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Breakup of Andersen Gains Steam

Accounting: Much of tax group will join Deloitte. Other partners discuss forming their own firms or joining rivals.

April 05, 2002|JERRY HIRSCH | TIMES STAFF WRITER

Accounting firm Andersen moved closer Thursday to transforming itself into a leaner, audit-oriented firm by agreeing to sell much of its U.S. tax practice to Deloitte & Touche and preparing for the layoff of as many as 7,000 workers next week.

But the firm also is perilously close to splintering in the U.S. as partners in almost every domestic office participate in talks to spin out into their own firms or to bolt in groups to both larger and smaller rivals.

Talks include individual partners looking to take their book of clients to a new firm, industry and specialty groups within offices looking to move en masse and groups of Andersen offices looking to band together to form regional firms.

"I would be hard pressed to tell you of an Andersen office that is not in discussions at this moment with another Big Five, national or regional firm," said Allan Koltin, a Chicago consultant working with several Andersen offices to help structure some of the deals.

"This is the beginning of the endgame," Koltin said. "We are going to see other deals announced now, and soon, essentially the majority of Andersen will be spoken for."

The transactions endanger a plan by former Federal Reserve Chairman Paul A. Volcker to reinvent Andersen as a smaller firm focusing on audits and tax preparation.

Koltin and others are examining ways to shield new partnerships from Andersen's liabilities. The accounting firm is a target of lawsuits for its work for companies such as energy trader Enron Corp. and telecommunications concern Global Crossing Ltd.

In announcing the transaction with Deloitte, which will get roughly 350 of Andersen's 560 tax partners and many of its offices, neither firm said how they planned to deal with the liability issue.

Koltin said a template is developing by which acquiring firms will pay into a fund that would free them from liability, possibly through the structure of a formal bankruptcy.

Andersen called the Deloitte deal "an agreement in principle," which it anticipates will be completed by the end of this month. Deloitte described the deal as a "memorandum," adding that "the two firms continue to work through the issues and the agreement is subject to due diligence."

Terms were not disclosed.

People familiar with the transaction said Deloitte will pick up only a portion of the business, mostly in the big cities. Some of the specialty practices within the tax group and some of the smaller offices have been told they can now go out and cut their own deals with other firms.

It is not clear whether all of the Andersen tax partners will go along with the transaction. A similar agreement for Andersen to transfer its overseas partnerships to KPMG fell apart after individual practices overseas decided to cut deals with other firms.

Efforts by Andersen partners to find new business homes has intensified in the last week as the firm's international structure disintegrated and as a stream of client defections has turned into a flood.

Andersen has lost about $500 million of its $4.3 billion in U.S. revenue since Enron filed for bankruptcy protection in December and expects to lose an additional $500 million in the near term, according to internal estimates. The expected layoff could extend to as much as 25% of Andersen's 28,000 U.S. employees. Sources said Andersen's Chicago headquarters will be especially hard hit.

Andersen is struggling to survive a criminal indictment on an obstruction-of-justice charge for destroying Enron-related documents sought in a federal probe. A trial is scheduled for May 6, but many clients are not waiting to see if the firm is proven innocent. They are hiring other auditors out of fear that Andersen won't have the critical mass to conduct large global audits even if it does survive the federal indictment.

Andersen has handed control of the firm to Volcker, who is trying to execute a rescue plan. Success of the Volcker proposal is contingent on the Department of Justice suspending or dismissing its indictment and on settlement of the class-action lawsuits. Volcker said he would scuttle much of Andersen's tax consulting practice to transform the firm into a company that primarily provides auditing and tax preparation services.

An Andersen source said the intervention of a federal mediator has resulted in some progress in settlement talks between the firm and attorneys representing Enron investors and employees.

The source acknowledged that multiple merger talks were taking place among Andersen's scattered offices but said it was clear during a three-hour teleconference for partners Thursday that there was still considerable support for the Volcker plan.

Larry Gorrell, managing partner of the U.S. Andersen partnership, said the deal announced with Deloitte on Thursday was "consistent" with Volcker's vision for the firm.

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