Andersen Faces Tough Battle for Survival

Accounting giant Andersen is facing a legal mountain cragged by a felony charge and crumbling public confidence, but its main goal is to preserve clients and staff needed for the climb. It's a tall order.

The Chicago-based firm, indicted Thursday for obstructing justice for its role in the Enron (ENE) scandal, is fighting to survive amid billion-dollar investor lawsuits and an exodus of longtime clients. 

"Their top priority has to be to conserve their client base and stop their people from leaving,'' said Jonathan Hamilton, managing editor of Public Accounting Report. "I'm sure they're out lobbying their clients, and internally they're definitely communicating with their people everyday saying 'We are going to get through this.''' 

In a fresh blow, the U.S. government said on Friday it suspended new business dealings with Andersen, while food conglomerate Sara Lee Corp. (SLE) -- a hometown client -- joined some 45 companies and switched to a different auditor. 

Andersen, which booked $9.3 billion in revenues last year, has been reeling since it admitted in January that its staff shredded documents sought by investigators probing Enron's collapse. Houston-based Enron, which was once the nation's biggest electricity and natural gas trading outfit, filed for the largest-ever U.S. bankruptcy in December. 

Andersen spokesmen did not return calls seeking comment. 

Outlook Not Rosy 

Andersen has pushed for a merger deal in recent days, holding talks with rivals in an effort to salvage operations and lessen pain for its 1,600 U.S. partners whose net worth is certain to dwindle in any Enron settlement. 

"There is an enormous amount at stake. Not only are their incomes threatened but conceivably they could lose their pensions,'' said Vince Brennan, managing director at executive search firm Korn/Ferry International. "It's very tragic for such a prestigious firm to be faced with all of this ... but there will probably be another life after Arthur Andersen.'' 

Partners have two incentives to stay. They build up equity in the firm over time, and use that mostly to retire on. They also are tied to the firm by so-called noncompete contracts -- which prohibit them from working for rivals for at least a year after they quit. 

So far, rivals have shown little interest in picking up pieces of Andersen. The No. 5 accounting firm has seen two of the other "Big Five'' players abandon merger talks for fear of being tarred with its Enron liabilities. Andersen remains in talks with New York-based KPMG, sources have said. 

Still, with its combative stance against the Justice Department on the obstruction of justice charge and clients dumping the firm almost daily, the outlook is bleak. 

"Partners can go off individually to other firms and they can also vote to dissolve the firm at some point if they don't see their livelihoods as being better with Andersen than without it,'' said Mark Nelson, an accounting professor at Cornell's Johnson Graduate School of Management. "Andersen has to come up with a solution that convinces its partners that it's better to stay with Andersen than not.'' 

Andersen filing for Chapter 11 bankruptcy protection with an eye toward fencing off legal baggage is a possibility, but reorganizing a firm based on credibility and human relationships will be exceedingly difficult, experts say. 

"Andersen is not going to be with us in the long run,'' said Art Bowman of Bowman's accounting report. "I don't see how Andersen can survive this indictment and the potential for billions of dollars in liability that they're on the hook for.'' 

Combative Stance 

Andersen, founded 89 years ago and long seen as the gold standard in the accounting industry, made clear on Thursday that it intends to fight the U.S. government charge. 

Calling the indictment "a gross abuse of governmental power,'' Andersen's lawyers said the move put the firm's very existence in "grave jeopardy.'' 

The document shredding occurred mainly at Andersen's Houston office with only a few unsavory characters to blame, Andersen's law firm said, adding that a comprehensive charge against the entire firm would make it hard to repay investors fleeced by Enron. 

"It's obvious that the Justice Department wants some blood and the firm's personality does not allow it to be contrite,'' Bowman said. 

Andersen audits about 2,300 publicly traded U.S. companies, or nearly 1 in 5 of those listed. 

Legal wrangling aside, Andersen's future depends on its ability to stem client defections and keep the talent necessary to service those clients. 

Management of most U.S. companies will be asking shareholders to approve their choice of outside auditor in coming weeks through annual proxy votes. That's when the real bleeding could begin at Andersen. 

"I can't imagine too many CEOs and Chairmen going before their shareholders and endorsing Andersen as their auditor,'' Bowman said.