Auditor Balks at Guilty Plea in Enron Case

The Andersen accounting firm told the Justice Department late Wednesday that it would not plead guilty to felony charges of obstruction of justice.

In a letter to Assistant Atty. Gen. Michael Chertoff, lawyers for the troubled firm said government threats intended to get Andersen to reach a plea agreement or face a felony indictment represented “an unprecedented exercise of prosecutorial discretion and a gross abuse of governmental power.”

A copy of the letter obtained by The Times states that the government action would probably destroy the accounting firm, which became a target of multiple federal probes because of its work for Enron Corp.

Andersen, which earlier in the week had negotiated with the Justice Department, apparently reversed its strategy as the government’s deadline of 9 a.m. today for a plea agreement neared and as rival firms dropped out of merger talks.

Deloitte & Touche Tohmatsu and Ernst & Young earlier announced that they had decided against a merger with Andersen because they feared its liability in the Enron case was too large and complex.

Deloitte said that although “our first preference for the capital markets and for the profession is for Andersen to continue as a free-standing firm,” it was unable to continue discussions because of Andersen’s unresolved legal issues.

Ernst & Young issued a similar statement, saying that “as long as Enron and other Andersen litigation matters are unresolved, it is not in the best interests of our people, clients and our firm to pursue such a combination.”

The Justice Department could file criminal obstruction-of-justice charges as early as today.

Justice Department sources insisted Wednesday that prosecutors had not set a deadline for reaching a plea. But top officials were scheduled to meet today in Washington to discuss the case.

At the heart of the probe is Andersen’s admitted destruction of documents sought by the government in its probe of Enron’s collapse. Andersen served as Enron’s auditor and business consultant, earning as much as $1 million a week for its work for the Houston energy trader.

In the letter, Andersen complained that it had been denied the chance to “tell its story to the grand jury,” which it claimed was a violation of government policy.

The accounting firm contends that the document destruction “was confined to relatively few partners and employees of the firm and was almost entirely limited to the Houston office.”

And even then, Andersen argued, there was no “willfull criminal intent to obstruct a governmental investigation.”

Consequently, the attorneys for the firm told the Justice Department that Andersen’s actions do not warrant a plea bargain that would amount to a death sentence for the firm.

Chicago-based Andersen is considering filing for Chapter 11 bankruptcy protection, possibly to pave the way for an orderly sale of assets or as a strategy to cope with rising Enron-related claims, a source said. But a bankruptcy filing wouldn’t stop an indictment.

Criminal charges against Andersen certainly wouldn’t be the first corporate indictment by the Justice Department, but it is potentially one of the most devastating, scarring the auditor’s reputation and putting thousands of jobs at risk. Although dozens of other large corporations have survived criminal indictments or guilty pleas, a criminal case against Andersen, which trades on its reputation, could be a death knell for the company, experts say.

“One way or the other, this time next year Arthur Andersen as an entity will no longer exist,” said Thomas Ajamie, a Houston attorney who is advising an insurance company involved in the case.

The potential effects have put federal prosecutors in the unusual position of deciding whether one of America’s most venerable corporate names will live or die.

Assistant Atty. Gen. Chertoff, who is heading the department’s criminal probe, will need to weigh a variety of factors, balancing the imperative to punish Andersen with a reluctance to deliver a death blow to the company.

“There are human consequences here,” said Eric Holder Jr., former deputy attorney general in the Clinton administration. “Generally [in corporate indictments], you’re not talking about a company disappearing.”

Andersen said in its letter to Chertoff that the firm audits 17% of the nation’s public companies and that its death not only would put thousands of accountants and staff out of work but also would create a disruption in financial reporting as those businesses scrambled to find new auditors.

The accounting firm said it had agreed to institute a series of reforms recommended by a special panel headed by former Federal Reserve Board Chairman Paul A. Volcker. The attorneys said those reforms would result in “greater centralization and control of audit teams,” a critical change that would prevent the kind of document destruction that occurred last fall in Houston.

The firm proposed a joint settlement with the Justice Department and the Securities and Exchange Commission, which also is investigating the firm’s work for Enron.

That proposal included:

* Deferred prosecution of the firm and the appointment of a special monitor to oversee reforms.

* An agreement with the SEC on how to handle the problems that plagued Andersen’s Houston office.

* Other discipline, such as the firing of anyone associated with the document destruction “or whose failure of oversight and negligence made that destruction possible.”

Richard J. Favretto, the Mayer, Brown, Rowe & Maw attorney who signed the letter on behalf of Andersen, asked that senior Justice Department officials meet with Andersen one more time “before deciding to impose the death penalty on the firm.”

If Andersen collapses, its ability to fund settlements with Enron investors, employees and the SEC would diminish substantially. The firm has offered to pay $750 million to pay such claims, sources said.

Already, Andersen is losing big-name clients daily. On Wednesday, consumer finance lender Household International Inc. joined the growing list of defectors, citing the “uncertainty about the future direction” of Andersen. If Andersen is indicted, more clients are certain to bolt.

An indictment also could disrupt financial markets by potentially delaying or distracting Andersen from completing its auditing work for remaining clients, one analyst said.

“The financial markets have demonstrated over and over again that they are so skittish about any kind of accounting issues,” said Mark Cheffers, chief of the AccountingMalpractice.com Web site.

*

Even if Andersen manages to stop the flight of clients, a guilty plea would have prevented it from reviewing the books of its remaining customers. SEC rules provide that anyone convicted of a crime of “moral turpitude” is to be suspended from practicing business before the commission, which includes signing off on the audits of public companies.

SEC officials noted that such a penalty is not necessarily automatic and may be waived under a plea deal.

On the other hand, the SEC officially censured Andersen last year for its handling of Waste Management’s books and may be less willing to let the accounting firm escape a harsher punishment in the Enron case.

One option for Andersen would be to persuade prosecutors to press charges against individual employees, rather than the company itself. Andersen has admitted that senior executives ordered the destruction of Enron-related documents. The firm has shared the results of its internal investigation with prosecutors but has not released it publicly.

Hirsch and Leeds reported from Los Angeles and Sanders from Washington. Times staff writers Robert L. Jackson and Josh Meyer in Washington also contributed to this report.