Commentary: Why Andersen Is Making a Last Stand

By Joseph Weber

It sure looks like chaos at Arthur Andersen LLP. Almost daily, it seems, more clients jettison the accounting firm and more people sue over flawed audits. The firm's value is shrinking fast as its lawyers haggle with claimants. It has let 7,000 employees go. Yet each morning, Andersen accountants and remaining staffers faithfully show up for work.

Why doesn't Andersen just declare bankruptcy? Insiders acknowledge there's no future for the business, even as the audit-only shop former Federal Reserve Chairman Paul A. Volcker proposed. It's not as if Andersen partners would go on the dole: Competitors such as KPMG, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers are angling for pieces of its business.

Basically, the partners are trying to wind up the firm on their own terms. That means resisting bankruptcy--even though it would impose order on the breakup. Their reasoning: Putting the firm's fate in the hands of a bankruptcy court would make public the details of the firm's finances, and eliminate the chance of negotiating a better deal with claimants or buyers. "The reason we are seeing a deal a day is there's an attempt by our management to get some value," says Joseph Berardino, Andersen's former CEO. Also, declaring bankruptcy wouldn't assure partners of what they most want: to be free of the threat of endless litigation.

The trouble is, Andersen is in a legal straitjacket (table). The firm faces civil suits from investors and others who lost billions on Enron Corp. and the Baptist Foundation of Arizona. On May 6, Andersen goes to trial on federal obstruction of justice charges over Enron. The Securities & Exchange Commission may fine Andersen up to $500 million and the board of Sunbeam Corp., another bankrupt audit client, is mulling a suit.

The liabilities are blocking most of the exits. Andersen's retired partners, suing over $800 million in benefits, have asked a court to stop partners from voiding noncompete pacts--which they must do to take clients with them when they go to competing shops. Fear of inheriting liabilities is also stalling buyers. "No deals can be inked until the liability is capped," says Allan D. Koltin, CEO of the Practice Development Institute Inc., a Chicago consultancy.

The biggest question is to what extent partners are personally responsible for Andersen's failures. If Andersen doesn't yield much money, plaintiffs' attorneys may sue partners on the Enron or Baptist Foundation audits as well as top firm executives. Even if that's unsuccessful, these partners may face years of appeals.

In theory, Andersen partners should get significant protection from the firm's status as a limited-liability partnership, which is supposed to confine partners' shares of a firm's liabilities to the capital they put in. But the Illinois LLP law, under which Andersen is chartered, has never been tested in a case of this magnitude. When the firm breaks up, "the partners will be thrown out of an airplane, and they will hope the LLP is an effective parachute," says Harvard law professor Elizabeth Warren.

The Andersen strategy carries other risks--not least that time is against it. Acquirers can now get Andersen's skilled partners and their Rolodexes for far less than the 1.5 times annual client fees their noncompete agreements say they must pay to go to take clients to competitors. If all 1,620 U.S. partners paid that--never a likely scenario--the U.S. business would have yielded $6 billion, more than enough to pay off claimants. Instead, says Leland E. Graul, public companies practice director at accounting firm BDO Seidman LLP, the average asking price per partner is now closer to $100,000 to $150,000--yielding $240 million at most. BDO is a possible buyer.

Andersen's last stand may be brave, but the odds are it will surrender--in bankruptcy court.

Weber covers Andersen from Chicago.

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