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Bankruptcy Debated as Andersen Splinters

Accounting: Analysts say firm's deals to sell off parts of its business are an effort to raise cash to settle claims resulting from its work for Enron.

April 10, 2002|JERRY HIRSCH | TIMES STAFF WRITER

An internal debate at accounting firm Andersen over whether to file for bankruptcy protection took on greater urgency after Tuesday's plea agreement by the lead auditor on the Enron Corp. account to cooperate with the government's investigation into the Houston energy trader.

And there were more signs Tuesday that the firm was splintering when Andersen said it signed a "memorandum of understanding" to sell its tax practice in a leveraged buyout to Fox Paine & Co. of Foster City, Calif. Andersen tax partners will have a piece of the deal, which would allow them to create a new and separate tax firm. The new offer appears to compete with a tentative agreement Andersen reached last week with Deloitte & Touche, but the companies have disclosed few details.

Some analysts saw the two offers as an effort by Andersen to raise cash that could be used to settle claims resulting from its work for Enron, whose demise cost thousands of jobs and billions of dollars in investments.

The firm is taking several actions to conserve cash. It started layoffs of 7,000 workers this week and has slashed its travel budget and other expenses.

Partners within the firm, which is seeing daily defections of large clients, are divided over the bankruptcy issue, according to individuals within the firm. Some advocate a bankruptcy filing that could speed an orderly dismantling of the firm and make it easier to merge their business into new firms without the threat of Enron liability. Others support a rescue plan by former Federal Reserve Board Chairman Paul A. Volcker.

Andersen, which has reestablished the use of the Arthur Andersen name for its U.S. operations as the Andersen Worldwide confederation breaks apart overseas, "has no intention" of filing for bankruptcy, spokesman Patrick Dorton said.

Yet because they see time running out on efforts to save the firm, some partners are actively advocating a bankruptcy filing.

"It is difficult to tell which of the solutions is viable or if there is a consensus for either one," said an Andersen executive. "And even if the firm could reach a consensus, you have to ask if there will be enough time to enact a plan."

Accounting and bankruptcy experts say that when David B. Duncan, the lead partner on the troubled Enron account, pleaded guilty Tuesday to a single felony count of obstructing justice by ordering thousands of Enron records destroyed, the already bleak prospects for Andersen became grimmer.

Duncan's plea and his agreement to cooperate in the government's case against Andersen and Enron probably killed any chance the accounting firm had to reach a benign settlement with the Department of Justice over its obstruction of justice indictment. The trial in the Andersen indictment is scheduled to start May 6.

"It increases the pressure considerably on Arthur Andersen to settle the obstruction indictment on the terms the DOJ wants," said Jacob Frenkel, a former prosecutor who is a white-collar-crime defense attorney.

Generally, a person or company that pleads guilty or is convicted of a felony is prohibited from practice before the Securities and Exchange Commission and would be barred from conducting public company audits. They can only be reinstated by the commission after a special hearing.

That is why the dismissal or suspension of the firm's criminal indictment is a critical component of Volcker's plan to transform Andersen into a smaller firm that focuses on auditing and tax preparation. Volcker needs some sort of agreement that allows Andersen to avoid the criminal liability that would limit its ability to practice accounting.

Already, states including Arizona, Connecticut, Florida and Texas are considering various sanctions against Andersen that would be aided by a federal guilty plea or conviction.

"Quite frankly, I think it is over for Andersen," said Lynn Turner, former chief accountant for the Securities and Exchange Commission.

"For Andersen to survive it needs its customers, its international practice and its partners, and it is losing all of that," Turner said.

A bankruptcy filing, he said, would allow the firm to protect its cash while it arranges for an orderly liquidation in which its practice groups and offices are sold off for funds to settle its liabilities arising from its work for the bankrupt Enron. In negotiations with attorneys for Enron investors, Andersen has discussed paying $300 million to settle their claims.

Andersen's survival effort is complicated by the fluid nature of the crisis, said Carole Neville, a bankruptcy attorney with Sonnenschein, Nath and Rosenthal in New York.

"Volcker has embarked on what in essence is an out of court reorganization but has found like others that the problems often outpace the situation," Neville said. "The problem is that you can't control all the variables."

Last week, Andersen announced it signed a memorandum to transfer much of its tax practice to Deloitte & Touche. Then Tuesday came word of the possible sale of the same practice to Fox.

"Arthur Andersen is considering this option as well as the potential transaction with Deloitte & Touche announced last week," Dorton said.

Deloitte declined to comment on the Fox deal, but said in a statement that it "is continuing with its due diligence under the terms of the agreement announced last week."

The Deloitte deal would cover half of the tax practice, which has estimated U.S. revenue of more than $1 billion annually, whereas the Fox deal may keep the practice together as a single unit.

Meanwhile, fallout from the Enron scandal has cost Andersen more than 140 of its 2,300 public company clients. Several key businesses fired Andersen Tuesday, including Walgreen Co., Oracle Corp. and International Paper Co., which was the only remaining Andersen client listed in the Dow Jones industrial index.

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