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Tuesday, 7 May, 2002, 16:39 GMT 17:39 UK
Andersen trial begins in earnest
The US auditing firm Arthur Andersen LLP has been charged in a Houston courtroom with obstructing justice during an official investigation into the accounts of bankrupt energy firm Enron.

Prosecution and defence lawyers are preparing to give opening statements to the sixteen-strong jury relating to claims that the US arm of the global accounting firm Andersen knowingly destroyed Enron-related documents computer files in order to conceal their content.

Andersen is expected to argue that the shredding, which was carried out by some of its executives, had not been authorised.

This would not be enough to fend off a guilty verdict, the prosecution insisted.

"It's not a defence to come to court and say; 'Well, just a few people did this and there are thousands of people who are innocent'," said assistant US attorney Matt Friedrich.

The prosecution won an early victory by persuading Judge Melinda Harmon that Andersen's payment last year of a $7m fine to settle accusations of false accounting can be brought before the jury.

The firm agreed not to repeat its mistake - of signing off accounts which later proved to have inflated profits at rubbish removal group Waste Management to the tune of $1bn between 1993 and 1996 - or face being barred from practice.


A guilty verdict could present Andersen with a $500,000 (340,000) fine and five years probation.

Alternatively, the court could fine Andersen twice any gains or damages the court determines were caused by the accountant's actions.

More importantly, a conviction could also bar Andersen from auditing public companies.

This could finish off the embattled audit company which has lost hundreds of clients worth about $1bn in annual revenues since the crisis began.

The jury of nine men and seven women is not expected to reach a conclusion for another three weeks at the earliest.

Shredding documents

The charges against Andersen stem from its admission late last year that some of its executives shredded Enron documents, one of its most high-profile audit clients.

Some of the documents were destroyed after US stock market regulators had opened an inquiry into Enron's accounts.

But the prosecution, which has persuaded the Andersen executive in charge of the Enron account to give evidence on its behalf, is thought to have a strong case.

Jury selection

Mr Friedrich and the lead defence counsel Rusty Hardin selected a jury on Monday.

They questioned 106 panellists before appointing the 16-strong jury.

Some panellists were excused after telling the lawyers that their anger at the Enron scandal would have prevented them from being impartial.

On the stand

Among those likely to give evidence are officials from the Securities and Exchange Commission, the body charged with overseeing the behaviour of publicly listed companies like Enron.

The star witness is set to be Houston auditor David Duncan, who has already pleaded guilty to obstructing justice and can now testify without fear of further charges.

He is likely to tell the court that the firm's protestations that the decision to destroy documents was taken locally by individuals are untrue, and that senior management knew and approved.

A number of other Andersen staff will take the stand, including:

  • Carl Bass, a member of Andersen's Professional Standards Group, who may say Andersen executives in Houston ignored advice that they were on dangerous ground with Enron;
  • Nancy Temple, a lawyer whose 12 October email told employees to comply with Andersen's "documentation and retention policy", a message the prosecution could suggest was a heavy-handed hint to start shredding;
  • Michael Odom, a Houston-based manager who told employees in a video that if the document policy was followed "and litigation is filed the next day, that's great... whatever there was that might have been of interest to somebody is gone and is irretrievable";
  • and James Hecker, an Andersen partner who emailed executives in August after a phone call with Enron whistleblower Sherron Watkins to warn of irregularities.

Fallen giant

Houston-based Enron, one of the most dazzling corporate success stories of the 1990s, filed for bankruptcy in December after it emerged that the firm had hidden millions of dollars in debt using a series of complex external partnerships.

Andersen's failure to spot irregularities in Enron's books severely damaged its reputation, and triggered a crisis of confidence in the audit industry.

Investors expressed concerns that auditors may turn a blind eye to accounting glitches in order to secure lucrative consulting work from their corporate clients.

Andersen's attempts at negotiating a settlement with federal prosecutors failed earlier this year.

And last month, a US judge turned down a request from Andersen's lawyers to delay the trial on the grounds that negative media coverage of the Enron affair would affect the jury's impartiality.

Civil action

Andersen is facing a separate civil lawsuit from a group of aggrieved Enron investors and former employees, many of whom lost their retirement savings when the company collapsed.

The fallout of the Enron affair has severely damaged the Andersen brand, with many of its partnerships outside the US choosing to merge with one or other of the audit firm's global rivals.

Andersen is the smallest of the five global accounting groups. The other four are Ernst & Young, Deloitte & Touche, KPMG, and PwC.

The BBC's Mark Gregory
"The prosecution... are going to be allowed to bring evidence relating to various other Andersen audits"
The BBC's Kate Noble
"The Department of Justice scored an early victory"
The BBC's Stephen Evans reports from Houston
"They've gotten into the meat of the case"
See also:

19 Mar 02 | Business
Q&A: Andersen offices defect to KPMG
19 Mar 02 | Business
Andersen regions in break-up talks
15 Mar 02 | Business
US bans Andersen from official work
29 Jan 02 | Business
Andersen on the defensive
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