Andersen on Monday began laying off 7,000 employees–more than one-quarter of its U.S. workforce–in the largest unraveling of the accounting giant’s domestic operation related to the firm’s role in the collapse of Enron Corp.
At the same time, Andersen’s legal problems appeared to grow more serious, as the auditor who oversaw the firm’s Enron work was expected to plead guilty to obstruction-of-justice charges related to the shredding of Andersen’s Enron files, sources familiar with the case said.
Andersen partner David Duncan was to appear at a Tuesday court hearing in Houston, where prosecutors were expected to disclose the plea deal and reveal that he is cooperating with the government in its obstruction-of-justice case against Andersen, the sources said.
Duncan’s testimony would be the most troubling legal development for Andersen since federal prosecutors last month unsealed the indictment against the firm. In recent days, Andersen has sought to settle the criminal case as part of a strategy to save the troubled firm.
Under federal Securities and Exchange Commission rules, an accounting firm convicted of a felony cannot audit the books of publicly traded U.S. companies–a situation that Andersen officials have referred to as a “death sentence.”
Already, the indictment has caused the legendary Chicago-based firm to fall apart quickly, with auditing clients,foreign affiliates and U.S. tax partners abandoning Andersen in recent weeks. Monday, the disintegration of Andersen continued, as the firm announced that it would lay off 7,000 of its 26,000 U.S. employees, a process that firm officials said would take place over the next few months.
But throughout the day Monday, dozens of the firm’s 5,300 local employees left Andersen’s Loop headquarters and its St. Charles training center after being told that their jobs had been eliminated. Still others were asked to telephone their offices Monday night and listen to recordings informing them whether they had been let go.
As they waited for word about whether they still had jobs, Andersen employees gathered at taverns to assess the developments and make their calls.
“We knew it was coming,” said Pamela Woods, an executive assistant in Andersen’s downtown headquarters who lost her job after eight months. “They held a group meeting, then called us in one by one. They expressed their sympathy that it had to come to this.”
Monica Jenkins, another executive assistant who lost her job, said supervisors told employees that workers would be let go over the next three weeks. After learning their fates, Woods and Jenkins were among employees who gathered at the Grill Room, a restaurant on the ground floor of Andersen headquarters at 33 W. Monroe St.
The layoffs are the most significant breakup of the 89-year-old firm’s domestic operation. Last week, Andersen confirmed that hundreds of its U.S. tax partners would leave to work for competitor Deloitte & Touche. Already, about 10,000 partners and employees in Andersen’s more loosely tied foreign affiliates have defected to competing accounting firms.
Officials blame indictment
For weeks, Andersen had warned that U.S. layoffs were coming. Firm officials Monday blamed the action on the Justice Department’s decision to seek an indictment of Andersen for allegedly destroying records related to the firm’s Enron audits, including the shredding of “tons” of paper files.
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The indictment has prompted at least 145 of Andersen’s clients to abandon the firm, costing Andersen tens of millions of dollars in revenue and making Monday’s layoffs inevitable, business experts said.
“Of all the issues we have confronted recently, none compare to actions we are now forced to take with our employees,” Larry Gorrell, managing partner of Andersen’s U.S operation, said in announcing the layoffs. Gorrell said the layoffs were “even more painful,” given the fact that many of those let go had taken to the streets in Chicago and other cities to urge politicians and the public to support the firm.
But Andersen’s decision to lay off workers was unavoidable, said an expert in distressed companies.
“The firings are consistent,” said Carole Neville, a bankruptcy lawyer. “You would downsize to become a lean machine. They are trying to reduce to an essential core.”
She said Andersen’s efforts to sell assets, such as the U.S. tax practice sold to Deloitte & Touche, is a natural part of the firm’s strategy to save itself, as proposed by former Federal Reserve Chairman Paul Volcker. In February, Volcker was brought in by Andersen to recommend changes to salvage the firm.
Money from asset sales key
In addition to the criminal case, Andersen faces huge potential damages from civil lawsuits filed by Enron investors who relied on the company’s financial statements. Money from asset sales could be used to pay damages if Andersen can settle those suits, Neville said.
But word that Duncan is cooperating with federal prosecutors is more bad legal news for Andersen.
Duncan is a key figure in the obstruction case. In January, when the shredding came to light, Andersen said Duncan orchestrated it. Federal officials allege that Andersen scrambled to destroy Enron records after firm officials last fall learned of a federal investigation into the energy-trading giant’s demise.
While Duncan has been told the firm plans to dismiss him, he technically remains an Andersen partner until the firm’s complex removal process is completed and put before other partners.
Asked Monday whether Duncan was prepared to enter into a plea agreement, his lawyer, Robert Guiffra, said only, “Mr. Duncan is continuing to cooperate fully.”
Rusty Hardin, Andersen’s Houston-based attorney in the criminal case, said: “We’ve heard the reports also, and we are waiting to see what happens. If that is what happens, I’ll be surprised. We’ll have to wait and see how it turns out.”
As part of its severance agreement with laid-off workers, Andersen will pay one week’s salary for every year of employment. It also agreed to help the former employees look for jobs and temporarily maintain insurance benefits.
In addition, Andersen was making plans to provide rooms at its St. Charles training center where former employees could use computers, telephones and other equipment to search for jobs.