Andersen was prosecuted for acts (exercise of its document retention policy) that are not a crime. Moreover, despite that limited prosecution, the indictment is filled with largely irrelevant vitriol regarding Andersen's association with Enron. By the time of trial, Andersen was already withering shell of a business and the conviction only reinforced the inevitable. Thus, your suggestion that the only reason that the case was not retried was because of Andersen's demise begs a different question -- why was the case tried in the first place given that the government had already effectively run Andersen out of business?
Posted by: Tom K at February 25, 2006 09:03 AM
TK
The test whether a prosecution is proper or not is probable cause. There was more than probable cause viz AA, there was evidence sufficient to convict.
As others do to all other criminals, 12 jurors, 3 courts, and over 20 judges found there was sufficient evidence to convict AA.
No judge has ever suggested or implied that there was not sufficient evidence to convict AA.
Moreover, from the refusal of many individuals associated with AA to testify, we should also infer guilt on the part of the corporation.
Telling the truth takes little practice.
Posted by: Moe Levine at February 25, 2006 12:16 PM
What probable cause?
Because of the supposition that Andersen did something wrong on the Enron audit,the DOJ indicted Andersen for politely directing employees to follow a long-standing document retention policy, which is a routine audit step.
Yet long before the Andersen indictment, the government surely knew that the frauds were committed within Enron's SPEs, none of which were ever Andersen clients. Andersen partner David Duncan directed the audit team to follow routine document retention procedure before any evidence of the fraud came to light and before the SEC enquiry into the Enron SPEs (again, not Andersen clients) was initiated.
Enron Bankruptcy Examiners found widespread evidence that major financial institutions aided and abetted the frauds in the Enron SPEs by signing extensive documentation -- all fraudulent -- that asserted that the banks were "investing" in the fraudulent SPEs while at the same time the banks were accepting oral promises of repayment from Andrew Fastow. According to internal documentation at the various banks, the banks justified their failure to require written loan agreements from the Enron SPEs because in order to get its desired accounting, Enron needed to hide the facts from Andersen.
As to the trial itself, irregularities abounded.
1) Trial Court refused to allow the jury to know that Andersen had waived attorney/client privilege and had voluntarily made all Andersen papers available to both the SEC & DOJ.
2) Trial Court refused to allow the jury to know that something less that 2% of extraneous papers were destroyed. That means that in addition to the entire audit workpapers, something like 70 tons of extraneous papers were saved.
3) In response to David Duncan's testimony that the FBI had failed to correct transcripts of interviews containing "voluminous errors" as required by law, the Trial Court refused to let Andersen attorney Rusty Hardin ask on cross what the errors were, effectively gutting the right to cross-examination.
4) An FBI agent who had testified before both the grand and trial juries that "the vast majority of papers destroyed" by Andersen related to Enron, admitted on cross that she had never examined the majority of papers and on further questioning, she admitted that about 10% had something to do with Enron.
5) Trial Court ruled that it did not matter how many copies of a paper were kept, if one were destroyed, it constituted objection of justice. In one instance, the prosecution held up a memo fro justice is in your view either corrupt of incompetent with regar v 䬀 䬀 䰀 & en the foundation and these corporations were designed to achieve the accounting treatment desired by management. At the time of BFA’s bankruptcy, a complex mesh of over 90 insider-controlled entities had been used to help disguise BFA’s tenuous financial condition. "
"Two of the most significant entities set up to hide BFA’s nonperforming real estate properties were ALO and New Church Ventures. A former BFA director incorporated both nonprofit entities. The entities had no employees of their own, and both organizations paid BFA substantial management fees to provide accounting, marketing, and administrative services."
"ALO’s stated purpose was to develop real estate. New Church Ventures’ purpose was to finance new Southern Baptist churches in Arizona. However, the substance of ALO’s actions was to buy and hold BFA’s overvalued real estate in exchange for notes receivable valued in the millions of dollars. By 1997, ALO had a negative net worth of $138.9 and owed BFA $70.3 million and New Church Ventures $173.6 million. The majority of New Church Ventures’ assets were receivables from the insolvent ALO. Both ALO and New Church Ventures owed BFA significant amounts of notes receivables."
"As a nonprofit company, ALO filed its financial statements each year with the Arizona Corporation Commission as required by state law. The 1996 information, available for public inspection from the Arizona Corporation Commission, showed that ALO had a negative net worth of $116 million and had been losing more than $20 million per year for several years. Payments were being made on the receivables only because of funds being obtained from either New Church Ventures, or, indirectly, from BFA itself. The audit team requested the financial statements for ALO and New Church Ventures, but management refused to release the statements. If the audit team had obtained copies of ALO’s detailed financial statements, the auditors would have discovered that ALO was insolvent."
"Arthur Andersen provided unqualified “clean” audit opinions on BFA’s financial statements from 1984 to 1997. However, the State Board of Accountancy alleged that because of the very material departures from GAAP regarding the disclosure of related parties and the recognition of losses, the firm should have issued either a qualified or an adverse opinion on the 1991 to 1994 statements and an adverse opinion on the 1995 to 1997 financial statements. The following were among the major GAAP violations alleged by the State Board of Accountancy:
Inadequate disclosure regarding ALO and New Church Ventures’ relationships, transactions, and balances (SFAS 57, Related Party Disclosures).
Inadequate disclosure of losses on notes receivables due from ALO and New Church Ventures (SFAS 5, Accounting for Contingencies)."
"Arthur Andersen, without admitting or denying any fault, settled an investors’ lawsuit for $217 million.
This settlement takes on a sad historical significance in that it represents the largest cash settlement for a nonprofit case and helped to further accelerate the demise of a once prestigious and great firm.
Also, as a condition to the court-approved arrangement, the partner and the manager on the BFA audit lost their CPA licenses to practice and a third CPA was placed on probation, requiring that his work be monitored for two years by the Arizona State Board of Accountancy."
Note - emphasis added.
Posted by: Max at February 26, 2006 06:21 PM
Max, glad to see that at least one other person pays attention to the facts.
Preston,
Be assured that I work harder every day to protect and defend the Constitutional right's of defendants than anyone you know. No Enron defendant has been denied a single Constitutional ri ou would classify as a "restatement" issue.
The idea that Arthur Andersen had no idea of what was going on would be difficult to believe. Sharon Watkins, in a written letter to Ken Lay in August 2001, before any of Enron's problems had been made public, laid out the entire situation and incredibly predicted exactly what would happen when she made her now famous statement "I am incredibly nervous that we will implode in a wave of accounting scandals".
A few of Ms. Watkins comments, again made in August 2001, before anything regarding Enron had been made public, are as follows:
"To the layman on the street, it will look like we recognized funds flow of $800 million from merchant asset sales in 1999 by selling to a vehicle (Condor) that we capitalized with a promise of Enron stock in later years. Is that really funds flow or is it cash from equity issuance? "
"We have recognized over $550 million of fair value gains on stocks via our swaps with Raptor. Much of that stock has declined significantly — Avici by 98 percent from $178 million, to $5 million; the New Power Company by 80 percent from $40 a share, to $6 a share. The value in the swaps won't be there for Raptor, so once again Enron will issue stock to offset these losses. Raptor is an LJM entity. It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future."
"we booked the Condor and Raptor deals in 1999 and 2000, we enjoyed wonderfully high stock price, many executives sold stock, we then try and reverse or fix the deals in 2001, and it's a bit like robbing the bank in one year and trying to pay it back two years later. Nice try, but investors were hurt, they bought at $70 and $80 a share looking for $120 a share and now they're at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled "redeployed" employees who know enough about the "funny" accounting to get us in trouble."
"I realize that we have had a lot of smart people looking at this and a lot of accountants including AA & Co. have blessed the accounting treatment. None of that will protect Enron if these transactions are ever disclosed in the bright light of day. (Please review the late 90's problems of Waste Management — where AA paid $130 million plus in litigation re questionable accounting practices.)"
"The overriding basic principle of accounting is that if you explain the "accounting treatment" to a man in the street, would you influence his investing decisions? Would he sell or buy the stock based on a thorough understanding of the facts? If so, you best present it correctly and/or change the accounting."
"My concern is that the footnotes don't adequately explain the transactions. If adequately explained, the investor would know that the "entities" described in our related party footnote are thinly capitalized, the equity holders have no skin in the game, and all the value in the entities comes from the underlying value of the derivatives (unfortunately in this case, a big loss) AND Enron stock and N/P. Looking at the stock we swapped, I also don't believe any other company would have entered into the equity derivative transactions with us at the same prices or without substantial premiums from Enron. In other words, the $500 million in revenue in 2000 would have been much lower. How much lower?"
"Summary of Raptor Oddities"
"1. The accounting treatment looks questionable.
a. Enron booked a $500 million gain from equity derivatives from a related party.
b. That related party is thinly capitalized with no party at risk except Enron.
c. It appears Enron has supported an income statement gain by a contribution of its own shares."
2. The equity derivative transactions do not appear to be at arms length.
a. Enron hedged New Power, Hanover and Avici with the related party at what now appears to be the peak of the market. New Power and Avici have fallen away significantly since. The related party was unable to lay off this risk. This fact pattern is once again very negative for Enron.
b. I don't think any other unrelated company would have entered into these transactions at these prices. What else is going on here? What was the compensation to the related party to induce it to enter into such transactions?
3. There is a veil of secrecy around LJM and Raptor. Employees question our accounting propriety consistently and constantly. This alone is cause for concern.
a. Jeff McMahon was highly vexed over the inherent conflicts of LJM. He complained mightily to Jeff Skilling and laid out five steps he thought should be taken if he was to remain as treasurer. Three days later, Skilling offered him the C.E.O. spot at Enron Industrial Markets and never addressed the five steps with him.
b. Cliff Baxter complained mightily to Skilling and all who would listen about the inappropriateness of our transactions with LJM.
c. I have heard one manager-level employee from the principal investments group say, "I know it would be devastating to all of us, but I wish we would get caught. We're such a crooked company."
(End of Sharon Watkins quotes)
Ms. Watkins (a former Arthur Andersen employee) also expressed her concerns to her old Arthur Andersen boss, audit partner Jim Hecker.
It appears that just about everyone knew what was going on at Enron and a great part of it was a willful manipulation of the Enron financial statements to keep the investing public from knowing the financial problems that Enron was having.
Posted by: Max at February 27, 2006 09:37 PM
You are correct that Sharon Watkins notified Jim Hecker at AA in August 2001. And Hecker notified the relevant people at AA.
Sharon Watkins also notified Ken Lay who engaged Enron's lawyers to investigate the allegations. I do not recall whether the law firm, Vinson & Elkins, questioned AA but I do understand that AA stepped back from the situation so that the law firm could investigate.
Meanwhile, if you were an auditor, what would you do? I would rush to look at what information the audit workpapers contained. AA did so. In those audit workpapers, they had copies of the documents showing investments in the 2nd tier of SPEs (Raptor, Condor, etc.)audited by KPMG, plus Chewco/JEDI. Many of these investors were legitimate. Among those investors were banks -- Citigroup, JPMorgan Chase, Bank of America, CreditSuisse First Boston, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto Dominion, Royal Bank of Scotland, Barclays, BT/Deutsche, and Merrill Lynch.
In the course of the audit, Andersen sent out standard confirmation letters to all banks having any ties to Enron requesting confirmation of bank balances and disclosure of any loans, loan guarantees or contigent liablities. The banks above did not disclose that the disguised loans.
Further, in conjunction with some of the sales that turned out to be bogus, when Andersen wondered whether about whether the buyer was legit, they requested that the buyers represent that they were not related in any way to Enron or the banks who did business with the SPEs.
Looking at these documents in the face of Ms. Wadkins concerns, any auditor would worry but for Ms. Watkins concerns to be correct, all these banks would have to be complicit in fraud. That is a lot to swallow.
If AA had pulled its audit opinion on the bas also could be mistaken. At the very least, the jurors ' statemen & Rythms/Swap Sub transactions which AA required before allowing kruptcy Examiners repeatedly said that vital information was kep and their jobs, especially the retired partners who had built A al numbers. Yet those numbers can only be produced by the accoun to testify in court about your signature. Act accordingly.”
“If you don’t feel comfortable signing something, even after discussing if with the senior or manager on the job, go to a partner – any partner – to discuss your concerns. The principled refusal to sign is the single best protection for the partners and the firm.”
“Your job is to ask the right questions. Don’t ever fear looking stupid. It’s OK if you don’t know the right answers; somebody around here will be able to give the right answers. But unless you ask the right questions, we are all dead in the water.”
“Once we accept the job, the pricing decision is entirely separate from job management. Our job is to perform the best work humanly possible, as efficiently as possible. If the budget is blown because of some circumstance unknown when the fees were set, we will bill for the extra time. If we simply failed to correctly estimate the work entailed, we will set a more realistic fee next year. If the client doesn’t want to pay, we will resign the client. But under no circumstances will we do less than our very best work.”
“Because of world-wide profit-sharing, the engagement partner’s share of the fees amounts to only pennies, even for the largest client in the office. I point this out to reinforce that we are not about to sign off on anything that even hints of wrongdoing.”
These are the lessons taught to so many by Andersen partners in a firm summarily executed without ever being allowed to defend itself.
Posted by: Mary Ashby Morrison at March 2, 2006 05:02 PM
Thank you Mary for articulating your thoughts. Andersen will never be fully vindicated; many people like Moe just want to believe (and have the right to believe) that Andersen is guilty. It is important to remember that Andersen was a $10 billion revenue organization, with 85000 employees worldwide. Auditors do make mistakes, but they usually occur at the acceptance of the client. The auditors problem generally is that he cannot control the behavior of his clients. If they want to misrepresent the results, he will have a hard time catching them. Thankfully almost all organizations want to do right thing; the cynic can always point to the failures and impute to all corporations.
While Moe is sympathetic to the plight of some of the Andersen people, he should be reminded that:(1) 85000 people needed to find a new job; (2) the potential plaintiffs in lawsuits against Andersen will or have received less since the firm is worth less dead than it is alive; and (3) the corporations are having their audit fees increased, in part because there is less competition in the audit marketplace. The point of this brief list is that there is significant collateral damage to innocent people by the DoJ's indicting Andersen.
As a sidebar to this conversation, can you connect the indictment of Andersen with another item in the news, the government's handling of Katrina?
Yes, indeed, Michael Chertoff is at the center of both. This Harvard trained lawyer was front and center in the decision to indict Andersen. He apparently believed that indicting Andersen would be like indicting GE for polluting the Hudson. The difference is that felons cannot practice public accounting so the mere indictment put Andersen out of business. This lack of judgment plays through in the Katrina mess. While New Orleans wss flooding, Chertoff goes to a bird flu conference.
Chertoff is the worst kind of person in a leadership position; he cannot understand the consequences of his actions.
Posted by: Bob at March 3, 2006 07:56 PM
Thank you, Bob, for your thoughts.
Your assessment of Chertoff is right on the money. Not only does he not understand the consequences of his actions, he is consistent in that in the face of a crisis, he resorts to scapegoating. As we now know, ecookie" onclick="forgetMe(this.form)" value="Forget Info" style="margin-left: 15px;" />