Part 10- Corporations, Chapter 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals, Doc 8

Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals This section highlights key issues concerning the professional responsibilities of auditors, consultants, and securities professionals, particularly in the context of Enron’s accounting scandal, Andersen's role, and the broader implications of document retention policies and regulatory compliance. 1. Enron and the Destruction of Documents    Key Events: In the months leading up to Enron’s bankruptcy in November 2001, Andersen, Enron’s auditing firm, engaged in widespread document destruction in response to potential SEC and legal investigations. Senior members of Andersen, including partner Duncan, actively encouraged the destruction of documents that might be relevant to investigations, under the guise of complying with the firm’s document retention policy. Key Actions: After Enron’s financial difficulties became publicly known and an SEC investigation was initiated, Andersen formed a crisis-response team. A series of internal meetings emphasized adherence to the document retention policy, which led to the shredding of potentially incriminating materials. Despite concerns from some within the firm, such as Andersen partner John Riley, these actions continued until a formal subpoena was served, after which the document shredding ceased. Legal Consequences: The case eventually resulted in charges against Andersen for obstruction of justice under 18 U.S.C. §1512(b), which criminalizes persuading others to destroy documents to impede an official proceeding. The Court of Appeals upheld the conviction, but the Supreme Court reversed, finding that the jury instructions failed to require sufficient proof of "knowledge" and "corrupt intent." The case ultimately reinforced the need for clear legal guidelines on the intent required for criminal obstruction. 2. Liability of Auditors and Consultants in Other Contexts  Case Examples: o Accent Pointe LLP and Lincoln Assurance: Accent Pointe failed to uncover a $155,000 embezzlement scheme during its audit, despite the firm’s responsibility to verify the legitimacy of Lincoln’s expenses. The auditors did not perform necessary checks to confirm the existence of creditors, leading to questions about whether Accent Pointe could be liable for negligence. o Diversified Graphics and Ernst & Whinney: E&W was tasked with selecting and implementing a computer system for DG, but the system provided was inadequate. DG sued for breach of contract, arguing that o o E&W failed to meet the promised specifications, highlighting the liability consultants face when failing to fulfill agreed-upon standards. PaineWebber and Jorge Donato: Rizek, a vice president at PaineWebber, recommended a high-risk strategy involving zerocoupon bonds to a client despite the client’s preference for safety. The client suffered significant losses, raising questions about whether PaineWebber and Rizek violated common law negligence or securities regulations, such as Rule 10b-5, which prohibits fraudulent conduct in securities transactions. Price Waterhouse and Scioto Memorial Hospital: Price Waterhouse, engaged to assess the feasibility of a retirement center project, based its report on unrealistic financial projections rather than a more accurate forecast. The project failed, and Scioto sued Price Waterhouse for negligence, arguing that its oversight caused significant financial loss. The case highlights the importance of accuracy in consultant reviews and the potential liability for failures in due diligence. 3. Legal Standards and Professional Responsibilities    Auditors' Duty of Care: In general, auditors owe a duty of care to clients and third parties who may rely on their reports. This duty can extend beyond direct clients, as seen in the Marcus Brothers case where auditors' negligence in financial reporting led to financial losses for third-party creditors who relied on the audited statements. Consultants’ Duty in Selecting Systems: Consultants who fail to deliver promised services or meet the agreed-upon specifications may be held liable for breach of contract, as demonstrated in the Diversified Graphics case. Securities Professionals’ Responsibilities: Securities professionals must act in accordance with the client’s best interests. Recommendations that expose clients to undue risk or fail to align with their stated goals can lead to claims of negligence or violation of securities regulations. Key Takeaways:   Document Retention and Legal Compliance: Andersen's actions exemplify how the destruction of evidence in the face of potential investigations can lead to serious legal consequences. Professionals must understand when and how to retain or dispose of documents, especially when litigation or investigations are likely. Audit and Consulting Responsibilities: Auditors and consultants have a professional duty to perform due diligence, accurately report findings, and avoid negligence. Failure to act on key information—such as verifying the existence of creditors or providing suitable systems—can lead to significant legal liability.  Legal Standards for Professionals: The application of "corruptly persuading" under obstruction laws is nuanced. Intent to undermine an official proceeding requires more than simply persuading someone to act; it necessitates awareness of the potential legal consequences of one’s actions.