[corp-focus] When In Doubt, Shred It

[Robert Weissman]

When In Doubt, Shred It
By Russell Mokhiber and Robert Weissman

Arthur Andersen, one of the nation's Big Five accounting firms, admitted
this week that it destroyed a "significant" number of documents related
to its audit of Enron, the Houston, Texas-based energy trading giant
that collapsed spectacularly into a pile of worthless securities late
last year, wiping out $30 billion worth of shareholder value -- but not
before top executives bailed out early.

The Enron practice of shifting liabilities off the books to more than
3,500 subsidiaries raised so many red flags that you'd think you were in
a military parade somewhere in China.

As the criminal investigation geared up this week, Attorney General John
Ashcroft and the entire staff of the U.S. Attorney's office in Houston
recused itself from the investigation. The whole bunch has been
conflicted out. The investigation is going to be headed by Michael
Chertoff, head of the Justice Department's criminal division.

Whether justice can be had in a case where both Enron and the accounting
industry has marinated Washington in campaign cash is unclear.

What is clear is that Enron and the accounting industry were so drunk
with their corporate power that they mistook a modest proposed rule that
might have prevented the Enron collapse for threat to their profits and
nuked it.

In the summer of 2000, Securities and Exchange Commission Chair Arthur
Levitt sought to pass a rule that would have said to accounting firms --
if you are going to audit a client, you can't take consulting fees from
that client.

The accounting industry went bananas. Why? Because they see audits as a
way to get a foot in the door of big companies. First audit the company,
then ream the company for exorbitant management fees.

But Levitt insisted that auditors be "independent" of the clients they
audit. How can an auditor be independent if at the same time it's
auditing the company, it's raking in millions in consulting fees?

With Levitt's proposed rule, the accounting industry saw a booming
profit center threatened, and it began to marshal its friends -- both
Democratic and Republican alike -- in Washington to beat back the Levitt
rule. And beat it back they did.  Congressional leaders told Levitt, in
no uncertain terms, that if he proceeded, they would slash the SEC's
budget. Levitt backed down.

Last year, while Andersen was paid $27 million for its audit work at
Enron, it received $28 million in management consulting fees from the
same Enron.

Let's say that Andersen's audit partner in Houston saw the red flags,
and began to raise questions. Are Andersen executives going to risk
losing the lucrative consulting contract by offending the company with a
harsh audit? Probably not.

As for the destruction of documents, let's put it this way -- much of
the history of corporate crime and violence in this country has never
seen the light of day because of corporate executives who follow closely
the advise of corporate counsel -- when in doubt, shred it.

Corporate lawyers have become so cavalier about the subject that they
publicly discuss destruction of documents.

Andersen was apparently following to the letter advice often dished out
by white collar defense lawyers, including that of Harvey Pitt, the
accounting industry star defense lawyer until he became chair of the
Securities and Exchange Commission. (Pitt will probably have to recuse
himself from the Andersen investigation because he did work for the firm
when in private practice.)

White collar defense lawyers like Pitt often advise corporate clients to
implement flexible "document retention" programs so that incriminating
documents are destroyed before they see the light of day.

In 1994, Pitt co-authored a law review article ("When Bad Things Happen
to Good Companies: A Crisis Management Primer").

"At the crux of many corporate crises, there are typically a handful of
key documents," Pitt wrote. "Corporate counsel must take every available
opportunity to imbue company executives with the understanding that
their documents will take on separate lives when they enter the
treadmill of litigation. … Ask executives and employees to imagine all
their documents in the hands of a zealous regulator or on the front page
of the New York Times. … Each company should have a system of
determining the retention and destruction of documents," Pitt wrote.
"Obviously, once a subpoena has been issued, or is about to be issued,
any existing document destruction policies should be brought to an
immediate halt."

Former Securities and Exchange Commission enforcement chief John
Fedders, writing in a 1980 law review article titled "Document Retention
and Destruction: Practical, Legal and Ethical Considerations," took this
advice one step further.

"On occasion, counsel will be shown a document which could expose the
corporation to liability if it became available to adverse parties,"
Fedders wrote. "If the document is not yet scheduled for destruction
under the terms of the program, management may advocate a waiver of the
program to allow the document to be promptly destroyed."

Things are destined to get worse before they get better. The SEC has the
accounting industry's pit bull as its chair. In addition, Bush has
nominated two new SEC commissioners, both of whom are former partners of
big five accounting firms -- Paul Atkins, a partner with
PricewaterhouseCoopers, and Cynthia Glassman of Ernst & Young.

That gives the accounting industry absolute control over what was once
the top cop on the corporate crime beat. Get ready for more Enrons.



Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime
Reporter. Robert Weissman is editor of the Washington, D.C.-based
Multinational Monitor. They are co-authors of Corporate Predators: The
Hunt for MegaProfits and the Attack on Democracy (Monroe, Maine: Common
Courage Press, 1999; http://www.corporatepredators.org)

(c) Russell Mokhiber and Robert Weissman

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