Andersen Submits Its Terms for Settlement

A week after settlement talks collapsed, accounting firm Arthur Andersen sent a letter to the Justice Department on Wednesday outlining conditions it would accept to settle an obstruction of justice charge.

Also Wednesday, Andersen representatives disclosed that the firm is in talks to sell its middle-market practice to either BDO Seidman or Grant Thornton. The sale would change the look of the accounting industry by creating a large firm that fits between the top- and second-tier businesses.

The letter to the Justice Department is essentially a response to the government’s last offer to the firm when talks ended last week, said Rusty Hardin, Andersen’s defense attorney.

“Now we have provided them with a document that says what we can live with and why,” Hardin said. “I have no idea whether it will lead to anything.”

The accounting firm is seeking to reach an agreement with the government to defer prosecution in return for an admission of wrongdoing for destroying documents sought in the federal probe of its work for Enron Corp. The trial is scheduled for May 6.

Justice Department officials said they received Andersen’s letter late Wednesday afternoon and had no immediate comment on it. Among several conditions of the government deal, Andersen would have agreed to a probationary period during which it would make a series of operational changes and not violate any laws. Those talks ended last week. The government had hoped to use the plea agreement to obtain Andersen’s cooperation in its investigation of Enron’s senior management, the energy trader’s accounting practices and its subsequent bankruptcy.

According to Hardin, the Justice Department presented a package of conditions to the accounting firm last week and said Andersen’s partnership had to agree to the entire package by April 18.

Disagreement arose over whether the conditions were too restrictive to allow Andersen to continue as an ongoing business, Hardin said. Since negotiations broke off, the Justice Department has maintained that it considers the settlement talks closed and is moving ahead with the trial in Houston.

Andersen is trying to settle the federal charge, as well as a class-action lawsuit filed by Enron investors and employees, so it could preserve what is left of the firm. Andersen has lost several hundred clients in recent months and is in the process of selling off multiple offices and practices within the firm.

But none of those deals can move forward until there is a legal mechanism for shielding the buyers from Enron litigation.

Andersen partners talked with Grant Thornton executives about the sale of its middle-market practice last week. And today, Andersen and BDO Seidman executives are expected to discuss the outlines of a competing deal.

A decision is not expected for at least a week, according to people familiar with the talks.

Andersen’s recently hired restructuring expert, meanwhile, is moving ahead with plans for the orderly sale of many of its offices and practice groups.

Bryan Marsal of turnaround firm Alvarez & Marsal said in a federal court filing that his goal is to create a smaller firm that is still a viable business.

Andersen is hemorrhaging clients in the wake of its role as the accountant for Enron and many industry observers believe it will go out of business.

“Andersen is not in dissolution or liquidation. On the contrary, every effort is being made to restructure the firm, achieving the most value for its unneeded assets, and to preserve value for Andersen’s continuing businesses, its creditors, its partners and employees,” wrote Marsal in the April 16 filing in Houston federal court, which became public Wednesday.

He filed the affidavit as part of a response by Andersen to civil litigation plaintiffs who are trying to block the sale of the assets, such as the middle-market practice sought by Grant Thornton and BDO Seidman.

In the filing, Marsal said Andersen would consider releasing some of its 1,700 partners from non-compete clauses on a case-by-case basis, as long as the firm is compensated fairly.

Any continuing sales of separate units or smaller offices would require buyers to hire partners, their support staff and pick up obligations such as office leases, Marsal said.

The firm already has an agreement to sell about half of its tax practice to Deloitte & Touche and is in talks to sell parts of its Southern California operations to Deloitte and KPMG. All of these deals are contingent on finding a legal mechanism that would protect the buyers from Andersen’s litigation liabilities.

Whoever wins the bidding for Andersen’s middle-market practice will end up with a combined practice with about $700 million in annual revenue and 500 partners and 4,000 to 5,000 staff members nationwide.

However, the company will still be far smaller than KPMG, which has more than $3 billion in U.S. revenue and about 1,500 partners. Andersen’s middle-market audit business, which caters to companies with less than $1 billion in revenue, has about 200 partners and $300 million in audit revenue, said Allan Koltin, a Chicago accounting industry consultant who is advising parties in the talks.

The winning bidder, as it grows, would become large enough to offer the type of tax and other consulting and specialty practices that the biggest firms provide, said Bob Bunting, chief executive of Seattle-based Moss Adams, a large second-tier firm based in Seattle.

Bunting conceded that Moss Adams and other second-tier firms that would like to purchase pieces of Andersen have been forced “to sit on the sidelines” during this contest for the middle-market practice. But he said this won’t necessarily hurt the smaller firms.

“Businesses tend to go to auditors who know their industry,” he said. “We have 400 apparel companies in Los Angeles, and unless this winner winds up with a huge market share in that industry, they won’t be a threat to us.”

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Times staff writer Eric Lichtblau in Washington contributed to this report, and Associated Press was used in compiling it.