Bankruptcy Likelier for Beleaguered Andersen, Experts Say

Filing for bankruptcy may be the best option for Arthur Andersen, experts say, if the accounting firm hopes to salvage its operations. A Chapter 11 filing, while dire, could help the firm's chances of swiftly resolving civil liabilities linked to Andersen's role as chief auditor for Enron. However, Thursday's criminal indictment by a federal grand jury on obstruction of justice charges may already spell its demise.

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Filing for bankruptcy may be the best option for Arthur Andersen, experts say, if the accounting firm hopes to stop an exodus of clients and employees, and find a buyer to salvage its operations. A Chapter 11 federal bankruptcy filing, while dire, could help the firm’s chances of swiftly resolving civil liabilities linked to Andersen’s role as chief auditor for Enron. But such a move would almost certainly signal the end of its 94 years as an independent company, according to those who track the industry. “A bankruptcy would be a business strategy to save and protect as many jobs and assets as possible. But it means Andersen itself is done,” said Arthur Bowman, editor of the industry publication Bowman’s Accounting Report. Thursday’s criminal indictment by a federal grand jury may already effectively spell its demise, Bowman and other observers said. “I don’t see an independent Arthur Andersen in the future, no matter what they do,” said Michael Perino, a securities law expert at St. John’s University law school in New York. “Arthur Andersen’s reputation is so sullied right now that … if they do file a bankruptcy action, the only likely outcome is that the remaining pieces get bought up by somebody.” Andersen, indicted on obstruction of justice charges for shredding Enron-related documents, declined comment on the possibility of bankruptcy — a prospect it reportedly held out in merger talks with other Big Five accounting firms this week. “We are looking at many different options, both inside and outside the profession, and working on many reforms to set a new standard for audit quality and restoring public confidence,” spokesman Patrick Dorton said. In an effort to restore its tarnished reputation, Andersen recruited former Federal Reserve chairman Paul Volcker in early February to lead an oversight board that would make sweeping reforms at the firm. Volcker’s board released its first set of reforms Monday, which included splitting Andersen into separate accounting and auditing units, but the fate of the reform process is uncertain now that Andersen has been indicted and its future is in doubt. Volcker, speaking in an interview just minutes before the indictment against Andersen was announced, said that on Wednesday he had told a panel of experts he had assembled for his three-member board that the outlook for Andersen was “rather dim.” But the panel decided that it would stay together in order to promote reforms in the accounting industry even if Andersen went under, Volcker said. A Chapter 11 filing would enable the Chicago-based company to convert the more than three dozen lawsuits filed against it into bankruptcy claims. Its earlier-rejected offer of as much as $750 million to settle all claims might get new consideration, since claimants would otherwise be faced with waiting in line in bankruptcy court behind banks and other secured lenders. “Going into Chapter 11 is in everybody’s interest except competitors’,” said Ashish Nanda, an associate professor at Harvard Business School. “It might stop the vicious cycle of clients walking away and of that leading to professionals and partners walking away.” Numerous Fortune 500 clients have fired Andersen as their auditor — Delta Air Lines, FedEx Corp., Freddie Mac, Household International, Merck & Co. and SunTrust Banks in the past two weeks — and more are considering doing so. Some of the clients who are worried about Andersen collapsing may stay on if the company goes under federal bankruptcy protection, Nanda said, because of the difficulties for large corporations in switching auditors. But turning the Big Five into the Final Four would result in less competition in the auditing market. Perino said that means auditing fees would rise, especially if firms are not allowed to perform auditing and consulting for the same company. The only comparable precedent to Andersen’s situation is when Laventhol & Horwath — then the nation’s seventh-largest accounting firm — filed for bankruptcy and collapsed under malpractice lawsuits. Andersen, formerly the world’s biggest accountant, is now No. 5. Jonathan Hamilton, editor of Public Accounting Report, an industry publication, said Andersen’s collapse is resulting from more than one scandal. “This isn’t just Enron dragging them to the pavement here — it’s Sunbeam, Waste Management, Baptist Fund, Global Crossing,” he said, citing other mishandled audit accounts. “It’s kind of like the boxer — is it the one final punch that puts them out or the 500 over six rounds? It’s the beating they’ve taken.” Copyright 2002 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.

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