Arthur Andersen Corporate Criminal Liability and the Rise of Deferred and Non Prosecution Agreements

The corporate criminal defense bar used the demise of accounting firm Arthur Andersen in 2002 to transform the practice of corporate criminal liability in the United States.


The story the corporate criminal defense lawyers told went like this — federal prosecutors criminally prosecuted Andersen — Enron’s accountants. As a result, Andersen went out of business and thousands of innocent employees lost their jobs as a result. Lesson — the government should rarely, if ever, charge a company with a crime.

Repeated over and over again, the Andersen story had deep policy implications over the years since the firm’s 2002 demise — moving prosecutors away from corporate criminal conviction and toward settlement with deferred and non prosecution agreements.

Now comes former Andersen prosecutor and current Duke Law Professor Samuel Buell.

In a new book — Capital Offenses: Business Crime and Punishment in America’s Corporate Age (Norton, August 2016), Buell writes that “as someone who studies corporate crime for a living and who was one of the prosecutors on the Andersen matter (two other lawyers and I tried the case), I agree that the Andersen case is important to understanding the limitations of corporate criminal liability — but not for the usually cited reasons.”

“Andersen and its peers in the Big 5 were exceptionally at risk among professional partnerships because the core service they sold — certification of the reliability of corporations’ books to investors — depended heavily on their reputations for honesty and reliability,” Buell writes.

“In the fall of 2001, Enron Corporation shockingly collapsed in the midst of an historic scandal over its accounting practices. Andersen was Enron’s auditor and Enron was Andersen’s biggest and most lucrative global client. Andersen was in serious trouble. Because of two prior accounting scandals involving major clients, Andersen was already subject to a consent decree, a probationary status with the chief regulator of the public auditing profession — the Securities and Exchange Commission. Just weeks after Enron’s implosion and an ensuing SEC investigation, the obstruction of justice problem came to light — that ‘follow the document policy’ shredding and deleting by Andersen personnel who audited Enron.”

“Now Andersen was in really big trouble,” Buell writes. “Aside from the prospect of crippling civil liability over its role in the auditing of Enron, criminal charges looked possible. Corporate clients, required by law to keep their quarterly audits going, began to abandon Andersen. . .Andersen’s lawyers approached the Justice Department and said the firm needed to know, as soon as possible, whether there would be any criminal charges in the Enron affair. Prosecutors obliged by setting aside the larger Enron project for two months and conducting an all-hands investigation of the document destruction at Andersen.”

What prosecutors found was not pretty. They found that Andersen partners and employees “had deliberately urged rapid destruction of Enron records as the SEC investigation started.”

Prosecutors told Andersen that “forgoing a criminal case against the firm would be impossible to justify,” Buell writes.

Andersen said no to a plea agreement. The Justice Department offered a deferred prosecution agreement that would require no guilty plea. Again, Andersen said no. Andersen demanded that the Justice Department clear the firm of any wrongdoing. The government said — impossible.

As a result, the government indicted. Prosecutors again suggested a deferred prosecution agreement and again Andersen said no. The case went to trial and the firm was convicted of obstruction of justice. Two years later, the Supreme Court reversed, but it was too late. Andersen had collapsed.

“The story of Arthur Andersen does not carry the moral that prosecutors shouldn’t indict a firm,” Buell concludes. “Its moral is that the reputational sanction that makes criminalizing a corporation different from suing it is powerful and cannot be controlled. Potent reputational effects are what get a company’s attention when the prospect of criminal liability looms. But if an orderly settlement that controls those effects can’t be reached, then the reputational sanction must be applied in spite of its far-reaching consequences. Otherwise there would be no credible risk of criminal liability for corporations in the first place.”

“BP survived being called a criminal,” Buell writes. “GM will too. So did the massive Siemens Corporation, in spite of pleading guilty in a huge global bribery scheme. The auditing partnership Arthur Andersen, already gravely wounded from its relationship to the notorious fraud at Enron, did not.”

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