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.
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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.
Originally published in the December 2002 issue of Entrepreneur Magazine