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Arthur Andersen nearing its demise

"There are goofy PR people all across America who think you can spin your way out of a bad-fact pattern."

Charlie Leonard, Andersen's crisis management adviser

Arthur Andersen LLP's poorly planned attempt to survive and Paul Volcker's proposal to reform the firm and accounting industry probably will fail after Andersen ended settlement talks with the Justice Department, experts said.

Andersen, Enron Corp's auditor for 16 years, and the US broke off talks to settle an obstruction-of-justice charge over shredding of Enron documents, and the government is preparing for a May 6 criminal trial.

A guilty verdict probably would prohibit Andersen from auditing US companies. Even the prospect of a trial may scare off remaining clients, accountants said.

Andersen is selling tax and consulting businesses as part of former Federal Reserve Chairman Volcker's rescue plan to refocus the firm on auditing.

A trial victory may not be enough to avoid a bankruptcy filing as civil lawsuits loom, some of its US auditors discuss joining rivals, and the firm's global network crumbles.

"I don't see how a viable firm comes out of a trial," said Wayne Shaw, accounting professor at Southern Methodist University. "Once you start down that road I don't see how any of your clients stay around."

The Chicago-based firm has lost more than 200 US audit clients this year, including 42 in the Standard & Poor's 500 Index, and Enron shareholders, employees and creditors are seeking billions of dollars in damages in fraud suits.

The end of settlement talks "will precipitate Andersen filing Chapter 11," said Jay Nisberg, a Ridgefield, Connecticut-based consultant to accounting firms. Companies file Chapter 11 bankruptcy cases to protect themselves from creditors.

Andersen and Volcker's plan to become a much-smaller audit firm is doomed by the negative publicity and the splintering of Andersen's operations, analysts have said.

"The brand has been destroyed," said Mark Braverman, a crisis-management expert at CMG Associates in Newton, Massachusetts. "I don't see that they're going to be able to restore it."

Andersen repeatedly made mistakes in trying to craft a strategy to survive Enron's collapse, lawyers and management-crisis experts said. Chief Executive Joe Berardino's early effort to dismiss Enron's collapse as a "business failure," the firm's reliance on cooperation from former partner David Duncan and its failure to reach plea agreements that would have avoided indictment and trial were crucial errors, they said.

"When you look at every key aspect of this case and ask yourself `What is Andersen's exit strategy?' it's clear they didn't have one," said Thomas Hyland, a New York lawyer who has defended accounting firms in malpractice cases.

Andersen's efforts to defend itself in newspaper ads and at employee rallies backfired. It would have been more effective for Berardino and other officials to have accepted responsibility for the shredding and resigned immediately, officials said.

"The local audit they did on Enron was terrible, but I also think their handling of the whole situation after it happened was almost as bad," said Philip Livingston, CEO of Financial Executives International, an association of corporate executives.

Charlie Leonard, of Washington DC-based Chlopak, Leonard, Schechter & Associates, which has acted as Andersen's crisis management adviser, rejected the criticism.

"There are goofy PR people all across America who think you can spin your way out of a bad-fact pattern," Leonard said.
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