The criminal indictment of Andersen, which jarred Chicago and the financial world last week, promises to leave a trail of disrupted businesses and dislocated careers, especially if the venerable accounting firm collapses altogether.
Yet even as Andersen’s longtime clients flee and its workforce edges toward the exits, the immediate fallout may well prove to be short-lived. Most of its partners and staff will land elsewhere as its competitors gladly expand to take on the business Andersen is losing, industry observers predict.
And while Chicago would feel a pinch if Andersen’s Loop offices come on the market all at once, and a tangible loss if such a committed philanthropist departs from the scene, the city’s diversified economy is well-positioned to recover from the blow, they say.
More difficult to measure is the scope of reform in a business Andersen pioneered. No question, the indictment raises the stakes in the auditing of financial data at the nation’s top public companies. The outcome could well be a more transparent and scrupulous approach to the numbers–with a lasting effect on the nation’s economic future.
“People are now cognizant of the frailties and deficiencies of financial reporting,” said Lawrence Revsine, professor of accounting at Northwestern University’s Kellogg School of Management. “This entire episode has a silver lining. I think that is a wonderful thing.”
Of course, no one could blame Andersen’s many employees and boosters if they fail to see the positive side of last week’s action.
“People are shocked,” Suzanne Gylfe, 35, a partner in Chicago, told the Los Angeles Times. “They’re very, very concerned what this means for them, for their families and for their jobs, and they feel pretty strong that this is an action of a few people that’s being punished. The indictment of the firm is just not fair.”
The Justice Department on Thursday indicted Andersen on a charge of obstruction of justice in connection with its audit of Enron Corp., the failed energy giant that used deceptive accounting to inflate profits and hide debt. When the scheme came to light late last year, Andersen employees allegedly shredded tons of documents useful to investigators.
The accounting firm has vowed to fight, saying it never broke the law. It also accused federal prosecutors of abusing their power and timing the charge to strike the firm at its most vulnerable moment. Andersen officials would not comment for this story.
For weeks, Andersen has pushed hard to sell all or part of itself to its competitors, with no success.
The firm faces a huge liability from lawsuits by Enron shareholders, who watched their investment evaporate when the Houston company filed for bankruptcy. The criminal count makes any potential buyout deal that much more complicated, and most industry observers are betting that Andersen will fold, even though the firm is making plans to survive the crisis in a reduced form.
“It’s going to be extremely difficult for them to continue as a going concern,” said Roger Gray, former executive director of the New York State Association of CPAs and publisher of the CPA Journal.
Meanwhile, global consulting and accounting firms are gearing up to take over Andersen’s clients. “The local and regional accounting companies here are having a field day,” said Allan Koltin, president of PDI, a Chicago firm that offers consulting services to accounting firms.
“I think our Chicago practice would be a clear beneficiary,” said Lee Graul, a partner with Chicago-based BDO Seidman, sixth-largest in the nation. “In the Chicago marketplace, I think we could step right in and help former Andersen clients.”
The defections could come in bunches, Graul said, noting that BDO is in talks to hire entire Andersen practice groups. “We are talking about bringing over the accountants and their clients,” Graul said.
If other local firms can grow at its expense, the damage done from the shrinking fortunes of Andersen will be muted, despite its decades-long leadership role in the city, some say.
Although it has some 5,000 employees here, Andersen doesn’t carry the same economic weight as giants like Motorola Inc. While its accountants typically are well-paid, travel frequently and spend lavishly to entertain clients, there simply aren’t enough to affect an economy as large as Chicago.
“It’s a bigger hit for Andersen than it is for Chicago,” said Diane Swonk, chief economist at Bank One Corp.
Touchy real estate market
On the commercial real estate front, Chicago is at some risk. Andersen leases nearly 1 million square feet of office space downtown, according to CoStar Group, a Maryland-based real estate research firm. That makes it the largest downtown accounting tenant.
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If all of Andersen’s space went on the market at once, prices would drop temporarily, said Daniel E. Arends, senior vice president with Rosemont-based real estate firm Colliers, Bennett & Kahnweiler Inc.
“I think we are starting to see some positive signs about the downtown market, and a message like this would make everybody skittish,” Arends said.
Andersen also owns a sprawling conference center and training facility along the Fox River in west suburban St. Charles. Called the Center for Professional Education, the facility employs more than 900 and has overnight accommodations for 1,675 people. That space could be hard to fill.
Donations may dry up
Among the first to feel the effects of Andersen’s troubles are area non-profit organizations, already suffering from the economic downturn.
Many non-profit organizations have Andersen staff on their boards, and the firm’s partners are required to donate 2 percent to 4 percent of their annual income to charity, a former partner says.
“This would be a blow to those organizations that count on Andersen’s support,” said Kristin Lindsey, senior vice president of Donors Forum of Chicago.
For Andersen clients here and elsewhere, the threat is real but manageable. If Andersen suddenly was unable to audit its 2,300 publicly traded clients–scores of them based in Chicago–it would disrupt their business operations until they found a new auditor.
But the Securities and Exchange Commission last week relaxed some reporting rules, giving the companies more leeway to make alternate arrangements. Under the new measure, firms that can’t get financial statements audited on time may file unaudited statements, with an audited version to follow.
Northwestern’s Revsine said businesses already are becoming more scrupulous in their financial reports and the accuracy of their disclosure as a result of Enron and Andersen.
“You are going to have enhanced explanations of why companies chose particular accounting methods, what the impact on their numbers was,” Revsine said. “You are going to have more information.”
Auditing firms are under the same pressure, he said.
“The auditing firms themselves are going to feel that by expanding disclosure and asking their clients to expand disclosure, they are protecting themselves.”