Ray Edwards is 41 years old and licensed as a CPA in the state of California. When he was 33, he accepted a position as a tax manager in the Los Angeles office of Arthur Andersen. Consistent with the profession's and the firm's practices, Andersen required him to sign a one-page non-compete agreement, and Edwards did sign it on January 10, 1997. The agreement includes four major clauses (per court records):

• If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client.
• For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation.
• You agree not to solicit away from the Firm any of its professional personnel for eighteen months after release or resignation.
• Upon your release or resignation, you agree not to remove, retain, copy or utilize any confidential, privileged or proprietary information or property of the Firm or its clients. Discoveries, inventions or techniques developed in the course of your employment belong to the Firm and will be disclosed and assigned to it.

After its indictment in 2002, Arthur Andersen decided to sell some of its tax practices, including the practice in which Ray Edwards engaged. Around May 3, 2002, Andersen announced to its employees that it had consummated an agreement with HSBC, which transferred the Los Angeles tax practice to HSBC. Andersen terminated Edwards in July and suggested a new 18-page non-compete agreement to replace the old one-pager. Among other things, this new non-compete agreement required Edwards to:

• Voluntarily resign from Andersen;
• Not volunteer information to the United States Department of Justice, the Securities Exchange Commission, or other potential civil litigant that could be viewed as "disparaging" to Andersen;
• "Waive" his rights to compensation or indemnification from Andersen for any penalties or losses arising from the tax practice and advice provided to clients at the direction of Andersen …;
• Cooperate indefinitely, for no compensation, with Andersen in conjunction with any litigation against Andersen.

Typical non-compete contracts protect the firm from losing valuable clients and personnel. The fascinating thing about this new non-compete agreement is that Andersen has extended the terms to protect itself against future civil and criminal actions. One doubts whether Andersen can do this, but even if permissible, one wonders whether it makes good public policy. In particular, do we really want to prevent a former employee from testifying to the Department of Justice or the SEC when he knows about a firm's wrongdoing?

HSBC offered Ray Edwards a position but required him to sign Andersen's new non-compete agreement. Presumably, this stipulation is a feature of the deal between Andersen and HSBC. When he refused, HSBC rescinded its offer of employment.

Edwards is suing both HSBC and Arthur Andersen. In part, he alleges that non-compete agreements are void and unenforceable in the state of California and cites various court cases to make his point. In addition, he claims interference by Arthur Andersen and breach of contract by HSBC.

A peculiar feature of this case is that two other tax managers at Andersen refused to sign the second non-compete agreement. Even though they declined to sign the arrangement, HSBC still employed them. Given that the exceptions involved Caucasians and Edwards is an African-American, he also asserts racial bias.

However the case turns out, the profession remains with this nagging question whether non-compete agreements ought to include provisions that protect the accounting firm from civil or criminal actions. Protecting your assets from cherry-picking by former employees is one thing; protecting your back side from lawsuits or criminal indictments is quite another.

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle for SmartPros.com.