Arthur Andersen's disappearing act.

Arthur Andersen's disappearing act.

Arthur Andersen's disappearing act.

How you look at things.
March 12 2002 6:29 PM

The Suspect Protection Program

Arthur Andersen's disappearing act.

If you have information implicating a crook, and you're afraid his goons will kill you for testifying against him, the government has a program for you. It's called witness protection. You and your family can be moved to a new location and given new identities. If, on the other hand, you're facing lawsuits and indictment, and you respond by moving to a new location and assuming a new identity, the government will hunt you down. Unless you're a business, in which case you can do what Arthur Andersen is trying to do to get out of the Enron mess: move most of yourself to a new location, assume a new identity, and live happily ever after. Welcome to the suspect protection program.

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It isn't literally a program, of course, and Andersen isn't officially a suspect. According to the Washington Post, prosecutors have merely told Andersen that they "intend" to charge the firm with obstruction of justice for failing to prevent document shredding after Andersen learned that the feds were investigating Enron's accounting. Lawyers also expect Andersen to face fines, lawsuits, and restrictions imposed by the Securities and Exchange Commission. If you were being hounded this way by cops, plaintiffs, and creditors, you'd probably want to disappear. But legally, you couldn't.

William Saletan William Saletan

Will Saletan writes about politics, science, technology, and other stuff for Slate. He’s the author of Bearing Right.

Andersen can. Why? Because it isn't a person. It's a business partnership. It can break itself up and move its people to other companies. Andersen has been talking to other big accounting firms about combining with them or selling them parts of itself. When asked about the talks, a company spokesman said, "Andersen is considering many options to enable us to continue to successfully serve our clients and promote the career opportunities of our people. We are committed to making changes to our business that will restore the public's trust, enhance the quality and independence of our audit practice and allow all of our practices to thrive."

Translation: Our clients are leaving. Our employees are leaving. Our name is mud. We can keep losing our clients and employees for nothing, or we can sell them. Better yet, we can sell ourselves—the Andersen partners—and take our clients and employees with us. That way, we can dump our bad name as well. ValuJet became AirTran. Philip Morris is becoming Altria Group. We'll no longer be Arthur Andersen, the Enron guys. We'll be partners at Deloitte & Touche, or Ernst & Young, or whatever.

Shedding the Andersen name is crucial. Clients aren't leaving because they think Andersen botched or cooked their books. They're leaving because after Enron, having Arthur Andersen as your auditor is like having Philip Morris as your health insurer. It's embarrassing. (No wonder Altria Healthcare, a firm unrelated to Philip Morris, made a stink about having to share its name with a cigarette-maker.) People who run public companies don't want to irk shareholders over a choice of auditor. If Andersen is indicted, one client told the Wall Street Journal, "it could start to create a negative perception of the companies that retain them. We may have to make a choice of going with another firm."

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Why can't Andersen just change its name? One problem is punitive restraints on its business practices. Suppose the SEC forbids Andersen to sign audits. If Andersen changes its name, those sanctions would still apply. But if nobody works for Andersen anymore, the sanctions are meaningless, like shackles on a ghost.

The bigger problem is liability. Everyone who's been ripped off in the Enron scandal wants compensation. To whatever extent Andersen is to blame, that compensation lies in Andersen's assets. What assets does an accounting firm have? Accountants and clients. And what is Andersen trying to do with its accountants and clients? Move them to other companies. It won't matter what Andersen owes plaintiffs or the feds. They can't take what Andersen no longer has.

Here's how the New York Times describes the Andersen-Deloitte negotiations:

The trick then is for Deloitte to acquire most or all of Andersen's business—especially its accountants and their relationships with the firm's clients—without taking on all Andersen's liabilities. People close to the talks say the two firms' lawyers are analyzing how to wall off the liabilities to make sure that the Enron creditors and shareholders who are suing Andersen cannot also lay claims on Deloitte.

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In other words, a free lunch. Of course, says the Times, "some Andersen entity would have to continue to exist" for "paying fines and penalties." The point is to reduce that entity to a size that limits the available compensation and lets the rest of Andersen's partners get away.

Is this legal? Frame Game doesn't know. Neither do the partnership attorneys quoted in the newspapers. Nor, evidently, do the lawyers at Andersen or Deloitte. That's what they're being paid to figure out. What they aren't being paid to figure out is whether it's fair. To what extent should a corporation, or in this case a partnership, be able to dissolve its responsibilities by dissolving itself? Jack Beatty, the author of an excellent history of the corporation, notes that in the American legal tradition, "Corporations are perpetual persons. They don't die when the people who make them up die. … They have all the advantages of human beings, without mortality. They're protected from involuntary dissolution." Then what about voluntary dissolution? Individuals can't ditch their responsibilities by shedding their identities. (Even bankruptcy carries costs.) Should businesses be able to do that?

Businesses aren't exactly like people. So far, the percentage of Andersen employees implicated in Enron is tiny. It seems unfair to hold Andersen's European partners responsible for what happened in Houston or Chicago. And if Andersen employees are found to have broken the law, they can be sued or prosecuted individually no matter where they go. On the other hand, ill-gotten gains tend to trickle down through a company. There are disputes within Andersen as to who knew what, and prosecutors reportedly blame the whole firm for a lax record-keeping policy. Furthermore, Justice Department guidelines say that "Corporations should not be treated leniently because of their artificial nature" and that whether they merit prosecution depends on their past conduct. In that sense, prosecutors treat businesses like individuals with continuous lives and rap sheets.

The worst consequence of Andersen's disappearance may be the disappearance of accounting reform. When you do something wrong and everybody knows it, you face pressure to clean up your act. That's why Paul Volcker, the ex-Federal Reserve chairman hired by Andersen to rethink its policies, just announced his recommendation to separate the firm's accountants from its consultants, ending an apparent conflict of interest. But if Andersen dissolves into Deloitte, the stigma and pressure will dissolve as well. Deloitte executives have rejected Volcker's idea. They don't have to clean themselves up. They aren't Arthur Andersen. Pretty soon, nobody will be.