Andersen Sale Called Threat to Reforms

Efforts by the troubled Andersen accounting firm to sell itself to a larger rival are a desperate act that threatens reform of the nation’s financial reporting system, former Fed Chairman Paul A. Volcker, who heads a panel reviewing Andersen’s operations, said Monday.

Andersen has talked to both Deloitte Touche Tohmatsu and Ernst & Young International about a business combination in recent days, according to people familiar with the talks.

But Volcker said such an acquisition would reduce competition and blunt momentum for major reform in the accounting industry.

“The other accounting firms have said quite openly they don’t like the reforms we are suggesting, and it seems they would like Andersen to go away,” Volcker said. “The worst result for the nation would be the disappearance of Andersen and no reforms.”

Volcker noted, however, that Andersen was “desperate” to survive in the face of a possible criminal indictment and loss of clients. The already wounded company has been bleeding clients and on Monday lost two more: FedEx Corp. and Riggs National Corp., a banking company.

As former Federal Reserve Board chairman, Volcker’s views carry weight on Capitol Hill, experts said. But one said Volcker’s view that competition is needed would have little sway with the Justice Department, which is considering an indictment of Andersen for its shredding of Enron Corp. documents.

“Volcker has great influence on Congress but not at Justice, where the decision will be made,” said John Coffee Jr., a law professor at Columbia University.

Perhaps the only way Andersen can protect itself from indictment would be an agreement to cooperate with the government’s investigation of top Enron executives, such as former Chairman Kenneth L. Lay and former Chief Executive Jeffrey K. Skilling, he said.

Volcker, who guided the Federal Reserve from 1979 to 1987, is heading a special independent panel empowered by Andersen to make changes in its management structure and business practices in the wake of the Enron scandal.

Volcker on Monday released his blueprint to reform Andersen’s business practices, a model he says can extend to other accounting firms. He released the plan earlier than expected, fearing that delay would hurt Andersen’s chances of survival.

His plan would split Andersen into separate accounting and consulting companies to avoid conflicts in which auditors overlook irregularities so as not to lose the lucrative consulting work.

The accounting company would focus on the auditing and tax preparation disciplines that are the traditional functions of the industry. It also would rotate the lead partners on each audit every five years and provide for more oversight of the technical and analytic decisions that go into auditing a company’s books.

Although Volcker’s panel was empowered to make changes, the fate of the proposal was clouded by the prospect of Andersen being acquired by a competitor.

Spokesmen from Andersen, Ernst & Young and Deloitte said that their respective firms would not comment on the specific merger reports.

Andersen issued a statement that said, “Andersen is considering many options to enable us to continue to successfully serve our clients and promote the career opportunities of our people.”

Deloitte spokesman Matthew Batters confirmed that Deloitte was examining how it could “address the current and future issues facing the profession,” but he declined to provide any details.

But people familiar with the Deloitte talks said the two accounting firms had discussed options, including a merger, the sale of the entire Andersen firm and the purchase of parts of the accounting company’s business.

An agreement could come as early as this week if the firms can solve Andersen’s huge liability resulting from its work for Enron, the Houston-based energy trader that filed for bankruptcy protection Dec. 2. Andersen’s Enron liability also is an issue in the Ernst & Young talks.

Andersen has offered to settle the claims of shareholders, employees and other groups with grievances against Enron for $750million to be paid out over five years.

“I would be surprised if they can handle the legal complexity of such a transaction,” Volcker said. “Who knows what legal contortions they would have to go through to get this done?”

Opponents of such a transaction extend beyond Volcker to the plaintiff of a class-action lawsuit against Andersen.

“We will not tolerate any situation where Andersen partners protect their assets and go with their lives unscathed while there are thousands of investors who suffered billions and billions of dollars in losses,” said Trey Davis, a spokesman for the University of California Board of Regents.

The UC system is the lead plaintiff in a massive class-action lawsuit against Andersen and Enron’s senior management over the loss of investment money from Enron’s collapse.

Davis said the university system might take legal action to block any transaction that might diminish the amount of funds the plaintiffs hope to recover.

The threat of a criminal indictment has increased pressure on Andersen to find a way to survive. The Securities and Exchange Commission has barred individual accountants convicted of a crime such as obstruction of justice from certifying audited financial statements, said spokeswoman Christi Harlan. However, the statute is unclear on whether an entire firm could be subjected to same penalty, potentially a death sentence for Andersen.

Volcker and former SEC chief accountant Lynn Turner say the absorption of Andersen by another firm, or its demise through a bankruptcy, would concentrate too much power in the remaining four firms.

Under normal circumstances, a merger between Andersen and one of the other large accounting firms probably would face antitrust scrutiny, Turner said. But with the Andersen firm rapidly melting away, regulators may allow such a deal to preserve jobs.

Andersen has annual international revenue of $9.3 billion, compared with $12.4 billion for Deloitte and $9.9 billion for Ernst & Young.

Similar fears that the accounting industry was contracting too rapidly into a few powerful firms helped derail a proposed $18-billion combination of Ernst & Young and KPMG in 1998.

That deal would have created the world’s largest accounting firm but faced criticism over how it would affect competition here and abroad. European regulators were among the biggest opponents, Turner said.

The two firms called off the deal, citing regulatory hurdles and the potential difficulty of merging the cultures of the two firms. But a 1998 merger of Price Waterhouse and Coopers & Lybrand created the world’s largest accounting firm.

*

Times staff writer Ralph Frammolino in Chicago contributed to this report.