If Andersen is dragged into oblivion by the Enron scandal–an outcome some industry observers regard as inevitable–it likely will have far-reaching effects on Corporate America.
Auditing fees will rise if the Big Five accounting firms become the Big Four. Some companies may find that accounting firms reject their business. And the many thousands of people who are suing Andersen could win in court, only to learn that Andersen has no way to pay them.
Andersen is in dire trouble. The firm is negotiating with the Justice Department in the hope of avoiding indictment for obstruction of justice. After Enron’s deceptive accounting came to light late last year, Andersen partners shredded thousands of documents, the firm later disclosed.
The severity of Andersen’s problems was underscored Monday when the head of an independent oversight board established to recommend reforms at the Chicago-based firm urged Andersen to separate its auditing and consulting practices, among other changes. The combination at Andersen and other major accounting firms has generated conflict-of-interest allegations.
Former Federal Reserve Board Chairman Paul Volker acknowledged that his oversight board released its recommendations early to help Andersen in its struggle to survive. Since the Enron disclosures, more than 30 Andersen clients have abandoned the firm.
Andersen is looking for another big accounting firm to buy all or part of its operations. Shareholders are suing Andersen because it approved Enron’s accounting practices.
Meanwhile, Andersen has lost Federal Express, Freddie Mac and Delta Airlines, among other of its big clients, and observers say the defections could accelerate later this year, after companies have held their annual meetings and are freer to change auditors.
“I don’t know anyone who expects Andersen to survive” in its present form, said Al Goldman, chief financial strategist for A.G. Edwards. “Most people expect them to disappear into another firm.”
Firms often opt for Chapter 11
When businesses find they cannot continue as a going concern, they often try to reorganize under the protection of Chapter 11 bankruptcy. Under one scenario, Andersen could file for bankruptcy to escape much or all of its legal liability, then sell all or part of itself to another accounting firm.
“It is not unusual for companies to file for bankruptcy as part of a litigation management strategy,” said Randal Picker, a professor at the University of Chicago Law School.
Picker said that a bankruptcy filing automatically freezes any pending lawsuits. Should the plaintiffs win their case, they become unsecured creditors, meaning that they collect only after the secured creditors are satisfied. In many instances, unsecured creditors get nothing.
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Picker said that those suing Andersen may find it especially difficult to collect if they prevail in their lawsuits. Unlike a real estate company or a manufacturer, Andersen doesn’t have many hard assets. Its main value as a company is its partners and their relationships with the companies they audit–an asset that is portable and cannot be seized by a creditor.
“What assets are there that don’t walk out the door every night?” Picker asked.
An Andersen spokesman declined to discuss the firm’s plans, saying only that all possibilities are under consideration.
The possibility that Andersen will use bankruptcy to protect itself is not lost on the University of California, which is suing the firm over the $145 million it lost in its Enron investments.
Christopher Pattie, a lawyer representing the university, said that even as unsecured creditors, plaintiffs might be able to collect from Andersen if the firm has cash on hand and little debt.
Pattie also said his client is exploring the possibility of suing the individual partners at Andersen. “That is something we are looking at closely,” he said.
In general, however, it is difficult, if not impossible, to sue the members of a partnership. The very purpose of a partnership is to limit individual liability, which the courts ordinarily respect.
Plaintiffs are unlikely allies
While Andersen is in trouble, it does have allies. The people suing Andersen may not much like the firm, but they have a vested interest in seeing the firm survive, said Thomas Ajamie, a Houston securities lawyer.
“They may not be able to pay me a large judgment today,” Ajamie said. “But they do have considerable earnings, and over the years, Andersen could make payments.”
Plaintiffs won’t be the only ones affected by what happens to Andersen.
Ronald Dye, chairman of the accounting department at Northwestern University’s Kellogg School of Management, said there will be less competition among accounting firms if Andersen disappears. That means the cost of auditing could rise, he said. Proposals to prohibit accounting firms from providing consulting and auditing to the same client–a situation rife with the potential for conflict of interest–will make the situation worse. Dye said firms may decline to audit a company in the hopes they could make more money offering consulting services. That would have the effect of further reducing competition.
“My guess is that fees will go up,” Dye said.
Small firms eager to compete
While the Big Five firms–KPMG, PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young and Andersen–have a lock on most of the nation’s largest corporations, there are dozens of smaller firms eager for a share of their business.
Julie Lindy, managing editor of Public Accounting Report, said some publicly traded companies may decide that a marquee name isn’t worth the price, and consider going to a lesser-known auditing firm.
She noted that BDO Seidman of Chicago, the sixth-largest accounting firm, has revenues of $2.2 billion compared with fifth-ranked Andersen’s $9.3 billion. Still, she said, Seidman has an international reach.
“Would Corporate America be willing to entrust their audits to a smaller firm?” Lindy asked. “There are some very good firms with integrity and the ability to audit public companies.”