Called to Account

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THE SCENE: Arthur Andersen's Houston branch

Accounting firm Arthur Andersen had already been found guilty in the court of public opinion, and paid a heavy penalty. Clients deserted; employees fled. In fact the Chicago firm was barely alive, but one question remained: What would its epitaph be, the lesson for others? An answer came last Saturday, when a Houston jury found Andersen guilty of obstructing justice. It provided a moment of vindication for investors who lost more than $60 billion in the spectacular collapse of Enron, whose books had been audited by Andersen. But the verdict held a twist: at first the case seemed to hinge on whether an Andersen employee ordered tons of Enron paperwork to be shredded before investigators arrived. Jurors said they based their decision instead on Andersen's alteration of an internal memo that was critical of an Enron earnings release.

In holding the accountants accountable, the jury in essence sanctioned the entire bean-counting industry for its failure to police rogue corporations. As the jurors deliberated for the ninth day last Friday, the stock market was tumbling to its lowest level since Sept. 21, much of the decline tied to the lack of investor confidence in corporate America. The verdict also revved up prosecutors for their next target: Enron and its executives, including former CEO and chairman Ken Lay and former CFO Andrew Fastow.

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Although the jury convicted the entire firm, it focused the blame on a single person, Andersen's Chicago-based lawyer Nancy Temple, who, according to the legalese, played the "corrupt persuader" who led others astray. Knowing the Securities and Exchange Commission was starting to scrutinize Enron's books, Temple told David Duncan, who supervised the account, to remove her name from a file memo that disagreed with Enron's characterization of a $1 billion loss as "non-recurring." Said prosecutor Andrew Weissman: "This is a perfect example of Arthur Andersen sanitizing the record so the SEC would have less information."

Andersen vowed to appeal. After several days of deliberation, jurors had seemed deadlocked; then the judge gave them an instruction to basically force them off the fence, a charge that will now be part of that appeal. "Our purpose was to fight for our honor and dignity. We don't think we committed a crime," said senior Andersen partner C.E. Andrews as he stood in the Texas heat defending the firm, which faces as much as $500,000 in fines and up to five years' probation. While the case may continue, the firm may not. Soon after the verdict, Andersen said it would stop auditing publicly held companies by Aug. 31, essentially closing that business.

Even an acquittal would probably not have saved the firm. "The verdict doesn't matter anyway," says Arthur Bowman, editor of Bowman's Accounting Report. "Arthur Andersen is dead. Once the indictment was handed down, clients started jumping faster than they did off the Titanic." A third of the firm's 2,300 clients have jumped ship; the top clients are gone, and parts of the company have been sold off. About 5,000 of the 26,000 U.S. employees remain.

The victory also sets up the six-month-old Enron Task Force at the Justice Department to bore in on the energy-trading company. Prosecutors want to prove that former bosses Lay and Jeff Skilling and other executives touted Enron's stock when they knew the company was in a free fall — a violation of securities law. "This [verdict] can only help us," said Leslie Caldwell, chief of the task force. "We are going to get to the bottom of the Enron debacle.

But not all the Andersen testimony will be helpful. Duncan told jurors he didn't believe the $1 billion loss the company took to unravel some off-the-books partnerships was enough reason to question Enron's future health. If Andersen's lead accountant wasn't worried, why should Lay have been concerned? "Duncan definitely harmed the case against Lay," says former prosecutor and Houston securities lawyer Christopher Bebel. On the other hand, he says, lower-level Enron executives facing charges won't find much solace in the transcripts.

Neither will Anderson's loyal employees, sometimes referred to as Androids. "The government needed a guilty verdict for public opinion," says seven-year veteran Todd Cimino. "How else can they explain destroying an 89-year-old company? I'm here to support the company's values and its legacy." It's one that now looks for ever tarnished.