Document Retention Policies Have Long-Term Benefits

Goal Is to Ensure Important Information Is Kept as Long as Necessary and No Longer

The maximum fine is warranted to send†the message to the auditing community†that the destruction of documents will not†be tolerated.

So said U.S. District Judge†Melinda Harmon when she†imposed the stiffest sentence†under federal law on the†convicted and near defunct Arthur†Andersen LLP for obstructing a federal†inquiry into the collapse of Enron.1†Andersen in-house counsel Nancy†Temple remains at the eye of the storm,†waiting to see if she will be charged by†prosecutors for what she may have done or†failed to do while Andersen employees†were destroying documents.

No company or in-house counsel wants†to face the same fate that Arthur†Andersen and Nancy Temple face. Since†the Andersen downfall, document†retention policies have received renewed†attention from corporate counsel. This†article discusses the benefits of a formal,†written document retention policy, how a†document retention policy should be†created and implemented, why document†retention policies should be kept up-to-date†and when and how companies should†preserve documents once a litigation or†a government investigation arises or†is anticipated.

The Benefits

The creation and implementation of a†document retention policy entails readily†apparent administrative costs. The†benefits of a document retention policy†are not as clearly apparent, but the†Andersen trial has certainly raised public†awareness about the risks of improper†document destruction. Since the support†of management is critical to the success†of any document retention program,†corporate counsel will want to underscore†how the long-term benefits of a document†retention policy outweigh the short-term†administrative costs.

A document retention policy serves the†information and record management†needs of the business. The organization,†storage, retention and easy retrieval of†business records facilitate the company's†business operations and preserve the†company's valuable information assets ó†its institutional knowledge, experience,†business methods and practices.

Business activities are subject to†extensive regulations, from pension†and tax laws to securities laws. New†regulations are regularly adopted. For†example, ß802 of the new Sarbanes-Oxley†Act makes it a crime for any auditor of a†public company to knowingly and willfully†fail to maintain all "audit or review†workpapers" for five years from the end of†the fiscal period for which the audit or†review was conducted. The SEC plans to†issue more detailed regulations on the†retention of audit workpapers early next†year.2†A well-designed policy ensures†corporate compliance with statutory and†regulatory document retention rules,†enabling the company to avoid civil and†criminal fines and penalties.

A document retention policy protects a†company against other legal risks as well.†The destruction of documents in the†ordinary course of business pursuant to a†reasonable document retention policy†adopted in good faith is a valid justification†for the company's failure to produce†these documents in later litigation. Thus,†a document retention policy reduces the†risk that the destruction of documents will†undermine the company's position in†litigation or expose the company to†discovery sanctions for spoliation of†evidence. It also reduces the likelihood of†costly collateral litigation over discovery†sanctions. If a company has an ad hoc†policy or no policy at all, any document†destruction it undertakes is more likely to†be viewed by a court as selective and†motivated by a desire to destroy damaging†evidence.

A document retention...