Arthur Andersen: Shredding the Reputation and Viability of a Once Venerable Accounting Firm

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Case Teaching Note

Arthur Andersen: Shredding the Reputation and Viability
of a Once Venerable Accounting Firm

|CASE SUMMARY |

Four days before the high-flying, energy-trading giant, Enron, disclosed a $618 million loss for the third quarter of 2001, an attorney for Arthur Andersen, the accounting firm that audited Enron’s books, wrote a memo to Andersen employees directing them to do something extraordinary.[i] Andersen had a policy of retaining the key documents behind an audit but getting rid of notes, drafts and memos that were produced during the audit. The attorney, Nancy Temple, wrote in an e-mail to David Duncan, the Andersen partner in Houston who oversaw the Enron account, “[i]t might be useful to consider reminding the [Enron] engagement team of our documentation and retention policy. ( It will be helpful to make sure that we have complied with the policy.”[ii] Duncan followed Temple’s advice, and the Andersen engagement team was ordered to destroy all audit material related to the Enron account except for the most basic work papers. As the destruction directive was being fulfilled, the United States Securities and Exchange Commission (SEC) initiated a probe of Enron’s business activities. In order to secure needed accounting documents and information, the SEC issued subpoenas to Enron’s auditor on November 8, 2001.[iii]

In March of 2002, the United States Justice Department, sought an indictment against Andersen rather than specific individuals “because the firm had shredded massive quantities of Enron-related documents just as a government investigation was kicking into gear.”[iv] According to former SEC chairman Arthur Levitt, Andersen’s violation of the consent decree in an accounting scheme that inflated Waste Management’s pretax income was “one of the main reasons for indicting the entire...
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