Business Crime

In recent public comments, Securities and Exchange Commission Chairman Harvey Pitt has focused on the Enron scandal to criticize the professional standards that govern accountants, particularly in the context of management fraud. According to Chairman Pitt, “[p]resent-day accounting standards are cumbersome and offer far too detailed prescriptive requirements . . . [which] encourage[ ] accountants . . . to read accounting principles narrowly, to ascertain whether there is technical compliance with applicable accounting standards.”^[1]� In advocating a broader set of accounting standards, Chairman Pitt highlighted a 40-year-old decision by Judge Henry Friendly in the Lybrand Ross criminal prosecution, U.S. v. Simon.^[2]� In that decision, the Second Circuit Court of Appeals rejected the defendant auditors’ claim that criminal charges were foreclosed because the financial statements in question literally complied with generally accepted accounting principles. While Chairman Pitt’s comments were aimed at a revision of the professional and regulatory mechanisms that govern an accountant’s conduct, his comments are particularly poignant in light of the U.S. Department of Justice’s ongoing efforts to investigate and prosecute Arthur Andersen and individual accountants who were involved in the Enron debacle.

While the DOJ is clearly focused at the moment on Andersen’s alleged obstruction of justice through destruction of documents relating to the Enron audit, the question still hangs as to whether the government will attempt to impose criminal liability on the accounting firm (or individual Andersen or Enron accountants) for the Enron audits themselves, pursuant to securities, mail and wire fraud or even RICO laws. The class action plaintiffs in the civil litigation arising out of Enron’s downfall have already alleged that Andersen and Enron engaged in securities fraud, and, as facts emerge through ongoing governmental investigations and prosecutions as well as the civil suits, Andersen and others may find themselves defending against criminal allegations of fraud.