Well, well, well...as on the date of writing this, the last post got 440 page views and not one comment! Either everyone understood everything, or no one understood anything! I only hope it is the former because living in a vacuum without any feedback in form of comments, I have no way of knowing if the message is reaching the right audience. While I am ecstatic at number of page views the post got, I feel sad at not having any comments! So guys, please do leave a comment so I know if there are any doubts, disagreements or misunderstandings and can then evaluate how fast or slow to proceed!
Today, we will do one more case study. This case study will prepare us to understand the relationship between Human Error and the higher elements in the error causation food chain. The story is about the demise of one of the worlds largest auditing firms, Arthur Andersen Inc. Following short videos convey an interesting message and build a background to the case.
Downfall of Arthur Andersen (3 minutes)
Enron - Arthur Andersen (5 minutes)
The story of Nancy Temple (Temple) and Arthur Andersen (Andersen) is infamous in legal ethics. Temple was the in-house lawyer that advised Andersen’s employees to shred documents on the eve of the Security and Exchange Commission’s (SEC) investigation of Enron Corporation (Enron). Temple’s advice triggered a string of events that culminated in the needless demise of America’s fifth-largest accounting firm.
The accounting firm of Arthur Andersen was founded in 1913. Until 2002, Andersen was one of the world’s largest accounting and consulting firms. It was a $9 billion ‘big five’ accounting firm with hundreds of partners and more than 28,000 U.S. employees and 85,000 global employees.
Enron started as a natural gas pipeline operator but transformed itself into an energy trading and investment conglomerate in the 1990’s. During this time, Andersen audited Enron’s publicly filed statements while simultaneously providing internal auditing and consulting services to Enron. Enron was Andersen’s largest client, accounting for $58 million of Andersen’s revenue in 2000. There was a revolving door between Andersen and Enron, as dozens of Enron’s financial executives and accountants were former Andersen employees.
On August 14, 2001, Jeffrey Skilling, Enron’s CEO, resigned. A few days later, Sherron Watkins, a senior accountant at Enron (and a former Andersen auditor), blew the whistle by informing Kenneth Lay, Enron’s Chairman, and two senior Andersen accountants that Enron was ready to implode in a wave of accounting scandals. At this point, Andersen created an internal crisis-response group, which included Temple, an in-house lawyer in Andersen’s Chicago office.
On Oct 09, it was recognized that an SEC investigation of Enron and Anderson was “highly probable”. The very next day, Michael Odom (Odom), the senior Andersen partner on the Enron account, sent an email message to Andersen personnel urging them to comply with Andersen’s document retention policy, noting “if it’s destroyed in the course of normal policy and litigation is filed the next day, that’s great . . . we’ve followed our own policy and whatever there was that might have been of interest to somebody is gone and irretrievable.”
On October 12, Temple entered the Enron matter into Andersen’s internal tracking system, identifying it as a government regulatory investigation. Nonetheless, on that very same day, Temple sent an email to Odom suggesting that it might be useful to “consider reminding the engagement team of our documentation and retention policy.” Odom forwarded Temple’s email to David Duncan (Duncan), Andersen’s audit partner on the Enron account. As he later explained, Duncan felt “justified” destroying documents based on Temple’s email.
Later, at the trial Duncan entered into a plea agreement with the government under which he agreed to plead guilty to one count of obstruction of justice. At the Andersen trial, Duncan testified on direct examination that “I obstructed justice, I instructed people on the (Enron audit) team to follow the document-retention policy, which I knew would result in the destruction of documents. Obviously, the thought of litigation, whether with the SEC or some other kind, was on our minds when we destroyed the documents.”
The SEC sent a letter to Enron on October 16th informing Enron that the SEC had commenced an informal investigation, and that an additional accounting letter would follow. Andersen received a copy of the SEC letter on October 19. The following morning a crisis group conference was called and Temple reminded everyone to make sure to follow the documentation and retention policy. On October 22, Enron publicly acknowledged that the SEC had started an informal investigation. On October 30th, the SEC sent Enron a letter informing it that a formal investigation had begun and requesting accounting documents. Andersen continued, however, to destroy documents. In addition, more than 30,000 emails and computer files were deleted. In the end, documents supporting the final audit were retained but, in accordance with Andersen’s document retention policy, drafts, notes, and other non-supporting documents were destroyed. The shredding continued until the SEC issued a subpoena for records. Andersen received a copy of the subpoena on November 8th, after which it advised its personnel to cease shredding documents.
On March 7, 2002, Andersen was indicted for obstructing an official proceeding of the SEC in violation of 18 U.S.C. section 1512(b)(2). In effect, Andersen was charged with “witness tampering,”
For all practical purposes, the indictment destroyed Andersen in a matter of weeks, as its clients fled the firm and the firm was forced to slash its workforce and sell off its component services in response. The departing clients included long-term, Fortune 500 clients like Colgate-Palmolive and Merck. Moreover, Andersen’s overseas offices quickly moved to sever ties with their U.S. parent, with entire country groups – e.g., Spain and Chile – leaving Andersen to join other large accounting firms.
On October 16, 2002, the judge imposed the maximum sentence on Andersen: a $500,000 fine and five years’ probation.
It is now clear that Andersen was facing substantial civil and regulatory liability in the Enron matter. But such exposure did not destroy Andersen. Rather, Andersen was destroyed by the criminal indictment and conviction, which were based on Andersen’s destruction on Enron-related documents between October 16 and November 9, 2001.
So, the question to you is, “what do you think caused the downfall of this great firm? Is this merely a matter of “Human Error” by Nancy Temple or is there a larger issue behind this?”
On October 12, Temple entered the Enron matter into Andersen’s internal tracking system, identifying it as a government regulatory investigation. Nonetheless, on that very same day, Temple sent an email to Odom suggesting that it might be useful to “consider reminding the engagement team of our documentation and retention policy.” Odom forwarded Temple’s email to David Duncan (Duncan), Andersen’s audit partner on the Enron account. As he later explained, Duncan felt “justified” destroying documents based on Temple’s email.
Later, at the trial Duncan entered into a plea agreement with the government under which he agreed to plead guilty to one count of obstruction of justice. At the Andersen trial, Duncan testified on direct examination that “I obstructed justice, I instructed people on the (Enron audit) team to follow the document-retention policy, which I knew would result in the destruction of documents. Obviously, the thought of litigation, whether with the SEC or some other kind, was on our minds when we destroyed the documents.”
The SEC sent a letter to Enron on October 16th informing Enron that the SEC had commenced an informal investigation, and that an additional accounting letter would follow. Andersen received a copy of the SEC letter on October 19. The following morning a crisis group conference was called and Temple reminded everyone to make sure to follow the documentation and retention policy. On October 22, Enron publicly acknowledged that the SEC had started an informal investigation. On October 30th, the SEC sent Enron a letter informing it that a formal investigation had begun and requesting accounting documents. Andersen continued, however, to destroy documents. In addition, more than 30,000 emails and computer files were deleted. In the end, documents supporting the final audit were retained but, in accordance with Andersen’s document retention policy, drafts, notes, and other non-supporting documents were destroyed. The shredding continued until the SEC issued a subpoena for records. Andersen received a copy of the subpoena on November 8th, after which it advised its personnel to cease shredding documents.
On March 7, 2002, Andersen was indicted for obstructing an official proceeding of the SEC in violation of 18 U.S.C. section 1512(b)(2). In effect, Andersen was charged with “witness tampering,”
For all practical purposes, the indictment destroyed Andersen in a matter of weeks, as its clients fled the firm and the firm was forced to slash its workforce and sell off its component services in response. The departing clients included long-term, Fortune 500 clients like Colgate-Palmolive and Merck. Moreover, Andersen’s overseas offices quickly moved to sever ties with their U.S. parent, with entire country groups – e.g., Spain and Chile – leaving Andersen to join other large accounting firms.
On October 16, 2002, the judge imposed the maximum sentence on Andersen: a $500,000 fine and five years’ probation.
It is now clear that Andersen was facing substantial civil and regulatory liability in the Enron matter. But such exposure did not destroy Andersen. Rather, Andersen was destroyed by the criminal indictment and conviction, which were based on Andersen’s destruction on Enron-related documents between October 16 and November 9, 2001.
So, the question to you is, “what do you think caused the downfall of this great firm? Is this merely a matter of “Human Error” by Nancy Temple or is there a larger issue behind this?”
I will look forward to your comments in answer to this question before we proceed further to study in greater detail the Human Error made by Nancy Temple to decide what really was the Arthur Andersen's "Temple of Doom".
Until next week,
The Erring Human.
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