Erion employees after bankruptcy

Injustice Served at Enron, AA&Co: The Roles of Michael Chertoff and Sherron Watkins

The collapse of Enron and the conviction of its accounting firm, Arthur Andersen, mark a critical juncture in American business and political life. Not only the accounting profession but corporate America as a whole—and those charged with regulating it—must now confront what has been learned, what is at stake, and what can and should be done to restore public confidence in the integrity of the markets.
Bigger than Enron, Frontline 2002

Before we watch the documentary film, Enron, The Smartest Guys in the Room (Gibney & Kliot, 2005), let’s assess our knowledge of the Enron scandal.1 Do we even remember the rise and fall of the Enron Corporation very clearly? After all, a new generation has emerged since the company’s December 2, 2001 bankruptcy. And, noting the date, did some simply discard that news, since we were then, and are still, adjusting to the devastation resulting from the bombing of the World Trade Center towers?

Comparing the Enron Case to 9/11

Enron trademark
Enron trademark, positioned in front of Enron’s Houston Headquarters

We can compare the two events in time, but maybe very little else to compare otherwise. Of course, the collapse of Enron was earth-shaking to many people around the world who had invested in the company and had faith in its positive pronouncements. And, it was earth-shaking to others who had benefited from Enron’s philanthropic largess.

However, were lives lost? Were there lasting injuries? Unfortunately, we must answer “Yes” to both. Further, in both incidents, the fallout in America was a loss of faith in our fellow-man. Before these events, many citizens carried an image in their minds of US defenses as impenetrable, and of US regulatory and justice systems dependably watching over to make sure that safety and fairness is upheld. All of these systems failed.

If we can take anything away from these catastrophes that benefits us, it is a better understanding that all of our organizations are complex collections of people, some good and some bad, some responsible and some not, some diligent in their jobs and some not.

In Arthur Andersen & Company, Enron’s auditors, an incredibly important asset was destroyed unjustly by the stroke of the pen of one man, who was then Assistant Attorney General at the US Justice Department.

According to Shlaes (2014),

The indictment was served by Michael Chertoff, who was subsequently appointed Secretary of Homeland Security by President George W. Bush. The jury found Arthur Andersen guilty on June 15. Since federal regulations do not allow convicted felons to audit public companies, Andersen surrendered its license on August 31, effectively putting the firm out of business in the United States.

US Justice System Misrepresents Andersen Document Shredding

Later, upon appeal to the Supreme Court on the lawfulness of the action against them, Arthur Andersen’s conviction was overturned in a unanimous decision, following which Chief Justice Rehnquist stated the Court’s opinion (“Arthur Andersen LLP v. United States”, 2005),

As Enron Corporation’s financial difficulties became public in 2001, petitioner Arthur Andersen LLP, Enron’s auditor, instructed its employees to destroy documents pursuant to its document retention policy.

“Its document retention policy” is the critical item to understand in the above statement. Andersen’s document retention policy on the working papers of a particular client’s audit read,

The firm’s policy called for a single central engagement file, which ‘should contain only that information which is relevant to supporting our work. . . . [I]n cases of threatened litigation, . . . no related information will be destroyed.’ . . . It also separately provided that, if petitioner is ‘advised of litigation or subpoenas regarding a particular engagement, the related information should not be destroyed.’

In the course of performing its regular business services at Arthur Andersen & Co, documents were routinely destroyed—except, according to Andersen’s practice policy, in the case that the audit was potentially liable for investigation or an irregularity was suspected.

This practice was the way that all auditing companies across the US dealt with protected materials. Further, and most importantly, at the time the documents were being shredded, Enron had not been indicted.

From an account in The New York Times (Eichenwald, 2002),

The indictment itself offers few specifics. It says that the obstruction of justice began on Oct. 10, without describing what documents were destroyed at that point, or by whom.

The only event described in the indictment that seems related to that date is the firm’s decision the day before to hire an outside law firm ‘to handle future Enron-related litigation.’

Was Chertoff Ignorant of US Accounting Practices or US Law or Simply Rushing to Advance his Career?

The US Justice Department seized the opportunity to use the act of shredding documents as evidence of criminal activity (Shlaes, 2014),

They were charged under 18 U.S.C.(b)(2)(A) and (B), which made it a crime to ‘knowingly … corruptly persuad[e] another person … with intent to … cause’ that person to ‘withhold’ documents from, or ‘alter’ documents for use in, an ‘official proceeding.’

Chertoff went after the cover-up: Andersen had shredded documents without reporting, and Chertoff contended that was a crime.

However, even though Chertoff’s accusation against the firm had no basis in law, it was too late to reconstruct the business that was built by thousands of employees around the world, many who had performed honorably according to the words of their founding leader.

This leader, Arthur Andersen, had started the business in 1913 after graduating from Northwestern’s Kellogg School of Management. He had taught all new-hires upon their employment to “Think Straight, Talk Straight” as they did their work. However, some were likely not thinking straight in the Enron case. Over the years of building Arthur Andersen & Company into one of the world’s largest multinational companies, arrogance and greed had taken hold among some in leadership, similar to the story at Enron.

Michael Chertoff, said to develop a one-sided view of corporate America
Michael Chertoff, said to have developed a one-sided view of corporate America

Andersen, one of the Big Five accounting firms at the time, provided auditing services to almost 20 percent of the publicly traded companies in the US (Eichenwald, 2002). At the hands of the few at Arthur Andersen who managed the Enron account, and a single individual in the US Justice Department, a travesty of justice cost 26,000 responsible, active US employees their livelihoods and their pensions, many who had served clients lawfully and well for their entire careers.

This was an unjust outcome in itself, not to mention the disruption and extra work created for the Securities and Exchange Commission, and the loss of productivity in all of those client firms whose employees had invested time over the years to enabling the Andersen audit relationships.

Further, the Andersen offices in major cities around the world folded too, bringing the affected number of employees worldwide to 85,000, losing important foreign resource connections for our nation, and a loss of faith in the US by those foreign nationals.

Following the Enron fiasco, the Sarbanes-Oxley Act of 2002 was passed, which mandates that the accountants who audit or review an issuer’s financial statements must hang onto certain records  relevant to that audit or review. The “Final Rule: Retention of Records Relevant to Audits and Reviews” (2003) states,

the rule requires that these records be retained for seven years after the auditor concludes the audit.

Before such a law existed, the documents in an audit project were shredded afterwards for reasons related to client privacy and security, and practical storage problems.

Large organizations, public and private, are varied and complex. As with the employees at Arthur Andersen & Co, we cannot characterize all the Enron employees as just a bunch of crooks, nor can we say that the US government, now or ever, has consisted of people who, as a group of employees, are different from other groups of people who work for a living.

We always have some employees who are more competent than others and some whose interests are either more or less aligned with organizational or societal interests.

Enron’s Sherron Watkins Risked Her Job to Expose Fraudulent Activities

sherron watkins
Enron executive Sherron Watkins is sworn in on Capitol Hill , Feb. 14, 2002, before testifying at a House Subcommittee hearing (AP Photo/Ron Edmonds)

In fact, while Michael Chertoff represents government action at its worst, Sherron Watkins, former VP at Enron, represents the best of corporate employees.

Strange as it seems, it was Watkins who discovered the accounting issues and brought attention to the irregularities at her company, not the auditors or other watchdogs whose job it was to uncover fraudulent activities.

Sherron Watkins was one of those “smartest guys in the room,” yet an ethical person who risked her job to expose Enron’s misdeeds. It is also interesting to note that prior to her employment at Enron, Watkins had worked at Arthur Andersen for several years. An article in The Guardian presents her CV as follows (Curwen, 2003):

Career: Auditor, Arthur Andersen, in Houston and New York, 1982-90; portfolio manager, MG Trade Finance Corp, New York, 1990-93; joined Enron, 1993; moved to Enron International, 1997; became vice-president, 1998; joined Enron Broadband Services, 2000; returned to work for Andrew Fastow, discovered $700m losses hidden in Raptor partnerships and revealed her findings to Ken Lay, summer 2001; resigned from Enron, 2002

Alumni from Andersen had also become Enron’s President and Chief Operating Officer, as well as its Chief Accounting Officer (McRoberts, 2002). From an article praising Arthur Andersen employees (Shlaes, 2014),

Enron execs lied, to themselves, to their internal committees, to the world. Andersen fired the partner who handled Enron, opened itself to investigation, and prepared itself to pay giant fines. As a signal of the firm’s awareness of the scale of the trouble, Andersen approached another gold-seal name, Paul Volcker himself, to clean up. The idea was to save the firm. After all, more than twice as many people worked at Andersen in the US as did at Enron. Most Andersen employees had nothing to do with Enron. Many did not even work in the tax or audit divisions.

Let’s now look at a current issue, not to diminish Andersen’s or Enron’s leadership misdeeds or Chertoff’s egregious error, but to bring attention to what may be evidence of a more general lack of transparency, decision-making skills, and/or understanding of the law in US Justice Department actions.

Contrast the justice system’s response in the Enron case with their action related to the opioid crisis, which, according to a report of the Centers for Disease Control and Prevention (CDC) (“CDC launches campaign”, 2017),

From 1999 to 2015, more than 183,000 people died in the U.S. from overdoses related to prescription opioids.

McKesson Corporation, a manufacturer of opioid medication, has been found guilty—for a second time—of breaking the laws related to their distribution by flooding the country with addictive drugs.

Hardin reports in the Denver Post (2017),

After years of investigation of McKesson Corp., led by a Denver-based Drug Enforcement Administration team, over the pharmaceutical giant’s distribution of powerful opioid drugs in Colorado and elsewhere, DEA agents say they thought they had gathered enough evidence to warrant criminal charges and fines of more than $1 billion.

But Walsh—an Obama administration appointee who is now a partner with law firm WilmerHale—told the Post that ‘we were not presented with a case that had adequate evidence’ to merit criminal charges.

Are There Ever Just Two Sides in a Complex Organization?

With the understanding that large organizations are complex, therefore likely to involve even more than two sides in an event, what can we observe about the portrayal of the Enron collapse in this movie? What does Enron: The Smartest Guys in the Room (Gibney & Kliot, 2005) communicate through the course of the film?

Thinking about this question, I am drawn to our earlier articles on documentary films, those films that claim to represent real (not fictional) activities and events, and to contain no professional actors and no scripted drama (Shapiro & Godmilow, 1997).

We also remember that motivations for making a film are very different for different people, and that therefore, along with these different motivations comes different biases and associated perspectives.

Along with that observation is the realization that any judgment about a case’s validity comes with an understanding that at least two sides were considered. For example, we expect that if a jury is to make a just decision, the group must hear evidence both for and against the accused. How else can a verdict be justified?

How well does this movie present more than one side of the event? Techniques of persuasion may include arguments of others to convince people of the truth of an alternative perspective, but this doesn’t always happen. If only one side is presented in a case, the technique has propaganda at its core.

1 The movie is based on a book by Fortune writers Bethany McLean and Peter Elkind (2003).


Arthur Andersen LLP v. United States. (2005, May 31).  Cornell Law. Retrieved from

Arthur Andersen LLP v. United States. (2017, Aug 4).  Wikipedia. Retrieved from

CDC launches campaign to help states fight prescription opioid epidemic. (2017, Sep 25). Centers for Disease Control and Prevention (CDC). Retrieved from

Curwen, L. (2003, Jun 21). Interview: Sherron Watkins, Enron whistleblower. The Guardian. Retrieved from

Eichenwald, K. (2002, Mar 15). Enron’s many strands: The investigation; Andersen charged with obstruction in Enron inquiry. The New York Times. Retrieved from

Enron auditor’s verdict reversed. (2005. May 31). Associated Press. Retrieved from

Final rule: Retention of records relevant to audits and reviews. (2003, Jan 27). Securities and Exchange Commission. Retrieved from

Fisher, D. (2019, Jan 3). In opioid blame game, roles of Ohio doctors and so-called ‘pill mills’ sought. Forbes. Retrieved from

Gibney, A., & Kliot, J. (2005). Enron: The Smartest Guys in the Room. USA: Magnolia Pictures.

Hardin, M. (2017, Dec 17). Denver-based DEA opioid probe of McKesson was ‘hijacked,’ says Washington Post-’60 Minutes’ report. Retrieved from

Mclean, B., & Elkind, P. (2003). The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. London: Viking.

McRoberts, F. (2002, Sep 4). Repeat offender gets stiff justice. Chicago Tribune. Retrieved from

PBS Frontline. (Director). (2002). Bigger than Enron [MOTION PICTURE]. USA: PBS. Retrieved from

Shapiro, A., & Godmilow, J. (1997). Jill Godmilow in conversation with Ann-Louise Shapiro. History and Theory, Vol 36, No. 4. Retrieved from

Shlaes, A. (2014, Sep 11). Andersen teaches the prosecutors a lesson. National Review. Retrieved from

Thomas, C. (2002, Apr 1). The rise and fall of Enron. Journal of Accountancy. Retrieved from


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2 thoughts on “Injustice Served at Enron, AA&Co: The Roles of Michael Chertoff and Sherron Watkins”

    1. I am not a lawyer, but it seems to me that Michael Chertoff should be charged with malicious prosecution or abuse of process. I can see no justification under any US law for Chertoff’s action that penalized tens of thousands of innocent people.

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