In the aftermath of the Enron scandal and the downfall of Arthur Andersen, Congress enacted the Sarbanes-Oxley Act of 2002 (the “Act”) to tighten federal oversight of corporate and financial practices of entities which are publicly traded or which file periodic reports with the Securities and Exchange Commission. Among other things, the Act requires filing companies to prepare internal control reports and mandates the filing of certifications as to the accuracy of financial reports and disclosures. As a result, public companies are incurring dramatically increased costs for records and information retention and management.
The Arthur Andersen debacle which followed Enron demonstrated that a company and its principals could face criminal liability for document destruction when they knew that a government investigation of its client was highly probable. Thus, even when no proceeding is pending, document destruction can be deemed a criminal act. Also, Section 1519 of the Act makes it a crime to destroy documents with the intent to obstruct a federal investigation or bankruptcy case. Because of the broad implications of the Arthur Andersen case and the Act, the issue of document retention has perhaps never been so crucial.
Does a company’s desire to comply with the Act and with other laws that mandate retention of certain information mean that no corporate records should ever be discarded? While this might be an ultra-conservative approach, it is also a very burdensome one on several levels. First, maintaining storage space for documents is costly. Additionally, if a litigation discovery request is received, the company may need to expend significant resources searching through its extraneous materials to attempt to comply. Furthermore, some companies value the opportunity to lawfully discard unnecessary and potentially embarrassing documents which demonstrate past mistakes and bad business decisions.
The more rational approach is to adopt a document retention policy that addresses a company’s specific business concerns while complying with document retention laws applicable to such company. A document retention policy should take into account all business records of the company in its particular industry and should categorize all documents created or received at all layers of the organization. Categorization will allow employees to more easily identify document classification, and will also allow the company to change its approach to certain documents if the need arises. A comprehensive policy will also allow the company to ensure that documents relative to a particular matter or proceeding can be preserved for pending or anticipated litigation, investigations or proceedings. A timetable for retention and destruction of such categorized documents should be adopted. If appropriate, a central person or office can be designated for document destruction or for decision-making about unique documents or situations.
It is critical for a company to identify what obligations it has for the maintenance and retention of records. For example, the Fair Labor Standards Act requires employers to keep employee records such as payroll for not less than 3 years. Health care providers and insurance companies must maintain the confidentiality of patient records pursuant to the Health Insurance Portability and Accountability Act. Documents which should be kept permanently include but are not limited to the following: articles of incorporation and by-laws; stock books, stock certificates (whether unissued or cancelled), minutes and transfer records and ledgers; shareholder, operating and partnership agreements; settlement agreements and litigation dismissals; intellectual property registrations; promissory notes and mortgages (until paid in full, at which time they should be so marked and/or discharged); environmental compliance, audit, cleanup and insurance documents; tax returns and cancelled checks; sales and use tax returns; financial statements, balance sheets and ledgers; actuarial reports; and pension plans, trust agreements and related returns and records. Other documents must be evaluated based on considerations such as the company’s industry, storage costs, litigation/investigation potential, merger/acquisition/growth potential, and company control.
Careful consideration must also be given to electronic records, including email, information on PDAs, and information stored on hard-drives. For many companies, electronic documents now constitute the highest percentage of their corporate records. Email is perhaps the hardest type of document to address. On the one hand, comprehensive email destruction is difficult because emails can be disseminated in a nanosecond to myriads of people, and their deletion from desktop computers does not remove archival copies from computer servers. In addition, the cost to store email and electronic records continues to plummet. Difficult destruction and shrinking storage costs, however, must be balanced against the potential cost to search retained electronic records for discoverable information if a lawsuit or investigation is commenced. The company should take appropriate steps to make sure that all electronic records are adequately covered by its document retention policy.
A company that does not adopt an “official” document retention policy could face criminal liability when document destruction occurs at a time when an investigation or proceeding is taking place. Intent to interfere with an investigation can be inferred, even if intent did not exist. If a written document retention policy exists and is uniformly applied, then the absence of a particular document later (when, perhaps, it is sought through litigation discovery) will be explicable, rather than suspicious.
In short, every company, whether publicly traded or closely held, should take steps to adopt a document retention policy tailored to its particular technological, operational, regulatory and legal needs.
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