Paul Volcker, the former Federal Reserve chairman brought in to rescue Arthur Andersen LLP, said he'll try to persuade the Justice Department to drop its indictment of the firm after Andersen partners backed his plan.
Support for Volcker's proposal to separate Andersen's non- audit businesses including consulting and tax accounting is the first condition for a Volcker-led panel to take control. Also, the indictment must be dropped and Enron Corp investors' lawsuits over Andersen audits of Enron must be settled.
Volcker's appeal to prosecutors will be the first time he involves himself directly in the effort to forestall a criminal trial and help the firm survive client defections. His board can make Andersen a "model" auditing firm and promote reform in the industry, Volcker said, if the government drops the charge, which accuses Andersen of obstructing justice for shredding Enron-related documents.
"I can assure you I will have a personal interest in the negotiations with Justice because it is one of the conditions for our board to be put into place," Volcker said at a news conference. "This is not a matter of confrontation with the Justice Department, it is a matter of cooperating to reform Andersen, and in serving the public interest by helping to bring reform to the whole auditing industry."
Separately, Andersen is backing out of a US$217 million settlement of civil lawsuits that accused the firm of fraud in the collapse of a Baptist religious foundation, the Wall Street Journal reported. The insurance company owned by Andersen can't afford to pay the settlement, which the firm agreed to March 1, the newspaper reported, citing a person familiar with the matter.
Andersen spokesmen didn't return calls on the Journal report.
Justice Department spokesman Bryan Sierra declined to comment on Volcker's offer. Justice Department officials say they've had no formal discussions with Volcker about his plan. They have repeatedly said they want Andersen to take "full responsibility" for its actions, which suggests they want a guilty plea.
Justice Department officials yesterday asked a federal judge to allow a newly impaneled grand jury to continue investigation of criminal activity related to the bankruptcy filing of Enron. Justice officials have said Andersen may face additional charges.
Andersen senior partners CE Andrews and Larry Rieger were appointed to lead the effort to transform the 89-year-old Andersen into a firm that will focus almost solely on auditing. Andrews said a "critical mass" of auditing partners are behind the plan.
Survival will depend on keeping as many of the firm's remaining clients as possible.
"We'll be looking at a much smaller firm than Andersen is currently, with a different type of client," said Karen Nelson, an accounting professor at Stanford Business School. Volcker is "correct in saying that the indictment will have to be dropped and all these other things will have to happen for Andersen to survive. I doubt they will happen."
Andersen partners yesterday decided to back Volcker's proposal for the firm, which involves selling most non-audit businesses and ceding control to the seven-member oversight board led by Volcker. The firm is in mediation talks to settle the Enron investor lawsuits, which seek billions of dollars. Given its withdrawal from the Arizona settlement, Andersen may not be able to pay the amounts it's previously offered, the Journal reported.
Attorneys for the Baptist Foundation of Arizona's bankruptcy trust received a letter yesterday from Andersen representatives notifying them that the firm's insurer couldn't pay the settlement, the newspaper said.
Andersen must quickly resolve the shareholder lawsuits and persuade the Justice Department to drop the indictment, said Michael Cook, the former CEO of Deloitte & Touche LLP, the No. 2 accounting firm, and a member of Volcker's panel.
"This is not something that can wait five or six weeks until the trial," said Cook. "You have a limited opportunity because the client base will be uncertain and the financial liability will be uncertain. There is a real, competitive marketplace here."
More than 80 public companies have dropped Andersen as auditor this year. Equifax Inc., the largest US consumer-credit data company, and utility owner Xcel Energy Inc. today fired Andersen, increasing to 27 the number of companies in the Standard & Poor's 500 Index to do so in 2002. Atlanta-based Equifax hired Ernst & Young LLP and Minneapolis-based Xcel chose Deloitte & Touche.
"You read about the losses of clients but there are a lot of clients who remain committed to us," Andrews said. "When we've worked through this process you'll see a new Andersen that will set the standards for the auditing profession."
Before the client defections started this year, Andersen audited about 2,300 US public companies.
To serve large, multinational companies, accounting firms need an international network of affiliates, analysts have said.
Andersen's plan to merge its overseas businesses with KPMG LLP is falling apart. Affiliates in Japan, China, Hong Kong, New Zealand and Russia abandoned the plan and joined other rivals. Andersen's Australian unit yesterday agreed to combine with Ernst & Young. Volcker said Andersen may be able to hold its international network together, probably through affiliation agreements that would allow for cooperation on audits.
"There is a possibility of maintaining links between the auditing firm in the US and the auditing firms elsewhere to continue to serve Andersen clients,'' Volcker said. "It's clear that this will not be possible if Arthur Andersen in the US is under indictment."
Joseph Berardino resigned Tuesday as chief executive officer of the organization that coordinates the Andersen partnerships around the world. Andersen's 18 global partners meet next week in London and may appoint Aldo Cardoso, chairman of Andersen Worldwide, as Berardino's successor, the Times of London said.
Andrews refused to comment on what brought Andersen to the brink of collapse. "This is about looking forward, not backward," Andrews said.
Volcker said the firm lost sight of its origins when it began to offer services other than auditing. Last year, consulting provided about 60 percent of the firm's revenue, he said. Volcker also said that Andersen's accounting and consulting units had "feuded for a decade" before Andersen Consulting was separated and last year became a public company.
Andersen "got lost somewhere in the transition of emphasis to non-audit services," Volcker said. "I saw a brochure that described nine separate services being offered to clients, with auditing one of them. That is a failed model. In the future, there won't be any brochures like that."
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