Breakup of Andersen Gains Steam

Accounting firm Andersen moved closer Thursday to transforming itself into a leaner, audit-oriented firm by agreeing to sell much of its U.S. tax practice to Deloitte & Touche and preparing for the layoff of as many as 7,000 workers next week.

But the firm also is perilously close to splintering in the U.S. as partners in almost every domestic office participate in talks to spin out into their own firms or to bolt in groups to both larger and smaller rivals.

Talks include individual partners looking to take their book of clients to a new firm, industry and specialty groups within offices looking to move en masse and groups of Andersen offices looking to band together to form regional firms.

“I would be hard pressed to tell you of an Andersen office that is not in discussions at this moment with another Big Five, national or regional firm,” said Allan Koltin, a Chicago consultant working with several Andersen offices to help structure some of the deals.

“This is the beginning of the endgame,” Koltin said. “We are going to see other deals announced now, and soon, essentially the majority of Andersen will be spoken for.”

The transactions endanger a plan by former Federal Reserve Chairman Paul A. Volcker to reinvent Andersen as a smaller firm focusing on audits and tax preparation.

Koltin and others are examining ways to shield new partnerships from Andersen’s liabilities. The accounting firm is a target of lawsuits for its work for companies such as energy trader Enron Corp. and telecommunications concern Global Crossing Ltd.

In announcing the transaction with Deloitte, which will get roughly 350 of Andersen’s 560 tax partners and many of its offices, neither firm said how they planned to deal with the liability issue.

Koltin said a template is developing by which acquiring firms will pay into a fund that would free them from liability, possibly through the structure of a formal bankruptcy.

Andersen called the Deloitte deal “an agreement in principle,” which it anticipates will be completed by the end of this month. Deloitte described the deal as a “memorandum,” adding that “the two firms continue to work through the issues and the agreement is subject to due diligence.”

Terms were not disclosed.

People familiar with the transaction said Deloitte will pick up only a portion of the business, mostly in the big cities. Some of the specialty practices within the tax group and some of the smaller offices have been told they can now go out and cut their own deals with other firms.

It is not clear whether all of the Andersen tax partners will go along with the transaction. A similar agreement for Andersen to transfer its overseas partnerships to KPMG fell apart after individual practices overseas decided to cut deals with other firms.

Efforts by Andersen partners to find new business homes has intensified in the last week as the firm’s international structure disintegrated and as a stream of client defections has turned into a flood.

Andersen has lost about $500 million of its $4.3 billion in U.S. revenue since Enron filed for bankruptcy protection in December and expects to lose an additional $500 million in the near term, according to internal estimates. The expected layoff could extend to as much as 25% of Andersen’s 28,000 U.S. employees. Sources said Andersen’s Chicago headquarters will be especially hard hit.

Andersen is struggling to survive a criminal indictment on an obstruction-of-justice charge for destroying Enron-related documents sought in a federal probe. A trial is scheduled for May 6, but many clients are not waiting to see if the firm is proven innocent. They are hiring other auditors out of fear that Andersen won’t have the critical mass to conduct large global audits even if it does survive the federal indictment.

Andersen has handed control of the firm to Volcker, who is trying to execute a rescue plan. Success of the Volcker proposal is contingent on the Department of Justice suspending or dismissing its indictment and on settlement of the class-action lawsuits. Volcker said he would scuttle much of Andersen’s tax consulting practice to transform the firm into a company that primarily provides auditing and tax preparation services.

An Andersen source said the intervention of a federal mediator has resulted in some progress in settlement talks between the firm and attorneys representing Enron investors and employees.

The source acknowledged that multiple merger talks were taking place among Andersen’s scattered offices but said it was clear during a three-hour teleconference for partners Thursday that there was still considerable support for the Volcker plan.

Larry Gorrell, managing partner of the U.S. Andersen partnership, said the deal announced with Deloitte on Thursday was “consistent” with Volcker’s vision for the firm.

“While our firm will retain appropriate tax expertise in a manner consistent with these reforms, Deloitte will provide a significant number of our people with continuing career opportunities and our clients with continued quality service from recognized and respected professionals,” Gorrell said in a statement.

A senior Andersen partner who supports the plan said core staff are working hard to implement the proposal, but virtually all involved see it as a “long shot.”

Based on conversations with partners, Koltin said the Volcker plan has “tepid support at best” and that most partners would rather move to a new or existing firm. He said partners hoping to form regional firms believe they can create organizations that will keep many mid-market accounts.

Many partners have hired bankruptcy attorneys, either individually or in groups, to examine how they can use payments to what would remain of the Andersen partnership to relieve the new or acquiring firms of Enron and other liabilities, Koltin said.

Legal theories abound over how to best deal with the liability issue, said Bob Bunting, chairman of Moss Adams, the nation’s 12th-largest accounting firm.

Bunting said that although the bankruptcy route might provide the most security, its time-consuming nature might not staunch the dissolution of business quickly enough so that deals could get done.

Moss Adams, which is actively pursuing groups of Andersen partners, is wrestling with the liability issue but believes it might be solved by a wide enough splintering of the Andersen firm.

“If you buy a piece of the business and pay a fair market value for it, that might work,” Bunting said. “But no one has ever done this before, so there are a lot of what ifs.”

Andersen’s partnership rules require a payment of $1.50 for every $1 in annual recurring revenue that a partner takes from the firm. But Koltin and others expect that the partnership will agree to drop that threshold by half because the price is too high for the risk involved in purchasing a piece of Andersen’s U.S. business.

Meanwhile, Andersen Worldwide, the confederation of the 84 Andersen partnerships, said Thursday that Aldo Cardoso was named acting chief executive. Cardoso succeeds Joseph Berardino, who said in March he would step aside to make way for the Volcker plan.

Cardoso, based in Paris, will continue to serve simultaneously as chairman of the Andersen Worldwide Board of Partners. Cardoso’s main role at Andersen Worldwide will be to oversee the orderly mergers of the overseas partnerships with rival accounting firms.

Times staff writer Walter Hamilton contributed to this report.