Despite the Andersen accounting firm’s feverish efforts to negotiate a compromise with the Justice Department, the department continues to take a hard line and appears unwilling to accept anything less than a guilty plea for the firm’s role in the collapse of Enron Corp., according to a source familiar with the matter.
Meanwhile, Big Five accounting firms that had been considering acquiring some or all of Andersen abruptly backed out of the talks, seemingly leaving Andersen with dwindling options for survival in its present form. The Chicago-based firm had hoped to salvage its huge accounting and consulting practice by selling parts of the business to its competitors.
The Justice Department has reportedly set Thursday as a deadline for Andersen to plead guilty to a criminal charge or face indictment. Such deadlines are often fluid and negotiations might still continue.
But Andersen has made no progress in its effort to avoid criminal prosecution, a person knowledgeable about the matter told the Tribune.
“They appear intent on charging the company,” the source said of prosecutors. “The company believes there should be a creative way to address this without the company being destroyed, but has had difficulty getting that across. They appear to want to make an example of the company.”
Last year it was disclosed that Enron had used suspect accounting practices to hide debt and inflate earnings. Andersen, its auditor, had signed off on those practices.
After it became clear that the Securities and Exchange Commission was interested in what had taken place, Andersen employees shredded thousands of documents and destroyed e-mail and other electronic correspondence, the firm later disclosed.
Now Andersen faces an unenviable dilemma–whether to plead guilty to a federal charge and possibly lose its right to practice accounting, or face indictment and trial, with what some experts have said is a strong likelihood it will go out of business.
Convicted felons ordinarily are precluded from providing audit services to publicly traded companies regulated by the SEC. Some legal observers say the SEC may waive the rule, however, if only to protect Andersen’s 2,300 publicly traded clients from the disruption of abruptly losing their auditor.
The Justice Department and SEC are refusing to comment on the status of negotiations with Andersen. Andersen did not return calls for comment.
But another person familiar with the matter confirmed that Andersen’s efforts to deal with the government are yielding little.
“The word is that the situation is worsening,” the source said. “They are most concerned about being able to stay in practice.”
The source also said the plaintiffs suing Andersen are not involved with the firm’s negotiations with federal prosecutors.
Settlement not imminent
Although Andersen has offered as much as $750 million to settle with shareholders and others suing the firm, it has made no progress on that front either, according to lawyers for the plaintiffs. They say it would be premature to settle when it is unclear how much money Andersen can afford to pay.
“There are all kinds of discussions, but I can tell you there is not some imminent settlement,” said Eli Gottesdiener, a Washington attorney who represents some plaintiffs suing Andersen.
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Some legal scholars and current and former Andersen partners contend that the accounting giant may have to file for bankruptcy to cleanse itself of liability from its ties to Enron’s downfall.
Only if bankruptcy purged Andersen of its legal liability could a turnaround or sale proceed, observers say.
“You’re virtually certain you’re buying yourself into the litigation circus unless you take it through bankruptcy,” said John Coffee Jr., a securities law professor at Columbia University.
Possibilities sinking in
The possibility of a bankruptcy filing has begun to sink in among the firm’s partners.
“In a lot of respects, I think it would be a relief,” said one former partner, who left Andersen less than 18 months ago and stays in touch with several friends at the firm. “The partners are financial guys that are well-attuned to the realities of the marketplace. They know the capital they have in the firm is potentially locked up and potentially gone.”
Added Richard Measelle, chief executive of Andersen from 1989 to 1997: “I’m hearing that [talk of a bankruptcy filing] also. Going into bankruptcy would be a tactical thing to ring off the problems. I don’t think the firm needs to do it from a fiscal point of view. Assets far exceed liability. [But] they need some protection … the kind of protection Chapter 11 is designed to accomplish.”
While Andersen partners stand to lose their investments in the firm, which amount to hundreds of thousands of dollars apiece, many have concluded a bankruptcy filing would allow Andersen to cope with its troubles. Bankruptcy would “cap the liabilities to a combination of insurance, reinsurance and capital already in the firm,” the former partner said.
Other imperiled companies have taken similar approaches, selling units as part of pre-packaged bankruptcy. A recent local example occurred at Rosemont-based Comdisco Inc., which filed for bankruptcy the same day it agreed to sell its disaster recovery business.
Effect would be devastating
But a bankruptcy filing by Andersen or a guilty plea to criminal charges would have a devastating effect on the accounting firm, some observers say.
“It would be the death of Arthur Andersen as we know it,” said Jacob Frankel, former senior counsel at the SEC.
The lack of progress with federal prosecutors capped a painful day for Andersen.
Andersen has unsuccessfully tried for more than a week to sell all or part of the company to competitors, among them Deloitte Touche Tohmatsu, Ernst & Young and KPMG.
At least two of those firms, Deloitte and Ernst & Young, said Wednesday that they are no longer interested in acquiring Andersen.
“After reviewing the possibility of combining with Andersen, Ernst & Young has concluded that as long as Enron and other Andersen litigation matters are unresolved, it is not in the best interest of our people, clients and our firm to pursue such a combination,” Ernst & Young said in a statement.
Deloitte said it was “unable to continue to the next stage of discussions due to Andersen’s unresolved litigation and legal issues.”
More clients switch auditors
Meanwhile, two more high-profile clients deserted Andersen.
Household International Inc., the Prospect Heights consumer-lending company, said it has replaced Andersen with KPMG. “Due to the current uncertainty about the future direction of Arthur Andersen, Household’s board of directors felt that it was in the best interest of the company to make this change,” Household said in a statement.
Kerr-McGee Corp., an Oklahoma City energy and chemical company, said it has chosen Ernst & Young as its auditor. Andersen audited Kerr-McGee for 37 years.
In recent weeks, Andersen has lost about 40 clients, among them Freddie Mac, Merck & Co., and FedEx Corp.
The company has, however, won the endorsement of the board of directors of the Chicago Mercantile Exchange, which is urging its members to retain Andersen as auditor. Abbott Laboratories announced earlier that it would also retain Andersen.