[A-List] Arthur Andersen no more?

[Keaney Michael]

>From this morning's FT.Com...


Arthur Andersen is said to be near sale to rival
By KURT EICHENWALD, The New York Times - March 11 2002 08:22

Arthur Andersen, facing the defection of employees and clients as it
struggles under the weight of a potential criminal indictment, is
negotiating to sell itself to another Big Five accounting firm, Deloitte
Touche Tohmatsu, and an announcement of a deal could come as soon as
this week, according to people involved in the discussions.

The negotiations by the two big accounting firms were said to have begun
in earnest last week, about the same time Andersen learned that it faced
potential indictment on obstruction of justice charges in the Enron
investigation as a result of the wide-scale destruction of documents
last fall in its Houston offices. The firm is now talking to prosecutors
to see if a resolution of the criminal case can be reached before an
indictment is made public, possibly as early as this week.

Terms of the potential deal with Deloitte are still fluid, people
involved in the discussions said, and no decision has yet been reached
on whether Andersen would be sold whole or in pieces. Either way, these
people said, the Andersen name is certain to disappear from the
accounting industry once the deal is done.

The talks have been taking place in New York, led primarily by the
firms' chief executives, Joseph F. Berardino from Andersen and James E.
Copeland Jr. from Deloitte. They have been joined by a handful of
partners from the two firms as well as legal and financial advisers.

Unlike most such negotiations, which turn primarily on price, the
discussions are focusing instead on the complex issue of how Deloitte
can avoid assuming the legal and financial liabilities Andersen faces
for its role in the Enron debacle.

In addition to confronting potential fines from criminal charges,
Andersen is also facing possible regulatory action by the Securities and
Exchange Commission as well as myriad lawsuits from companies and
individuals hurt by Enron's collapse. Enron, a Houston energy company,
was one of Andersen's largest clients. Andersen approved financial
statements that Enron ultimately said were unreliable.

Essentially, Deloitte is interested in acquiring Andersen without
contracting the problems that crippled its financial health and
threatened its survival. Deloitte clearly would not agree to any deal in
which it assumed Andersen's legal liabilities.

"The primary issue is how do you isolate" the United States liability,
one person with knowledge of the negotiations said. "There are a number
of strategies that have been gamed out to deal with that."

A possible solution is to arrange the deal as a sale of assets, rather
than as a merger or full acquisition, people involved said. Deloitte
might acquire all but Andersen's American operations, allowing that unit
to temporarily stand alone while negotiating a resolution of its Enron
problems.

Regardless of how a deal might be structured, people involved in the
talks said, some Andersen entity would have to continue to exist in the
United States for the purpose of negotiating that resolution and paying
fines and penalties. While Andersen's American operations could survive
as a stand-alone subsidiary of Deloitte, a number of other approaches
are also being examined.

"This is much more of a legal issue than a banking issue," one person
involved in the talks said.

Patrick Dorton, an Andersen spokesman, declined to comment on any
negotiations. "Andersen is considering many options to enable us to
continue to successfully serve our clients and promote the career
opportunities of our people," Mr. Dorton said. "We are committed to
making changes to our business that will restore the public's trust,
enhance the quality and independence of our audit practice and allow all
of our practices to thrive."

A spokesman for Deloitte, Paul Marinaccio, also declined to comment.
Deloitte "has been conducting ongoing scenario planning in response to
the current and projected state of the profession," Mr. Marinaccio said.
"It is not our practice to discuss the details of any such planning in
public."

Accounting industry experts said that Andersen had little choice but to
seek out a partner among the other Big Five firms. In recent weeks, the
firm has lost a number of big-name clients, including Merck and Delta
Air Lines. An approaching tide of internal defections could not be
halted, experts said, if Andersen survived as an independent entity.

"They are doing the one thing they had to do," Itzhak Sharav, an
accounting professor at the Graduate School of Business at Columbia,
said when told of the negotiations. "Arthur Andersen's days as an
independent firm are numbered. It seems to be a sinking ship, and this
is a way for them to right themselves."

On some levels, industry experts and accountants said, a combination
between Andersen and Deloitte makes particular sense. The two firms have
similar business models, as well as comparable cultures.

"There are similarities in terms of Deloitte and Andersen," said R. Ramy
Elitzur, an associate professor of accounting and head of the M.B.A.
program at the Rotman School of Management at the University of Toronto.
"Both firms were pretty aggressive about the consulting business. And
they would pursue clients in a very similar, aggressive manner."

Deloitte, already the No. 2 accounting firm after
PricewaterhouseCoopers, would almost catch up to the leader if it
acquires Andersen, the smallest of the Big Five.

In recent weeks, Mr. Copeland, the Deloitte chief executive, has openly
discussed his concern about Andersen's future, and has signaled his
potential interest in intervening.

"I think at this stage you would have to ask questions about whether or
not they can survive," he said in an interview with Reuters on Friday.
"I hope they do because I think the implications for the capital markets
and for the profession itself would be terrible if they fail."

Andersen's structure complicates the negotiations in some other ways.
While Andersen is a worldwide firm, its overseas offices are somewhat
like independent entities that contract with each other. While
Andersen's overseas offices may join with Deloitte, industry experts
said, some might elect to join other competitors.

"I question what will happen in a deal with Andersen worldwide," said
Professor Elitzur of the University of Toronto. "Will it succeed as a
worldwide merger, or will the foreign offices go elsewhere?"

Another potential hurdle for a combination is the positioning of the
firms' consulting businesses. Andersen's consulting revenue for the last
fiscal year was $1.7 billion, out of total revenues of $9.3 billion.
Deloitte reported global revenues of $12.4 billion, with $3.5 billion
from consulting.

But in the wake of Enron's collapse, which led to widespread criticism
of the potential conflicts of interest between the accounting and
consulting units in such firms, Deloitte reluctantly decided to separate
its consulting arm from the rest of the firm. This decision would have
to stand in any combination with Andersen.

The downward spiral for Andersen began last October, when Enron
disclosed that dealings between the company and a series of partnerships
controlled by a a former senior executive had caused huge losses.

Enron was soon forced to announce that its financial reports dating back
to 1997 could no longer be relied upon. In December, the company filed
for bankruptcy.

Its implosion raised questions from Washington to Wall Street about the
actions of Andersen, which had served in several roles with Enron, as
both external and internal accountant as well as consultant. While Mr.
Berardino said in Congressional testimony that his firm had been misled
by Enron managers, the close relationship between Andersen and Enron
left the accounting firm exposed both to litigation and public
criticism.

In January, Andersen announced that documents and e-mails relating to
Enron had been destroyed by members of its Houston office. Soon after,
the firm added that David B. Duncan, the partner in charge of the Enron
account, had directed the shredding and destruction. Mr. Duncan, who has
said through lawyers that he believed he was acting in response to
instructions from an Andersen lawyer, was dismissed from the firm. He
has been speaking with prosecutors under an agreement that would prevent
the government from using his statements against him at trial.

A deal between Anderson and Deloitte would be the culmination of more
than a century of growth and competition. Deloitte traces its beginnings
back to the 19th century in England, when William Welch Deloitte founded
his accounting firm. As the industrial revolution boomed, the demand for
accountants increased. George A. Touche, a Scotsman, established his own
accounting practice in London at the end of the 19th century.

For decades, the firms competed, establishing offices in the United
States and growing into two of the most powerful accounting firms in the
world. In 1989, they combined to create Deloitte & Touche.

Andersen was formed in 1913 by an accounting professor whose name the
firm still bears. After Mr. Andersen's death in 1947, the firm almost
collapsed for the first time. But a new leader, Leonard Spacek, was able
to persuade the firm's partners to stay together despite financial
uncertainty. Mr. Spacek continued to lead the firm for decades,
transforming it into an accounting powerhouse.

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT385CXPXTC
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Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi