“Criminalizing business” and the public trust

Tom Kirkendall has posted several score times this year on the subject of how certain prosecutors, aided by the post-Enron political environment and the passage of the Sarbanes-Oxley law, have been interpreting questionable business practices as grounds for criminal charges.

I agree with Tom that the Enron Task Force has been wrong to coerce defendants into guilty pleas and into declining to testify for other defendants. I also agree that the collapse of the Arthur Andersen firm after its conviction markedly reduces competition in the area of major corporate audits, and that this reduction in competition will have serious lasting negative effects.

I have a question for Tom about the Arthur Andersen case, though:

As accounting professionals and Certified Public Accountants, the partners comprising the firm of Arthur Andersen were supposed to serve as independent defenders of the public interest, ensuring that the accounting practices of their clients were within the bounds of generally accepted standards.

As the auditors for Enron, the firm of Arthur Andersen appears to have become dependent on income from the consulting work it did on the side for Enron; and, as a result of that dependence, its managing partners were signing off on unacceptable accounting practices.

Faced with a situation in which an accounting firm has been corrupted into ignoring its responsibility to the public, leading to the loss to stakeholders and pensioners of several billion dollars, what course of action (if any) would you have recommended that the federal government take?

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