Arthur Andersen and the Enron Case

The firm ARTHUR ANDERSEN audited the financial statements of Enron (and gave it an unqualified opinion) for each year of its existence, from 1985 through 2000. In the wake of the Enron scandal, investors, regulators, and the public desired answers to three questions with respect to Arthur Andersen and Enron:
- Did Arthur Andersen's audit team know about Enron's controversial accounting issues, particularly the special-purpose entities (SPEs)?
- Did Arthur Andersen employees help Enron set up these SPEs?
- Why did employees of Arthur Andersen shred Enron-related documents?

Did Arthur Andersen Know?

Yes. For example, on February 5, 2001, partners of Arthur Andersen met to discuss Enron. The partners were concerned about the Enron SPEs, particularly the active involvement of Enron's CFO in the SPEs. The partners agreed that their concerns should be shared with Enron's board of directors. A board meeting was held the next week (on February 12), with representatives of Andersen in attendance, but the minutes do not indicate that they shared any of the SPE concerns. In fairness to Andersen, notwithstanding its shocked protestations to the contrary, many parties outside Enron had known of these SPEs for years. In particular, a number of Wall Street investment firms were investors in the SPEs (along with Enron's CFO) and thus had inside information about how the SPEs were structured. These investment firms included GE CAPITAL, J.P. MORGAN CAPITAL, MERRILL LYNCH, and MORGAN STANLEY.

Did Arthur Andersen Help?

Yes. The following comes from an internal Enron investigation conducted in early 2002: “From 1997 to 2001, Enron paid Andersen $5.7 million in connection with work performed specifically on the LJM and Chewco transactions.” The LJM and Chewco transactions were the most prominent of the SPEs involved in the Enron accounting scandal. Again, out of fairness to Arthur Andersen, it should be noted that advisory work on difficult accounting issues is a service that all accounting forms have been providing to their clients for years. This is a valuable service because it allows all U.S. companies to take advantage of the technical expertise developed by the large audit firms.

Why Did Andersen Shred?

The shredding was in compliance with Andersen’s existing document policy, which allowed and even encouraged the disposal of all peripheral documents not forming part of the formal audit workpapers. This policy was consistent with the practice o the other large audit firms, reflecting the impossibility of keeping every draft memo, email message, and to-do list generated as part of a complex audit. Andersen’s document policy also stated that, when Andersen was served a subpoena with respect to a certain audit engagement, no further documents or files could be disposed of. In the case of Enron, this two-faceted document policy was followed to the letter by Arthur Andersen—the shredding began in earnest on October 23, 2001, apparently in response to news of an SED investigation of Enron’s accounting practices, and the shredding stopped on November 9, one day after Andersen received a subpoena for its Enron-related documents. In retrospect, the document shredding undertaken by Andersen employees was $10 billion mistake. Without the sleazy image of cover-up conveyed by the news that Andersen employees had shredded at least 50 trunks and boxes of documents. Andersen would probably have escaped the Enron debacle with just a harsh reprimand from the SEC and, probably, a large settlement payment (around $1 billion) to Enron shareholders. Instead, the document shredding led to Andersen’s indictment on obstruction of justice charges, and the subsequent loss on credibility caused a rapid exodus of Andersen’s clients, blasting the prospects of a venerable accounting partnership that had previously had an aggregate value to the partners almost surely in excess of $10 billion.


Sources: Memo from Michael D. Jones to David B. Duncan and Thomas H. Bauer; subject: Enron retention meeting, February 6, 2001.
William C. Powers, Jr., Raymond S. Troubh, and Herbert S. Winokur, Jr., “Report of Investigation by the Special Investigate Committee of the Board of Directors of Enron Corp.,” February 1, 2002.
Email message from Nancy A. Temple to Michael C. Odom; subject: Document retention policy, October 12, 2001.