Jesse Eisinger having conclusively nailed the award for best book title of the year, for his detailed polemical history of the US Department of Justice’s timorous post-Enron retreat from the pursuit of corporate malefactors, it may seem churlish to quibble.
Nor to take away from his dispiriting story’s call for renewed vigor in the prosecution of financial criminality. But from the perspective of fifteen years of scrutinizing Big Audit and the challenges facing the large accounting firms,[1] there are issues at both ends of Eisinger’s narrative – subtle, to be sure -- on which the vigor of his arguments can stand for clarification.
Background, for those who have not yet done the reading (emphasis deliberate): after the convictions of the principals of Enron, WorldCom, Tyco and Adelphia,
“Today’s Department of Justice has lost the will and indeed the ability to go after the highest-ranking corporate wrongdoers…. Prosecutors don’t simply struggle to put executives for “Too Big to Fail” banks in prison. They also cannot hold accountable wrongdoing executives from a gamut of large corporations: from pharmaceuticals, to technology, to large industrial operations, to retail giants” (p. xvii).
His argument bases heavily on the disintegration of Arthur Andersen, Enron’s auditor and the target of the DOJ's wrath for document shredding in the fall of 2001, while the company was collapsing and law enforcement forces were gathering.[2]
Eisinger spins out the 2002 time line of Andersen’s indictment, jury trial and conviction, and cessation of business; the Supreme Court’s 2005 reversal; and the public relations campaign by which Andersen posed itself as the aggrieved victim of government over-reach. As he concludes, Andersen’s “too big/too consequential” arguments failed, but also had no observable collateral consequences:
“The Andersen case ushered in an era of prosecutorial timidity when it came to taking on the largest corporations in America. The response to the financial crisis of 2008, which took down the nation’s largest banks and put the global financial system at risk, stands in contrast to the post-NASDAQ-bubble accounting-fraud emergency…. (F)ear for the fragility of the system dominated the political discourse and tormented Department of Justice officials” (pp. 57-8).
Here’s the first problem. Eisinger is correct, but for the wrong reason, saying that, “The notion that the indictment was solely responsible for putting Andersen out of business is a myth” (p. 54).
In fact, the indictment was irrelevant. Andersen was mortally wounded by Enron, beyond salvation or recovery, simply because it lacked the financial strength and organizational cohesion to withstand the litigation shock.
Enron’s collapse was to be the first case to extract a billion dollars as the responsible auditor’s litigation exit cost. Andersen had that capacity, with its 2001 revenue of $ 9.3 billion -- but barely. It would have teetered on the brink, still facing a crushing load of claims relating to the catalog of scandals that caused Justice to view it as an unrepentant serial recidivist – the sum of which would have swiftly driven it into insolvency.
So -- arguments on both sides of the Enron indictment impact miss the misplaced nature of their premise: Andersen was dead anyway, no matter the policy decisions at Main Justice in Washington. Andersen was like a terminal patient on late-stage life support -- its death was imminent and inevitable; the tortured decision to indict only pulled the respirator plug.
Having strung so much dirty laundry on this fragile line, Eisinger works himself into a righteous froth over the government’s retreat to its pattern of settlements and corporate fines -- all to be absorbed as business costs by the corporate treasuries and shareholders’ equity of the large public corporations -- rather than devoting the time and taking the risks of seeking the higher but less certain rewards of pursuing prosecutions through to trial.
His proposition raises two concerns. The first is narrow, based on the post-Enron structure of the Big Audit model, totally dominated as it is by the surviving Big Four. Here, Eisinger’s bland observation (p. 56) about the absence of effect from Andersen’s collapse – that its “prosecution did not lead to any economic or financial crisis…. Markets didn’t crash (and) corporations just found other auditors” -- fails to meet today’s reality. Which is, loss of another of the surviving quartet would not just reduce the field to a Big Three, but would trip the entire Big Audit franchise into failure.
That’s because the four-firm model is down to a critical minimum. Unlike with the Big Four, there is no supply shortage elsewhere in the professional services sector. The clients of the recently-failed public relations firm Bell Pottinger are relocating without issue, as did those of failed law firm Dewey LeBouef. But as is currently playing out in Japan in the dysfunctional relations between Toshiba and PwC, the range of large-company auditor replacement choices is now too severely constrained to allow any margin for reduction.
So much for the sector. Closing views on Eisinger’s basic premise on criminal accountability start here: outbreaks of financial malfeasance well enough evoke spasms of cathartic retribution. Society calls for the guilty to be punished.
Any longer-term deterrent impact, however, is another matter. That is, cyclical outbreaks of financial excesses inhere in the system and are inevitable,[3] with their attendant criminality, for reasons ranging from the post-event focus of regulators and legislators on fighting the last war, to simple human credulity, greed and rapacity -- embodied in the observation of a legendary New York judge, that “from the time to which the memory of man runneth not to the contrary, the human animal has been filled with cunning and guile.”
It is simply fanciful to think that the next generation of as-yet-undiscovered white-collar successors to the current Martin Shkreli of Turing, Elizabeth Holmes of Theranos or Kweku Adoboldi of UBS will be deterred in the least by the successful but now ancient and forgotten prosecutions of Ken Lay or Jeff Skilling or Andy Fastow – any more than they would by a return to public flogging or transport to Tasmania.
In the rural countryside of my youth, it was considered a measure of perception and good judgment whether a man “had the common sense to tell gravel from chickenshit.”
At the level of fundamental law enforcement policy, that question hangs over Eisinger’s otherwise noble and illuminating work.
[1] Please see my book, “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” – here at Amazon, where the “Look Inside” link gives free access to the Contents and Introduction.
[2] Disclosure: after 19 years as a senior member of Andersen’s in-house legal group, I had just left in June 2001, months ahead of the Enron debacle; intensely unpleasant events were to come, but as put by the eponymous ogre in that year’s “Shrek” -- “Better out than in, I always say!”
[3] See, for example, Benoit Mandelbrot’s brilliant “Misbehavior of Markets” (Basic Books 2004, paperback 2006).
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