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Company Fading From Big 5 Picture

Accounting: Staff and client defections mount, giving the firm's four largest rivals a growth spurt.

June 17, 2002|JERRY HIRSCH | TIMES STAFF WRITER

The U.S. accounting industry is expected to undergo a major transformation in the months ahead in the wake of Arthur Andersen's conviction of obstruction of justice.

Already, industry power is consolidating into an oligarchy of four giant firms--Ernst & Young, PricewaterhouseCoopers, Deloitte & Touche and KPMG International. What used to be called the Big Five is shaping up as the Big Four.

Firms that previously were small players in specific industries such as energy and gaming will gain new clout as they pick up pieces of Andersen's crumbling empire.

And the gap between the largest of the Big Four (PricewaterhouseCoopers) and the smallest (KPMG) will narrow as PricewaterhouseCoopers and Deloitte & Touche divest themselves of their consulting businesses.

For The Record
Los Angeles Times Thursday June 20, 2002 Home Edition Main News Part A Page 2 National Desk 17 inches; 617 words Type of Material: Correction
Accounting firm--A story in Monday's Business section about the transformation of the U.S. accounting industry incorrectly identified one of the industry's major firms. It is KPMG.
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Last year, PricewaterhouseCoopers collected about $9.3 billion in U.S. revenue, $5 billion more than KPMG. A year from now, analysts expect that difference to shrink to $2.5 billion or less.

Before Enron Corp.'s debacle, Andersen had 26,000 staff members, nearly 2,000 partners and annual U.S. revenue of $4 billion. It was noted for its expertise in the energy, hotel, casino, airline and natural resources industries, as well as its tax work.

Spokesman Patrick Dorton said the firm now has about 10,000 employees.

Client defections began in January with the disclosure that Andersen shredded Enron audit documents, and accelerated with the unsealing of an indictment March 14 charging Andersen with one count of obstruction of justice. The firm's conviction Saturday is widely seen as a mortal wound.

A compilation by The Times of auditor-change filings with the Securities and Exchange Commission and other public documents shows Andersen has lost more than 720 of its 2,300 public-company clients. That represents almost $1.3 billion in business.

But Dorton said the firm is shrinking faster than the records show. On Saturday, the firm notified the SEC that it will cease auditing public companies Aug. 31.

Ernst & Young looks to be the biggest winner from Andersen's meltdown, gaining 189 former Andersen clients, or more than a quarter of the business that has defected from the troubled accounting firm. Combined, they made up $300 million of Andersen's $4 billion in U.S. revenue last year.

The firm also has aggressively courted Andersen's partners, reaching agreements to hire about 200 partners and at least 1,000 staff members in many regions, including important business centers such as New York and Los Angeles and small markets such as Baltimore; Richmond, Va.; and Nashville.

Overseas, Ernst & Young has signed 54 of the 83 overseas partnerships that once made up the Andersen Worldwide confederation, a move that greatly expands its international reach and will feed multinational business back to its U.S. offices.

The sale of Ernst & Young's consulting practice two years ago paved the way for the growth the firm is seeing this year, allowing it to invest in sectors such as technology, entertainment, real estate and hospitality, said Tony Anderson, managing partner for Ernst & Young's Pacific Southwest Area.

Nowhere are Ernst & Young's gains from Andersen's fall more evident than in the hotel industry. Before this year, Ernst & Young's biggest hotel client was the Six Continents Hotel Group, a British company best known for its Holiday Inn chain.

Over the last several months, Ernst & Young has won the business of former Andersen clients Hilton Hotels Corp., Marriott International Inc., Westin Hotels and Starwood Hotels & Resorts Worldwide Inc., and now audits hotel companies that combined account for more than $4 out of every $10 collected by U.S.-based hospitality companies, said Jonathan Hamilton, who publishes the Public Accounting Report, an industry newsletter.

In real estate, Ernst & Young has picked up about half the clients that abandoned Andersen, including Centex Corp., the big Dallas-based home builder, and real estate investment trusts such as Nationwide Health Properties Inc. of Newport Beach.

Deloitte & Touche also benefited from Andersen's troubles, becoming the dominant accounting firm in the gaming industry by hiring two of Andersen's top partners in its casino practice and winning a number of important clients, including Trump Hotels & Casino Resorts Inc., Harrah's Entertainment Inc. and MGM Mirage.

Deloitte, long the No. 2 player in the business, now audits 70% of the publicly traded U.S. gaming companies, Hamilton said.

The firm also has made a big move in the airline industry, now auditing two of the three largest U.S. airlines after capturing longtime Andersen audit clients UAL Corp. and Delta Air Lines Inc.

Moreover, Deloitte, which previously had not been in the top echelon in the tax business, became a major player by hiring 2,000 Andersen tax staff members, including 200 partners, said Allan Koltin, a Chicago accounting industry consultant.

Andersen's energy practice is being divvied up among the major accounting firms, with each picking up significant clients.

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