Arthur Andersen LLP may be headed for bankruptcy as purchase talks with rivals collapse and the fifth-largest accounting firm faces a possible indictment related to the failure of Enron Corp.
"It's going to take a miracle for this firm to survive now," said Arthur Bowman, editor of Bowman's Accounting Report.
Ernst & Young LLP, the fourth-largest accounting firm, and second-ranking Deloitte & Touche LLP abandoned negotiations to acquire Andersen yesterday. KPMG LLP has held talks with Andersen, the Financial Times and the New York Times reported. KPMG spokesman George Ledwith declined to comment.
Andersen, which audits the books of more than 2,400 companies, has told lawyers suing the firm that it has readied a Chapter 11 petition, people familiar with the matter said.
The 89-year-old firm, Enron's auditor for more than a decade, is losing clients and facing lawsuits and possible criminal charges related to accounting issues surrounding the energy trader.
Gordon Klein, an attorney and bankruptcy law expert at UCLA's Anderson School of Management, said Andersen is "going nowhere."
Potential buyers were attracted by Andersen's "extraordinary client base," he said, before they were scared off by Enron-related liability.
"I'm surprised they haven't worked out a deal with one of the other major accounting firms," Klein said. "As soon as the name on the audits changes from Andersen to one of the other firms, the clients will all stay."
Patrick Dorton, a spokesman for Andersen, didn't return a call seeking comment.
Andersen has lost dozens of clients this year related to Enron, which filed the largest US bankruptcy on Dec. 2. The Justice Department is investigating the firm for criminal violations, including document shredding that may involve obstruction of justice.
Andersen officials decided the accounting firm won't plead guilty to obstruction of justice charges, the New York Times said.
Experts said a bankruptcy filing for Andersen may offer the best chance of staying alive, and help Enron's former auditor escape lawsuits.
"A bankruptcy sale cleanses the business assets of all old sins," said Peter Chapman of Bankruptcy Creditors' Service, a newsletter publisher and research company.
Andersen's lawyers may be using the threat of Chapter 11 as a bargaining chip in negotiations with the Securities and Exchange Commission and lawyers for Enron shareholders and employees.
A bankruptcy threat "is a normal part of the negotiation process in these types of cases," said Charles Parker, a Houston lawyer representing pension funds for New York City and the state of Florida that have sued over Enron.
"I don't see that they get a lot of leverage out of it. What client is going to want to be audited by an accounting firm in bankruptcy?"