While many companies in far worse trouble than Andersen often manage to survive, Andersen is in serious danger of disappearing altogether because of the way accounting firms work. Unlike most businesses, an accounting firm has relatively little in the way of cash and tangible assets. Its value consists almost entirely of its clients, its partners and its prospective profits. If it loses lots of partners and clients, there’s not much left. “In its current form, the firm is done,” says Arthur Bowman of Bowman’s Accounting Report. “The indictment sealed their fate.”
There doesn’t seem to have been much last-minute bargaining. The one-count indictment, charging Andersen with obstruction of justice for allegedly destroying records related to Enron, was handed up by a grand jury in Enron’s hometown of Houston on March 7, but was unsealed only last Thursday. The Justice Department used the sealed indictment as leverage to try to get Andersen to plead guilty. But Andersen wouldn’t: it feared that a guilty plea would cause state regulators across the country to instantly yank its licenses. Justice remained unmoved.
By last week, NEWSWEEK has learned, between Andersen and Justice had soured to the point that criminal division chief Michael Chertoff was refusing to take calls from Paul Volcker, the former Federal Reserve chairman whom Andersen named in February to run its the relationship-oversight board and recommend changes in its practices.
Andersen had a tough case to make for yet another chance to mend its ways. It used to be regarded as the primo accounting firm. “They’re like the Marine Corps of accounting,” says Bowman. “They have an incredible culture. Their motto is, ‘There’s the Andersen way and the wrong way’.” But lately, the Andersen way has seemed to be the wrong way. It recently signed a consent decree growing out of fraud at Waste Management, failed to catch major fraud at Sunbeam and paid $217 million to settle a case involving the Baptist Foundation of Arizona. It also faces huge liability for the collapse of Global Crossing. And, of course, there’s Enron.
That record is obviously a major reason behind Justice’s decision to indict Andersen, risking the implosion of a firm that handles 20 percent of the country’s publicly traded companies. Fearing the worst, the Securities and Exchange Commission issued guidelines Thursday designed to forestall panic if Andersen collapses, and to keep publicly traded companies from being forced to dump the firm. But the SEC guidelines don’t apply to non-SEC transactions, such as banks requiring firms to get certified audits to complete purchases or sales, or to conclude loan agreements.
Since January, Andersen has trotted out a variety of public-relations strategies in an attempt to save itself. Chief executive Joseph Berardino bought full-page confessional ads, blamed everything on rogue employees and rotten apples at Enron and hired the 75-year-old Volcker as a symbol of good intentions. But last week, it moved into attack mode, charging Justice with “abuse of prosecutorial discretion.’’ An Andersen spokesman didn’t return calls. But sources told NEWSWEEK that, having failed to head off or soften the indictment, Andersen now intends to push for a quick knockout in court. The government is required by law to begin criminal trials within 70 days of indictment, but that deadline is generally waived in complex cases. However, Andersen is expected to press to get the case before a jury by summer in hope of a quick dismissal (Andersen is scheduled to make its initial court appearance on Wednesday).
It’s not clear when Andersen found out the indictment had been issued. But it’s considering whether to argue that keeping the indictment secret while the firm continued to turn over information to the Feds in good faith violated Andersen’s right against self-incrimination. Normally, indictments are kept secret so defendants won’t flee the country–not a problem in this case.
If Andersen is going to salvage itself it will have to act quickly, or risk having its partners desert en masse, taking clients with them. The 1,600 partners face the virtual certainty that their stake in the firm is down the drain because the firm’s huge legal liabilities greatly exceed its liquid assets and insurance. So the sooner a partner leaves and starts over, the sooner he can begin the game of amassing wealth at a new firm.
Andersen has been trying to sell itself to one of its Final Four competitors. But prospective purchasers fear inheriting Andersen’s legal liabilities. The conventional method of dealing with this type of problem is for the company to file for bankruptcy, then sell its assets. But having Andersen go Chapter 11 would create a whole new set of problems. For example, how many managers of publicly traded companies want to ask shareholders for permission to have their company audited by a bankrupt? Very few.
With luck, Andersen will either miraculously hang together or at least go out of business in an orderly manner. Let’s hope that March Madness stays confined to the basketball courts, and doesn’t spread to the financial system.
The Charge Against Andersen
told to work overtime if necessary to accomplish the destruction.Tons of paper relating to the Enron audit were promptly shreddeddozens of large trunks filled with Enron documents
