Embattled accounting firm Andersen, facing an exodus of prestigious clients and possible criminal charges for its role in the Enron scandal, is seeking a possible sale to rivals, an Andersen source told Reuters on Monday.

Andersen, which has been shaken to its core by investigations stretching from Wall Street to Washington, has held merger talks with No. 2 accounting firm Deloitte Touche Tohmatsu, the Andersen source said.

Andersen expected some progress on the talks -- which could involve a wholesale acquisition or unit sales, according to published reports -- by the end of this week, the source added.

Any merger deal would have far-reaching consequences for the accounting profession, which would become further concentrated if Andersen combined with another firm. The current group of top firms, known as the Big Five, dominate the corporate auditing business and the remaining four would gain significant heft if Andersen collapses.

At the same time, sources close to Andersen and Deloitte emphasized no deal is imminent. A Deloitte acquisition faces many hurdles, in particular how to deal with Andersen's legal problems. Andersen faces Enron investor lawsuits and possible fraud or other criminal charges.

Chicago-based Andersen, which employs nearly 85,000 people worldwide, signed off on bankrupt Enron Corp.'s books. The firm has admitted its Houston office shredded documents sought by investigators -- and now faces possible criminal charges of obstruction of justice. Both the Wall Street Journal and The New York Times on Monday reported the talks.

Andersen and Deloitte spokespeople declined to comment on the reported talks, but issued statements that didn't rule out any options.

"Deloitte Touche Tohmatsu has been conducting ongoing scenario planning in response to the current and projected state of the profession, and it's not our practice to discuss the details of any such planning in public," a New York-based Deloitte spokesman said.

An Andersen spokeswoman said: "Andersen is considering many options to enable us to continue to successfully serve our clients and promote the career opportunities of our people."

DESPERATION

Andersen is fighting to stave off its demise following Enron's bankruptcy on Dec. 2, which marked the largest ever U.S. bankruptcy filing.

Enron -- and Andersen's role as its auditor -- are now the subject of over a dozen U.S. congressional investigations. The negative publicity surrounding Andersen's role has prompted many top flight clients such as Merck & Co. and Delta Air Lines to dump the firm as auditor.

The firm has lost 35 clients since the beginning of the year, or nearly half the total client losses among the Big Five in that time, according to Auditor Trak, a research unit of Strafford Publications. It has gained only two clients.

"With every passing day, it seems that Andersen's prospects for survival dim further and further," Columbia University accounting professor Izthak Sharav said on Friday. "It appears to be the case of a sinking ship with clients jumping out."

Indeed, regional bank Riggs National Corp. said on Monday it will end its 28-year tie with Andersen, becoming the latest long-standing client to ditch the accounting firm.

HURDLES

Obstacles for a possible Andersen merger abound.

Enron shareholders are suing Andersen and the firm has reportedly offered $750 million to settle the disputes.

In the next few days, Andersen attorneys are expected to try to reach a settlement with the U.S. Justice Department to avoid facing criminal charges for document shredding, the Wall Street Journal said on Monday.

A sale or merger of Andersen could depend on the firm's ability to protect the acquirer from Enron-related liabilities, the Journal said. Legal problems are scaring potential acquirers, one source told Reuters.

"Very few of the Big Five would be interested in Andersen right now because of the potential liability," an industry source who declined to be identified told Reuters. "There really is no shield from that liability, should anyone pick up units of Andersen."

One method under consideration is a possible Chapter 11 bankruptcy filing, with a sale or merger taking place under court protection from creditors and litigants, the Journal said.

"People within the Big Five are simply waiting to see what happens because if there is a total collapse of the firm, companies are going to leave, which the other Big Five will pick up, as well as any personnel they want," the source said.

Andersen has fought hard to improve its image, embracing changes that have made the other Big Five firms nervous. It has said it will no longer provide information technology consulting or internal audit services to U.S. audit clients, for example.

In a headline-grabbing move early last month, Andersen brought in former U.S. Federal Reserve Chairman Paul Volcker to head a special panel charged with recommending reforms at the firm.