Should Accountants Go to Jail?

The “Save Arthur Andersen” spin machine is now running full tilt. Full-page ads titled “Injustice for All” are cropping up in national newspapers. Last night’s episode of Moneyline featured five guests who argued that the Justice Department’s indictment of Andersen for obstruction of justice was wrong (and not one who defended it), including Congressman Robert LaFalce, D-N.Y, and the head of the U.S. Chamber of Commerce. While Moneyline has never been a paragon of objectivity, Lou Dobbs delivered a rare personal plea to Justice to reverse its “horrible decision to punish the many for the acts of a few.”

How valid are the pro-Andersen arguments? Let’s take them one by one.

1) The indictment of Andersen was politically motivated.

This was the line pushed on Moneyline by a Seattle-based political commentator named Carl Jeffers. He claimed that the Bush White House needed help because it was embarrassed by all the stories linking Enron to the administration. “So someone said, how can we deflect the political fallout and create more political cover for us? And I believe that the decision was simply made, look, we can take Andersen and essentially make Andersen a political scapegoat,” Jeffers argued.

It’s a provocative take, and it appeals to my inner conspiracy theorist, but I’m not persuaded for two reasons. One is that all published accounts indicate that the decision to indict Andersen was made by Michael Chertoff, a veteran prosecutor whose career I’ve followed for more than a decade. Chertoff is one tough cookie, but he is not the kind of guy who would indict a global, multibillion-dollar company to protect George Bush’s image. Second, even if we assume that the White House is venal and cynical enough to manipulate Justice for political gain, the indictment of Andersen doesn’t accomplish the stated goal. If anything, it raises the stakes for the administration and puts pressure on potential witnesses (Andersen employees) to actually expose more about Enron’s wrongdoing.

2) Indicting Andersen is unfair while Enron leaders walk free.

This argument borders on silly. It would make sense only if you believe that there will never be any indictments of Enron officials. Assuming there eventually will be Enron indictments, there are two reasons why Andersen was indicted first. One is that it was easier. The Andersen indictment is for a single count of obstruction of justice, stemming from document shredding (“dozens of large trunks” full of paper, according to the indictment) that took place over a couple of days in October, 2001. By contrast, the Enron indictments are going to be immensely complex, involving probably years of activity in offices all around the country and probably the world.

Which leads to the second reason for indicting Andersen first: That’s how prosecutors work. You go after all the little fish first, getting as much information as you can, which you then use to nail the big fish. If a little fish won’t cooperate (or starts hiding stuff in the aquarium), you indict him.

3) Indicting Andersen is a predictable way of killing an accounting firm, and that will reduce competition in the accounting industry.

It’s certainly true that the indictment of an accounting firm has further-reaching effects on future business than the indictment, say, of a waste-management company. But do we really want accountants to be a privileged class, unreachable by criminal law because there are so few global firms?

In addition to the intrinsic injustice of the “too big to fail” argument, I think shielding accountants from criminal prosecution would ultimately be bad for the industry. It creates an incentive for corporations to fob off their dirty work on auditors. The analogy is the “safe harbor” of lawyer-client privilege, which tobacco firms abused for decades. When they wanted to keep secret their research showing how health-corroding tobacco truly is, they just ran the documents past their lawyers.

4) The Justice Department should have indicted individuals involved in document destruction, not Andersen as a whole.

This argument has considerable merit. The indictment specifically says that Andersen as a whole, through its partners, encouraged people to destroy documents. It doesn’t offer very much evidence of how, exactly, the partners did this. It doesn’t name a single Andersen employee. I suspect that Justice felt it had to indict the company as a whole because document destruction allegedly took place on an international scale (specifically in Houston, Chicago, Portland, and London). But Andersen has some 85,000 employees worldwide. Indicting the firm, as opposed to individuals, casts a shadow on thousands of employees who surely weren’t involved in any Enron-related misdeeds.

But even accepting this, I can’t help thinking that the pro-Andersen spin is designed to take the focus off the fact that—assuming Justice’s account of events is correct—Andersen officials acted abominably, grossly violating their role in protecting the public interest, and did so in a systematic way. If that kind of misbehavior can’t call into question an accounting firm’s very existence, it’s going to be hard to restore confidence in the accounting profession as a whole. And the failure to do that threatens much more than just Arthur Andersen.