Andersen in Merger Talks With KPMG

The Andersen accounting firm worked Friday to sell all or part of the company to rival KPMG, while trying to dissuade its foreign affiliates from striking independent deals after the firm’s indictment on obstruction-of-justice charges a day earlier.

Also Friday, the federal General Services Administration suspended Andersen, which handles more than $60 million in government contracts, from receiving new contracts from federal agencies as long as it is under indictment.

After seeing potential deals with two other rivals falter this week, Andersen stepped up negotiations with KPMG, the lone Big Five accounting firm still willing to explore a business combination, according to people familiar with the matter.

They said the merger talks center on how to structure a deal that would allow KPMG to buy Andersen’s foreign affiliates and other portions of the company that might not carry liability from its audit of Enron Corp. Already, Andersen partner firms in Spain, Chile and Canada have talked about arranging separate mergers.

KPMG would acquire the U.S. operations of Andersen at a later date, once its Enron liabilities were determined, sources familiar with the talks said.

A decision on whether to move forward with the merger is expected to come as early as today, one source said.

However, others familiar with the talks cautioned that the deal could fracture, just as negotiations with Deloitte Touche Tohmatsu and Ernst & Young broke up earlier this week over the liability issue.

On Thursday, the Justice Department unsealed an indictment that accused Andersen and its senior managers of shredding and destroying thousands of Enron- related files and e-mails after learning that the Securities and Exchange Commission was examining Enron’s accounting.

The company has admitted that its employees destroyed the documents but has said the criminal charges are unwarranted and vowed to fight them.

Accounting industry experts likened the criminal indictment to a death sentence for Andersen, but sources close to the company indicated that executives were determined to find a way forward.

If the KPMG talks collapse, one source said, another option for Andersen would be to restructure the company as a much smaller business--akin to the second tier of accounting firms.

Such a reorganization may require putting the firm through bankruptcy proceedings in hopes of shielding the new company from existing liabilities, said Arthur Bowman, publisher of Bowman’s Accounting Report.

Patrick Dorton, an Andersen spokesman, said the firm “is looking at many options” but declined to elaborate. KPMG also declined to comment.

Andersen is seeing a daily erosion of major clients. On Friday, Sara Lee Corp., Brunswick Corp., and Northeast Utilities joined the list of about 50 companies that have dismissed Andersen since December.

Andersen has lost about 50 of its 2,300 public company audit clients in the U.S.

That represents about $200 million in business since December, according to a Times review of accounting firm fees listed in Securities and Exchange Commission filings.

Andersen collected $4.3 billion in U.S. revenue last year.

“Although I say this with great pain, the Andersen name has become radioactive,” said Bill Cummings, an accounting professor at the University of Northern Illinois.

Cummings said the rate of client losses will accelerate in the next month, when most large companies select auditors for the coming year.

Executives fear that Andersen won’t be able to complete their audits and would be a liability with shareholders, he said.

Dorton said that the firm “remains committed to providing high quality” for its clients and that it “continues to be hard at work” on its many engagements.

But the company’s woes mounted Friday after the GSA concluded that Andersen, along with Enron, did not meet federal ethics standards.

“The purpose of suspension is not to punish a contractor or an individual, but to protect the government from contractors that do not have a satisfactory record of business ethics and integrity,” the GSA said in a statement.

Andersen will meet with the GSA on Monday to discuss the suspension.

“The quality of our government work is unaffected by the indictment, or Enron, and if they have concerns that the issues raised in the indictment might affect it, we will make whatever changes to reassure GSA that there is integrity and oversight and all the proper controls,” said Ira Goldstein, Andersen’s managing partner for government services.

Andersen’s government contracts include work for the Defense Department, Justice Department, Department of Housing and Urban Development, State Department and Centers for Medicare and Medicaid Services.

The GSA issued a 12-month suspension against Enron, its major subsidiaries and former leaders, including former Chairman Kenneth L. Lay and former President Jeffrey K. Skilling.

Enron’s contracts with the government total about $35 million, according to the GSA.

Meanwhile, Securities and Exchange Commission officials planned to meet over the week- end to detail emergency relief measures announced Thursday for audit clients of Andersen.

The full package of regulations is due to be filed Monday, spokesman John Nester said.

The SEC will accept financial statements audited by Andersen but will require companies to obtain assurances from the accounting firm that it can perform the work properly.

Companies that cannot obtain such assurances or that decide for other reasons not to have Andersen complete the work would be allowed to file unaudited financial reports, providing they obtain audited statements within 60 days, the SEC said.

For the bulk of corporate America that operates on a calendar year, annual financial reports are due at the commission March 31.

Most of the field work for those reports already has been done, so experts doubt that many firms will file unaudited statements.

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Times staff writers Edmund Sanders in Washington, Thomas S. Mulligan in New York and Nancy Rivera Brooks in Los Angeles contributed to this report.