and irrelevant papers associated with Enron. But prosecutors saw it differently and opened an independent investigation into whether individuals at Andersen had obstructed justice by disposing of Enron-related documents. Eventually, prosecutors indicted the entire Andersen firm, using as their chief...