Andersen Units in Deals With Rivals

The Andersen accounting firm’s efforts to transfer its overseas operations to KPMG frayed Thursday when three important foreign affiliates bolted for rival companies and a senior Ernst & Young executive launched a campaign to pick off Andersen practices worldwide.

Andersen partnerships in Hong Kong and China said Thursday that they planned to merge with PricewaterhouseCoopers. The Russian practice plans to merge with Ernst & Young.

“We are interested in talking to Andersen practices all over the world except in the United States,” Bill Kimsey, the London-based chief executive of Ernst & Young Global, said in an interview. “We have already contacted many of the offices.”

Analysts said the defection of the Andersen’s offices in Hong Kong, which is an international financial center, and in China, an important emerging market, was significant but not necessarily a deal breaker.

Andersen has a tentative agreement to merge its overseas operation with KPMG as it deals with the fallout of its audit of Enron Corp. and a federal obstruction of justice indictment for destroying documents sought in the probe of the energy trader’s accounting practices.

Such a move would preserve most of Andersen Worldwide, an international confederation of 84 member accounting partnerships, under the KPMG banner while Andersen’s U.S. practice deals with the criminal indictment, other investigations and lawsuits arising from its Enron work.

KPMG and Andersen executives said their plan was moving forward, notwithstanding Thursday’s defections.

They are taking the broad outline of their agreement to the individual firms in each country, a process that will take several more weeks, said George Ledwith, a KPMG spokesman.

But Kimsey at Ernst & Young said the other big accounting firms remained interested in obtaining as much of Andersen’s international business that they can.

“I don’t think anyone knows how this will go,” Kimsey said. “I do think the Andersen partners need to move quickly.”

Andersen is seeing a steady erosion of its business in the United States, losing about 50 major clients.

The decline is less precipitous at its international offices, in part because they are expected to merge with other firms and don’t appear to carry the staggering liability claims Andersen faces domestically.

“We have studied the situation, and if there is a problem we believe it is with the U.S. practice,” Kimsey said.

Both Ernst & Young and Deloitte Touche Tohmatsu broke off merger talks with the U.S. practice because they could not find a way around the liability issue.

Andersen’s practice in Spain, which has signaled it wanted to shed the Andersen name quickly, will provide a key test for the KPMG plan, said Jonathan Hamilton, editor of Public Accounting Report, an industry newsletter.

“If Spain decides to go with someone other than KPMG, that would be a clear signal that this is going to be every man for himself and that each of the offices will seek to cut the best deal that they can,” said Hamilton, who believes a decision out of the Spanish practice could come within the next week.

“If any of the European firms bolt, that will be a real blow to this deal,” he said.

An Andersen spokesman called the decision by the three offices to leave the network “regrettable.”

Andersen spokesman Charlie Leonard also said that the foreign affiliates are “not at liberty to simply opt out” without paying remuneration.

“They have clear contractual obligations,” Leonard said, although he did not disclose details. “We presume they will fulfill their commitments.”

Neither Ernst & Young nor PricewaterhouseCoopers provided information on the financial details of transactions, except to describe them as mergers or business combinations.

However, Kimsey said the merger will double the size of Ernst & Young’s Russian practice to 56 partners.

Ernst & Young does about $50 million of business in Russia annually.

He said the Andersen’s Russian revenue was more than $50 million. Andersen clients in Russia include two of the country’s largest oil producers and Aeroflot, the national airline.

The combined practice will be the largest in Russia.

In announcing the company’s decision to join Ernst & Young, Hans Jochum Horn, the general director of Arthur Andersen ZAO in Russia, said in a statement that “Ernst & Young’s firm culture is much like our own, and its international support network offers our clients the essential support they need.”

Andersen executives in China issued a statement that said they were upset by “the events affecting Andersen in the USA” but that “joining PricewaterhouseCoopers offers great opportunities and benefits for our firm, our people and, above all, our clients.”

Any of these deals may face challenges by attorneys in the class-action and federal pension lawsuits against Andersen and senior Enron management, as well as from a group that holds $200 million in Andersen notes that is concerned about repayment.