Arthur Andersen LLP began talks with a second potential buyer, Ernst & Young LLP, as the fifth-largest accounting firm struggles to survive mounting client defections and the threat of criminal indictment, people familiar with the negotiations said.
Andersen CEO Joseph Berardino met with his Ernst & Young counterpart, James Turley, in New York the past two days, one person said. Andersen also has discussed a buyout by Deloitte & Touche LLP as the US Justice Department prepares obstruction of justice charges over Andersen's destruction of documents tied to its role as Enron Corp's auditor, people familiar with the talks said.
"They need someone to come to the rescue," said Jonathan Hamilton, editor of Public Accounting Report. A transaction with one of the companies may be announced as soon as Wednesday, one person familiar with Andersen said.
Andersen is considering putting its US unit under Chapter 11 bankruptcy protection to fend off legal claims, a person said.
Lawyers who are suing Andersen on behalf of Enron investors say they would oppose any transaction unless there is a provision to pay legal claims against the firm.
The firm is seeking to settle Enron shareholder and investor lawsuits for about US$750 million. Earlier this month Andersen paid US$217 million to settle a separate lawsuit filed by investors in the Baptist Foundation of Arizona. Enron filed for the largest US bankruptcy in December.
A combined Andersen and Deloitte & Touche would have almost US$22 billion in revenue, surpassing PricewaterhouseCoopers LLP as the biggest US accounting firm. A merged Andersen and Ernst & Young would rank second to PricewaterhouseCoopers.
FedEx Corp, the largest overnight delivery company, and Riggs National Corp, the biggest Washington-based bank, dropped Andersen as its auditor today, joining Delta Air Lines Inc, Freddie Mac, Merck & Co and more than 25 other companies.
Separately, Paul Volcker, the former Federal Reserve chairman named to restore Andersen's credibility, said the firm must split its consulting business from its auditing operations.
"There is a strong public interest in a reformed Arthur Andersen able to restore and maintain leadership in the auditing profession," Volcker said in a news conference at his Manhattan office.
Earlier today, the New York Times and the Wall Street Journal reported Andersen was in talks to sell all or part of itself to Deloitte. Berardino and Deloitte & Touche CEO James Copeland are leading the negotiations, the Times said.
Andersen spokesman Patrick Dorton declined to comment on whether the firm held talks with Deloitte or Ernst & Young.
"It's our policy that we would not discuss any rumors or anything to do with strategic plans the firm might have," said Les Zuke, a spokesman for Ernst & Young.
Deloitte spokesman Matthew Batters said, "We are involved in scenario planning exercises to address the current and future issues facing the profession. It's inappropriate for us to discuss these planning exercises in public."
Lawyers representing Enron investors said they are monitoring the Andersen sale talks.
"If Andersen is going to disappear without any provision for liability, that's a material fact I'd want to deal with," said Tom Cunningham, a Houston lawyer who represents Georgia's state pension fund. "It wouldn't surprise me if somebody ran to the courthouse to enjoin this."
An Andersen failure would also cause headaches for regulators. Unless Andersen is rescued, and the majority of its client relationships preserved, regulators would have to deal with more than 2,000 public companies that all needed to change auditors at once, said Dennis Beresford, a University of Georgia accounting professor and former chairman of the Financial Accounting Standards Board.
"Unless Andersen is bought, it would take a couple of years or more to get through the trauma," Beresford said. "It's a real issue as far as how do we keep the overall financial reporting marketplace functioning."
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