Andersen: Auditors' reputation went through the shredder too

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Threat of Just desserts hangs over Andersen

Enron shows that auditors can get steamrollered when they cross the road

The scene in the Houston office of Andersen must have been like the US embassy in Saigon in 1975 as the North Vietnamese army moved in. The accounting giant's shredding machines, which turned the most incriminating documents into unreadable mush, whirred into action, destroying data relating to its most controversial client, Enron.

The shredding started in mid-September. It continued after the Securities & Exchanges Commission, the US financial regulator, launched an investigation into Enron's questionable off balance sheet "partnerships". And continued even after an email was sent by Andersen's in-house lawyer in Chicago reminding Houston of the group's policy on shredding documents (a memo that was forwarded within the Houston office with the world-weary epithet, "More help").

When Enron collapsed in early December – at $40bn (£28bn) in debt the largest bankruptcy in history – a few people started sweating. They included Kenneth Lay and Jeff Skilling, the duo who built up the oil and gas behemoth; George W Bush and members of his administration, who had helped Enron and received money from it; and Andersen, the auditors who had apparently not spotted the potential disaster looming, despite the warnings from senior Enron executive, Sherron Watkins, who wrote: "I am incredibly nervous that we will implode in a wave of accounting scandals."

With the SEC and the US Senate investigating, legal actions flying and talk of potential criminal indictments, the proverbial is hitting the fan. And Andersen, which received $56m (£39m) in fees from Enron last year, is the most exposed.

Last week it fired David Duncan, the head of the Houston auditing team which looked after Enron, and suspended some of his subordinates. A couple of days later, Andersen was fired by Enron. It seems the energy company is trying to pin the blame for its collapse on Andersen, and Andersen is trying to pin the problem on Mr Duncan. It is a high-stakes game of poker with the future of one of the world's big five accounting firms at stake.

In the mid-Nineties, Andersen was flying high in league with its successful sister business, Andersen Consulting. But the two fell out, and went to arbitration. When the terms of the divorce were announced in late 2000, there was a feeling that the consulting side was the winner. That business, now renamed Accenture, floated on the New York stock exchange and is valued at $24bn.

What was left at Andersen is worth a fraction of that, if it is worth anything. Before Enron, the firm had already suffered a fall in business with the end of the dot-com boom. The company had been hit by sporadic scandals, though no more than any firm its size, and certainly a lot less than PricewaterhouseCoopers (PwC), which was found by the SEC to be guilty of breaching rules on employee ownership of shares in clients.

There is a feeling in the accountancy world that the Enron scandal is the most damaging in history for an auditor, more damaging than the collapse of BCCI, audited by Ernst & Young and Price Waterhouse (now part of PwC), more damaging than the Maxwell scandal, which embroiled the empire's auditors Coopers & Lybrand (also part of PwC), more damaging than the Barings collapse, which has brought legal actions against Deloitte & Touche and Coopers & Lybrand.

"It's not merely the size of the collapse but also the apparent complicity of the auditors in the cover-up," said one rival. "The other factor is politics. To keep the heat off George W, there has to be a scapegoat. Andersen has to be fearful of that."

There is little doubt Andersen will have to pay damages to shareholders. The question is, how many billions will be enough? The chief executive, Joe Berardino, may have to fall on his sword to save the firm. Even if that works, Andersen may never be the same again.