LENGTH: 789 words

Andersen Breakup Tests Final Four

BYLINE: by Charles Sisk in Boston

HIGHLIGHT:
The four remaining big accounting firms carve up their collapsing U.S. rival even as litigation fears linger.

Chicago-based Andersen, the U.S. arm of Andersen Worldwide SC, has begun to sell itself off in pieces, after the firm failed to find a buyer willing to risk exposure to the litigation arising from its role in the Enron Corp. bankruptcy and several other accounting scandals.

So far, Andersen has sold its tax and audit practices in 10 cities to Ernst & Young LLP and its offices in fives cities to KPMG LLP. The firm has also agreed to sell roughly half of its tax practice to Deloitte & Touche LLP and its consulting unit to KPMG Consulting Inc., the McLean, Va.-based consulting company spun off by KPMG in 2000. In general, these deals have made Andersen's competitors stronger. But just how much stronger is unclear.

Buyers have little guarantee that former Andersen partners and clients will stay with their new firms. And Andersen's untested legal structure -  it was organized as a limited liability partnership -  means that people with a claim against Andersen are likely to challenged every deal.

By several measures, Ernst & Young, the third-largest accounting firm, has taken the lead in the race to buy up parts of Andersen. The firm has enticed about 90 former Andersen clients to purchase its auditing services, more than any of the other "Final Four" major accounting firms. The five separate deals it has struck for individual Andersen offices will add about 700 employees to the firm, including 70 partners.

But it is not clear how much those deals will benefit Ernst & Young. The major assets the firm has acquired are Andersen's employees, partners and clients. But, in general, those people and companies are free to abandon their new firm for a competitor at any time, provided they haven't signed a contract waiving their right to do so.

A similar situation faces KPMG, which has brought on more than 300 employees, including 31 partners, through its purchases of Andersen's offices in Boise, Idaho; Jackson, Miss.; Portland, Ore.; Seattle and Salt Lake City. The same is also true for Deloitte & Touche, which will take on about 200 Andersen tax partners and 1,800 other employees.

"There's going to be a year or two of unsettled people and clients," said Arthur Bowman, editor of Bowman's Accounting Report, an Atlanta newsletter tracking the industry. "They're going to switch if they're not happy with the firm they're going to."

An Ernst & Young spokesman said that many former Andersen employees have already reported for work at the firm, but he declined to discuss the firm's employment policies. A spokesman for KPMG and Deloitte and Touche likewise declined to disclose employment agreements.

Further complicating matters is the fact that some of Andersen's best assets, including its offices in Chicago and New York, are still up for grabs. Getting one of these practices could be a major coup -  provided a firm could structure a deal and acquire it.

"They could be so large that no one is able to put together a deal," Bowman said. "No one's picked up Atlanta. Deloitte & Touch got Delta a major Atlanta-based client that dropped Andersen as its auditor , so there's not much interest. I think that might be what happens in New York, Los Angeles or Chicago."

Finally, there is persistent uncertainty raised by the suits against Andersen and the firm's legal structure. Andersen is organized as a limited liability partnership, a relatively new structure that combines elements of a partnership and a corporation.

The laws behind LLPs are supposed to limit liability to just the partners involved in wrongdoing, their supervisors and the firm itself. That would appear to mean that only David Duncan, the Andersen partner who audited the company, his bosses in Houston and Chicago and Andersen LLP are exposed to possible litigation arising from the Enron case. But because the LLP structure has never been tested in court, there is a chance that Andersen's other partners could face liability as well.

And if Andersen were forced to file for bankruptcy, the risks would only increase. Creditors and plaintiffs with claims against the firm could ask a bankruptcy court to review whether the prices paid for Andersen's units were fair. If the judge determines they were too low, he could issue an order forcing buyers to fork over more money for the units they bought.

"I think we've got a good decade-full of litigation," said Mark Cheffers, chief executive of AccountingMalpractice.com, a risk mitigation service geared toward accountants.

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LOAD-DATE: May 21, 2002