From the December 2002 issue of Entrepreneur

When the Enron scandal was heating up, two accountants at Arthur Andersen worried about memos and records that could implicate the firm. Suspecting a coming investigation, they geared up an existing company policy of destroying all documents not directly related to the final audit report. Soon, the company was shredding documents and deleting e-mails right and left.

That was a phenomenally bad idea. Investigators didn't buy the explanation that the firm was merely following its own document-retention policy. Whatever trouble the firm might have faced over turning a blind eye to the financial shell games played by its biggest client, destroying evidence made it far worse. The Justice Department indicted the firm for obstruction of justice. Clients fled, and one of the five biggest accounting firms in the world essentially died. There's a lesson in this for businesses large and small.

First, the basics. No business can keep all documents forever, but various state and federal laws require businesses to keep particular kinds of documents for given lengths of time. In addition, you'll want to keep personnel records, company policies and other documents that might become evidence in a lawsuit.

Keeping documents can be burdensome, but it's a cost of doing business, says Minneapolis attorney Robert Hennessey, chair of the litigation section at Lindquist & Vennum. Hennessey notes that the law doesn't distinguish between electronic records and those on paper. It's up to each company to decide what form of storage works best. "We're at a point where we're not a slave to keeping everything on paper," he says.

To ensure compliance with all the scattered laws about how long you have to keep what, work with your attorney to create a document-retention policy. The policy puts every document on a schedule to be stored for a given period and then destroyed. It's best to get rid of unneeded documents routinely so there aren't as many to wade through later.

Don't let that policy get you into trouble, though. If you learn of a pending lawsuit, don't panic and toss memos, e-mails and other records that might make you look bad. Hennessey tells of a sexual harassment case he tried against a major defense plant where company officials emptied desks and took everything to the shredder. "Once the court learned about that, they lowered the boom," he says. The court imposed a $750,000 civil fine plus attorney fees and the cost of reconstructing the evidence.

In one high-profile case against a manufacturer, Hennessey notes, the plaintiff's lawyers discovered that the company was destroying all its test results. "The judge instructed the jury that it could assume that the documents being destroyed were adverse," he says.

And don't destroy evidence routinely. "Employees don't get it that you don't destroy documents according to schedule if there's an investigation," Hennessey says. The minute you learn of trouble, send out a memo telling employees what not to destroy.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.