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Arnold Kling  
PERMANENT LINK | MAY 31, 2005

Arthur Andersen Posthumously Exonerated

Arnold Kling
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Don't Do Me Any Favors... Deadly Medicine and Youthful R...

I found this story interesting.


The Supreme Court on Tuesday overturned the conviction of the Arthur Andersen accounting firm for destroying Enron Corp.-related documents before the energy giant's collapse.

In a unanimous opinion, justices said the former Big Five accounting firm's June 2002 obstruction-of-justice conviction -- which virtually destroyed Chicago-based Andersen -- was improper. The decision said jury instructions at trial were too vague and broad for jurors to determine correctly whether Andersen obstructed justice.


It was not just Arthur Andersen partners who lost wealth because of this miscarriage of justice. When Andersen collapsed, Freddie Mac had to switch accounting firms. The new accounting firm decided to challenge Freddie's use of hedge accounting for its derivative contracts. This in turn created panic on Freddie Mac's board, which launched a guilty-unless-proven-innocent investigation of top management, resulting in the CEO and essentially all other top executives being fired. Lots of shareholder value was destroyed--it is not clear that the new management even understands mortgage cash flows well enough to run the company.

As you might guess, I lost money on Freddie Mac stock because of this. Although I was no longer an employee of the company, I still held some stock.

But I guess I can't sue the judge who gave the vague instructions to the Andersen jury, can I?

Of course, the prosecutors in the case still think that Andersen was guilty, and that the Supreme Court ruling was on a technicality. Maybe they're right. But I think that many events have vindicated those who warned that the worst consequences of Enron would come not from that company's collapse, but from the political reaction to it.

Thanks to J. Henderson for the pointer.

CATEGORIES: Business Economics


TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/271
The author at Economics and Liberty in a related article titled Court Overturns Andersen Conviction writes:
    The Court's opinion was unanimous. Andersen's conviction led to it's demise. I find it striking that the judge's instructions were apparently so far from the law. I believe the judicial branch of government has to be the branch most committed to prot... [Tracked on June 1, 2005 10:15 AM]
COMMENTS (4 to date)
Bernard Yomtov writes:

Pretty far-fetched to blame this on the judge in the Andersen case.

Let's follow the bouncing ball.

Andersen found guilty, possibly due to poorly written jury instructions by the judge.

Andersen out of business, forcing Freddie Mac to hire new auditors.

New auditors challenge Freddie Mac accounting procedures. (Note that we are not given any information as to whether the challenge was justified.)

Freddie Mac board panics and replaces competent management with turkeys.

So the board's panic caused the damage. And the panic arose because a CPA firm took a different view of an important matter than Andersen had. And this is the Andersen judge's fault?

Did the board have to panic? Could they have defended the treatment instead? (Or just changed it). And if they couldn't defend it doesn't that suggest the challenge was reasonable, and that Andersen shouldn't have allowed it?

Posted May 31, 2005 7:29 PM
CS writes:

I was actually cheering when the Macs came under fire. A government backed firm (maybe half its market cap coming from that backing) that is a new S&L crisis waiting to happen, and that uses its foundations to bribe every politician and think tank in D.C. (though refused by CATO, CAGW and a few others) is not my cup of tea...

Posted May 31, 2005 10:12 PM
jaimito writes:

Excellent note. I got more insight on the why things did happen than reading 3 business magazines. Life is unfair, my teachers forgot to tell me that in school.

Posted June 1, 2005 12:44 AM
Patrick R. Sullivan writes:

Martha Stewart disease?

Posted June 1, 2005 9:26 AM
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