To Shred or Not to Shred: That is the Nightmare
from
July/August 2002
by Shaun Assael
As Enron’s auditors at Arthur Andersen were furiously trashing files last November, a parody of Sprint’s cellular phone campaign started making the e-mail rounds. “The Arthur Andersen partner was on his cell phone,” the now-classic copy began, “when he said, ‘Ship the Enron documents to the feds.’ But his secretary heard ‘Rip the Enron documents to shreds.’ It turns out that it was all just a case of bad cellular.”
Like most good parodies, this one carries a sharp warning. Listen up, directors: Your company needs to have clear policies when it comes to ditching documents, or else. And you need to maintain formal minutes of board meetings that show these policies are being monitored.
Ever since the late 1970s, when Clara Carlucci accused Piper Aircraft of destroying records that she said would prove her husband was killed as a result of design defects in a turboprop that crashed, courts have taken a dim view of selective destruction. Piper tried claiming that it jettisoned the records in a routine housecleaning. But when the company couldn’t produce a written policy that spelled out the routine, or an executive to articulate it, the defense collapsed. More than 20 years after Piper settled for $10 million, the case remains a legal standard and the reason retention policies are part of most companies’ boilerplate bylaws.
Unfortunately, the old boilerplate may need revamping. After news of the shredding at Arthur Andersen went public, records expert John Montaña, who owns a consulting firm in Landenberg, Pennsylvania, clicked onto Andersen’s website to read about its procedures. He was stunned to see that the accounting firm gave managing partners wide latitude in deciding what was an “audit work product”—a category of records that its policy promised would be kept for six years. “Your worst enemy is inconsistency,” Montaña says. “When you have a policy, you want it to be as uniform as possible.”
It’s not that David Duncan, who ran Andersen’s Houston office, didn’t have a right to clean out his cabinets. Federal, state, and local jurisdictions give the typical records manager of a national business 3,000 laws to worry about. Factor in specialty codes—those affecting hospitals or restaurants, say—and the number doubles. That’s a lot of paper the regulators make you keep, but it’s also a lot of paper they let you legally burn. Or shred. Or use to make piñatas. The law doesn’t care how you dump it.
Has someone been injured on the job? The U.S. Occupational Health and Safety Administration generally wants injury reports kept for five years. Employee benefits? If Joe Smith suddenly announces that you’ve cheated him out of a benefit, you need to have six years’ worth of his records on file. That’s the amount of time federal law gives him to assert a claim.
Then there’s a whole layer of corporate jetsam that the law usually cares nothing about. Donald S. Skupsky, a nationally recognized records expert who has been an adviser to Exxon and Holiday Inn, tells clients not to keep anything “that doesn’t reflect the final version of a work product that mirrors the position of the company.” According to this guideline, it might have been permissible for Andersen employees to destroy early memos and drafts of audit reports on one of Enron’s questionable partnerships, so long as they kept the final audit report and all material relevant to what actually went into it.
But Skupsky hastens to add, “The last thing you want to do is start shredding anything just before the feds knock.”
That is what helped get Andersen indicted for obstruction. As U.S. deputy attorney general Larry Thompson told reporters in January, “The destruction began as Andersen foresaw imminent government investigations . . . and only ended nearly one month later, when the SEC officially served Andersen with a subpoena for Enron documents.”
Duncan may have thought he was saving his company (not to mention his job) by going on a shredding binge. But absent documents can be more damning than the real thing. If Montaña had been one of the forensic investigators who descended on Andersen’s Houston office, the first thing he says he’d have done is search Andersen’s files of other clients. “What I would have liked to prove,” he says, “is that Anderson destroyed documents in Enron’s case that it didn’t destroy for comparable clients.”
Duncan has said that he acted on orders from Andersen’s in-house legal counsel in Chicago, Nancy Temple. But all Temple did was send out an e-mail that advised managers, “It might be useful to consider reminding [yourselves] of our documentation and retention policy.” One element of that policy, she said, was that e-mails “should be retained until not useful.” Duncan took that as a green light to do what he did.
