The Next Accounting Fiasco

Twenty years after Enron’s failure, investors are still vulnerable to corporate numbers games

- By Greg Farrell

The collapse of Enron, which filed for bankruptcy protection on Dec. 2, 2001, shook the capital markets and led directly to the demise of Arthur Andersen, the auditing firm that approved Enron’s annual statements and accounting acrobatics. The scandals led to new rules and laws for corporations and auditors that were meant to prevent future frauds of such massive scale.

Two decades later, no similar blowups have occurred in U.S. markets. But it’s not clear that investors are any safer today than they were before Enron Corp. failed.

At the time of the Enron fiasco, Andersen had already been enmeshed in frauds at Waste Management Inc., Sunbeam Products Inc., and the Baptist Foundation of Arizona. Soon an even bigger fraud would emerge at WorldCom, another Andersen client. In the wake of the Waste Management collapse, the U.S. Securities and Exchange Commission hit Andersen with a $7 million fine, sanctioned four partners, and issued an injunction against any further violations of securities laws.

Once the Enron fraud began to emerge, Andersen’s Houston office quickly activated its “document retention policy,” shredding Enron work papers in advance of an SEC inquiry. As public outrage grew, the Justice Department charged the firm with obstruction. In settlement talks, prosecutors insisted that Andersen admit to some form of wrongdoing. Andersen’s management refused, maintaining that the firm had not broken any laws. A Houston jury convicted Andersen in 2002, effectively putting it out of business.