"Guilty" of obstructing justice came the verdict in the historic Andersen trial in the aftermath of the Enron bankruptcy. Arthur Andersen's "death sentence" was sealed by a single e-mail: "I suggested deleting some language that might suggest we have concluded the [Oct. 16, 2001 Enron news] release is misleading," Andersen attorney Nancy Temple wrote.1 What mattered to the jurors was that Temple's e-mail recommended altering wording to a file memo Andersen partner David B. Duncan had written. In it, he documented that he told Enron's chief accounting officer, "Andersen believed the company's third-quarter earnings news release was misleading...[and] how such presentations had triggered SEC [Securities and Exchange Commission] disciplinary actions at other companies. Enron ignored the advice and issued the news release ... anyway."2 Andersen had a problem and the smoking gun that proved to the jury Andersen set out to alter documents to keep the truth from the investigation.
This information quality (IQ) problem is one form of information fraud altering data to hide the truth from a criminal investigation. Even without conviction, Andersen would probably not have survived, having lost 750 of its 2,311 publicly traded clients by June 17.3,4
But the larger IQ problem is the apparent failure of knowledge stewardship not acting on knowledge it had as an independent watchdog to protect shareholders. Andersen appeared to give their audit approval on financial statements that were inaccurate according to generally accepted accounting practices.
Andersen's problems went beyond Enron, having "audited 35 percent of the 20 largest accounting blowups ever."5 After Peregrine Systems terminated Andersen, it discovered $100 million in revenue may have been wrongly booked. Two class action suits resulted. One suit alleges Peregrine violated the Securities Act of 1933, making "materially false and misleading statements" about revenue and income, and was restating up to $100 million of previously recognized revenues "based on information that resulted from its ongoing internal investigation into accounting 'errors and irregularities.'"6 Peregrine's stock closed at 99.9 cents June 21, 2002, only three percent of its 52-week high of $31.31, as a result of investors selling out due to inaccuracy of Peregrine's financial statements.7
Enron may be the saddest example of information fraud. Last November Enron disclosed it had overstated earnings by $600 million (earnings not revenue!) since 1997. The SEC launched an investigation, and Enron's stock plummeted 80 percent over the next three weeks.8 Enron stock closed at 11.3 cents a share June 22, 2002, less than two-tenths of one percent of its $84 value 18 months earlier.9
Tragically, Enron executives touted the soundness of the company while they sold their shares but prohibited employees from selling. Enron paid $681 million to its 140 senior managers ($4.86 million apiece) even after its stock started to slide in January 2001 up to its bankruptcy filing.10 The suffering will be borne by those who worked hard to build a company in which they felt, at one time, secure.
Enron's collapse came when investors discovered the inaccuracy of the information about Enron's earnings. The share price was grossly over- valued according to the "accurate" earnings ($600 million lower over the past several years) data. Investors rushed to sell the stock, causing the stock price collapse. Enron's debt could no longer be supported by its assets (stock), and it became nonviable. Enron went bankrupt.
In the irony of ironies, bankrupt Enron jumped to Fortune 5 in 2002, the fifth-largest company in the U.S., and the largest company known to fail as a result of information quality problems.
Information quality is "consistently meeting knowledge worker and end-customer [here, investors] expectations."11 When customers cannot trust your information quality, they cannot trust you, and they will leave.
What do you think? Let me know at Larry.English@infoimpact.com.
Weil, Jonathan, Alexei Barrionuevo and Cassell Bryan-Low. "Andersen Win Lifts U.S. Enron Case." The Wall Street Journal 17 Jun. 2002: A1, A10.
- Eichenwald, Kurt. "Andersen guilty of obstructing justice." New York Times Service, The Tennessean. 16 Jun. 2002: 1A.
Krantz, Matt. "Andersen's reputation takes new hit with Peregrine audit." USA TODAY. 7 May 2002: 1B.
"Shapiro Haber & Urmy LLP Brings Class Action Against Peregrine Systems, Inc. on Behalf of Persons Who Received Stock in its Acquisition of Harbinger Corp." PR Newswire, Boston, June 18, 2002 at 11:19, http://fast.quote.com, accessed June 22, 2002.
PRGN Stock Summary https://investing.schwab.com, accessed June 22, 2002.
- Dugas, Christine. "Enron workers sue over retirement plan." USA TODAY. 27 November 2001.
ENRNQ Stock Summary https://investing.schwab.com, accessed June 22, 2002.
- Kranhold, Kathryn and Mitchell Pacelle. "Enron Paid Top Managers $681 Million, Even as Stock Slid." The Wall Street Journal, 17 June 2002: B1, B4.
- English, Larry P. Improving Data Warehouse and Business Information Quality. New York: John Wiley & Sons, 1999.
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