By Joseph Weber
It was a tough, though probably inevitable decision: On Mar. 26, after months of missteps in his handling of the scandal that has engulfed Arthur Andersen LLP, Chief Executive Joseph F. Berardino finally stepped aside. His resignation now offers Andersen a glimmer of a hope for survival--though not much more than that.
Indeed, no sooner had Berardino quit than the firm's partners began to fall in line behind a controversial rescue plan that former Federal Reserve Chairman Paul A. Volcker is trying to put in place. As BusinessWeek went to press, leaders of Andersen's audit partners agreed to back the Volcker proposal. If the firm as a whole endorses it, Volcker would pick new management for a restructured company that would focus solely on auditing.
But that's only a first step--and the clock is ticking. Volcker says his plan must move forward in "a matter of days" or he may abandon ship. As soon as they win backing for Volcker's plan, Andersen's current leaders, including U.S. practice head Larry J. Gorrell, should quickly step aside to make way for a new management team. Then, Volcker must rapidly find a way to convince the Justice Dept. to drop its indictment of Andersen, persuade the Securities & Exchange Commission to allow Andersen to continue auditing the books of its publicly-traded customers, and reach a settlement in scores of lawsuits filed on behalf of Enron Corp. workers and shareholders.
If that all sounds like a tall order, consider that Volcker must do it all before legions of partners and other key employees decide to pack it in and find new jobs. Unless enough partners see some reason for staying, they'll bolt just as so many of the firm's foreign affiliates are now doing. Volcker's plan is strong medicine, says former Andersen CEO Duane R. Kullberg. "The patient," he says, "has to be willing."
But new leadership would be a good start. Andersen's biggest problem over the past few years has been a lack of strong, decisive management. After getting entangled in a string of high-profile audit failures--including Sunbeam, the Baptist Foundation of Arizona, and, most notoriously before Enron, the fraud-tarred failure of Waste Management--Andersen's leadership missed the chance to clean up the firm's act. Many of the partners and accountants involved with the earlier scandals remained at the firm. And they came up with the firm's questionable document retention policy. Andersen also passed up one opportunity after another to upgrade its standards and procedures or impose tougher national controls on its too-independent regional offices.
Cleaning house could also go a long way toward ending what remains Andersen's toughest problem: resolving the obstruction of justice charges. In the end, its best bet for survival may be a guilty plea in conjunction with sweeping reforms and management changes--a deal that Volcker can propose far more convincingly than Berardino. It's a tough decision--but ultimately one that the firm, like Berardino, may have little choice but to make. Chicago Bureau chief Weber covers Andersen.