[A-List] Enron: Arthur Andersen implodes

[Keaney Michael]

Implosion at 33 West Monroe

Efforts to sell Enron-stricken Andersen drive wedge between Chicago and
the rest of the world

David Teather in New York
Wednesday March 13, 2002
The Guardian

Senior executives at Arthur Andersen were last night struggling to keep
the global accountacy firm from falling apart as talks to sell the
business to one of its rivals continued.

A growing rift is surfacing between the US business and Andersen's
network of European offices, which could derail efforts in New York to
find a buyer. Frustrated at being tarnished by the US involvement in the
Enron scandal, several European partners are talking of breaking away
from the parent company based at 33 West Monroe Street, Chicago.

The split emerged as sources confirmed that Andersen has opened talks
with a second possible buyer, Ernst & Young, in parallel to discussions
with Deloitte Touche Tohmatsu. Andersen has approached other firms,
possibly including another of the big five, KPMG.

Several partners in Europe oppose the merger talks and technically would
not have to submit to a US-brokered takeover. "There are whole member
firms who don't want to merge," said Bernhard Vanas, senior partner with
Andersen in Vienna. "It is clearly destructive of the goodwill we have
built."

European offices account for $2.87bn (£2bn) of Andersen's $9.34bn
revenues and would be an attractive asset for any buyer. Chistoph Gross,
who heads Andersen in Germany, Switzerland and Austria, has been an
outspoken critic of the Enron debacle and is also said to be keen for a
breakaway. A spokesman for Andersen in Britain said the office would
view any US proposals before making up its mind.

Dissent from Europe adds to the difficulties of hammering out a deal.
Key to any discussions with a buyer would be their ability to acquire
the assets of Andersen without also taking on its liabilities in the
Enron affair.

Andersen and its advisers are working on a plan to file for Chapter 11
bankruptcy protection against creditors in the US. The merger partner
would then acquire Andersen's US assets, leaving the shell to settle
claims against it with the cash from the sale. There is no certainty
that the buyer would be able fully to extricate itself from the numerous
lawsuits, securities and exchange investigation and potential criminal
charges facing Andersen.

A merger would also face considerable concerns among regulators about
shrinking the market from five to four. Red flags were raised when the
merger of Coopers & Lybrand with Price Waterhouse took the market down
from six big firms to five in 1997, creating a widely ridiculed
corporate brand names in the process.

The merger to create PriceWaterhouseCoopers was agreed only after
lengthy scrutiny by regulators in Brussels.

Deloitte could argue that it is saving Andersen from going under, which
means it would be exempt from competition rules. But it would still have
to meet a series of criteria set by the European commission.

Sources close to Andersen hinted that the firm had made numerous
approaches to other firms in the hope of finding a rescue.

Deloitte is widely seen as the best fit. In Britain at least there is
little overlap with Andersen, which has a strong client list among media
and technology firms. Deloitte is better known for working with
professional firms and charities. There is also little overlap among
their respective FTSE 100 clients.

The undignified touting for a potential buyer is an ignominious end for
Andersen, which was founded by a Chicago aca demic in 1913. The firm is
now the fifth largest accountancy practice in the world.

Until this week, Andersen had remained publicly defiant about its
ability to survive as an independent company. Evidence against that
happening has been gathering pace. Big name clients are deserting the
firm in the wake of Enron's fall into the biggest bankruptcy in
corporate history.

Patrick Dorton, a spokesman for Andersen, admitted last week that some
clients, while still commending the quality of the firm's auditing, were
turning away because of the potential for bad publicity. In little more
than a week, Andersen has lost Fedex, drugs group Merck, US financial
services business Freddie Mac, Delta Airlines and regional bank Riggs.

Andersen is also fending off a wave of lawsuits from Enron shareholders
nursing huge losses. Andersen had audited Enron for 10 years and signed
the accounts which it later emerged had been masking huge debts off
shore. Enron's former chief executive, Jeffrey Skilling, hid behind
Andersen in his testimony to Congress. He repeatedly intoned the fact he
was not an accountant, saying he relied on the judgment of his auditors.

The smoking gun for Andersen was the admission that a partner at its
Houston office shredded documents that were later sought by federal
investigators. An attempt to limit the damage by firing the employee,
David Duncan, and suspending or demoting a handful of others has not
been successful. At hearings in Washington, members of Congress were
sceptical that Mr Duncan had acted alone.

Andersen has offered a $750m settlement, but the shareholders behind the
suits want much more. The trigger for ad mitting defeat is understood to
have been the prospect of possible criminal charges for Andersen's
involvement in the Enron collapse. Negotiations are said to be ongoing
with the US justice department.

When the Enron debacle began to unfold in the media, alarm bells started
ringing in Connecticut where 12 years ago a property firm called
Colonial Realty collapsed amid allegations that the auditors supported
unrealistic financial projections and had destroyed documents as part of
a cover-up. The auditor was Arthur Andersen, which was found to have
violated accounting principles and impaired objectivity. It later paid
the state $3.5m and gave back monies earned from work with Colonial.

Connecticut has asked whether there might be cause for revoking
Andersen's licence to operate in the state. That investigation looks
likely to now become academic.

Full article at:
http://www.guardian.co.uk/business/story/0,3604,666404,00.html

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi