May 23 (Bloomberg) -- The Justice Department appears to have learned a lesson in the 10 years since it indicted Arthur Andersen LLP for alleged improprieties in the firm’s Enron bookkeeping. By 2005, when the U.S. Supreme Court unanimously vacated a conviction in the case, the accounting firm had collapsed, and all but a handful of the 85,000 employees worldwide lost their jobs.

The Justice Department has since avoided large-scale corporate prosecutions that would threaten the disastrous collateral consequences brought on by its case against the former Big Five accounting firm.

But in the place of actual prosecutions, the Justice Department has aggressively pursued what are blandly called “deferred prosecution” or “non-prosecution” agreements -- DPAs and NPAs, for short -- through which prosecutors and companies negotiate terms to avoid a criminal trial. This approach may be avoiding the sort of corporate death sentence visited upon Andersen for what proved to be non-crimes, but nonetheless does something just as worrisome: It insinuates Justice Department career bureaucrats into the day-to-day management of major American businesses.

Although only 17 DPAs or NPAs were reached between businesses and federal prosecutors in the decade before the Andersen indictment, more than 200 have followed in its wake, through both the Bush and Obama administrations. Seven Fortune 100 companies are currently operating under the supervision of federal prosecutors: CVS Caremark Corp., Google Inc., Johnson & Johnson, JPMorgan Chase & Co., Merck & Co., MetLife Inc. and Tyson Foods Inc.

Wal-Mart on Deck

Seven other of the 100 largest businesses have been under a DPA or NPA in just the past few years. Others, such as Wal-Mart Stores Inc., currently facing scrutiny for alleged Mexican bribes prohibited under the Foreign Corrupt Practices Act, are sure to follow.

In each of the past three years, fines and penalties levied under federal deferred-prosecution and non-prosecution agreements have exceeded $3 billion. While such fines are not insignificant, of far greater concern are the sometimes sweeping powers that prosecutors have asserted over business practices. In recent DPAs and NPAs, federal prosecutors have variously pressured companies to change long-standing sales and compensation practices; to restrict or modify contracting and merger decisions; to carry out onerous compliance and reporting programs; to appoint corporate monitors with broad discretion over management decisions; and even to oust executives or directors.

Businesses accept the agreements with such aggressive terms because they can ill afford to fight a criminal investigation. A certified public-accounting firm like the former Arthur Andersen is uniquely vulnerable to criminal indictment and conviction. But criminal inquiries place significant pressure on stock prices for all companies and can impair the ability to obtain credit. Companies can be debarred from government contracting or denied licenses upon an indictment or conviction, making businesses in certain industries, such as health care and financial services, particularly unable to fight back against a prospective prosecution.

Just since 2009, finance companies have entered into 18 federal DPAs and NPAs and health-care businesses into 11 such agreements. The finance companies alone have a collective market value exceeding $690 billion, with more than $20 trillion in assets under management.

There is essentially no evidence that DPAs and NPAs, for all their sweep, have been effective in combating corporate crime. Some corporate-ethics watchdogs have argued that current Justice Department practices, by failing to credit internal compliance programs, have undermined companies’ incentives to self-police.

No Judicial Oversight

What the agreements have been effective in doing is elevating Justice Department lawyers as business regulators who can reshape industry practices without having to engage in the cost-benefit analysis that is the norm for administrative agency action. Prosecutors in this area act largely without any judicial oversight: Judges never see NPAs and routinely rubber-stamp DPAs, and these agreements typically state that determinations of whether a company is in breach are the prosecutor’s alone and are beyond judicial review.

It is long past time that Congress asserted itself over the Justice Department’s use of DPAs and NPAs to assume broad and unaccountable regulatory authority. Public “tough on crime” sentiment and understandable anger over unprincipled conduct by some business leaders make most politicians hesitant to suggest that the criminal law is being too harshly applied to corporations.

Still, there’s little case for prosecuting corporations as entities in the first place. Unlike individuals, they can’t be imprisoned. As the Arthur Andersen case demonstrated, business entities often cannot be prosecuted, either -- at least without potentially drastic effects on corporate shareholders, employees, pensioners, customers and suppliers.

Federal prosecutors have been having a profound impact on those constituencies, with broad economic consequences, in the way they have been deciding not to prosecute businesses, but rather to control them through DPAs and NPAs. In the decade since Arthur Andersen was indicted, we haven’t seen a repeat of that error. But in its place we have watched as federal prosecutors assume vast powers that make them an overarching, if hidden, regulator of American business.

(James R. Copland is the director of the Center for Legal Policy at the Manhattan Institute and author of a new report, “The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements.” The views expressed are his own.)

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To contact the writer of this article: James R. Copland at communications@manhattan-institute.org

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net