Merger talks between Big Five firm Andersen and rival firms Ernst & Young and Deloitte Touche Tohmatsu came to an abrupt end on Wednesday when E&Y and Deloitte issued separate statements indicating their rejection of possible plans to combine with Andersen.
Both E&Y and Deloitte had met with Andersen to discuss the possibility of somehow absorbing Andersen into their respective practices. But the threat of federal prosecution as well as other pending litigation relating to Andersen's audit of failed energy giant Enron provided too large an obstacle for negotiators to overcome.
"Ernst & Young has concluded that as long as Enron and other Andersen litigation matters are unresolved, it is not in the best interests of our people, clients, and our firm to pursue such a combination," said E&Y in a published statement. "Deloitte was unable to continue the next stage of discussions due to Andersen's unresolved litigation and legal issues," read the Deloitte statement.
Andersen Will Not Plead Guilty
Responding to a U.S. Department of Justice request that Andersen plead guilty to obstruction of justice charges relating to the destruction of documents from its Enron engagement, lawyers for Andersen delivered a letter to the Justice Department Wednesday night indicating that the Big Five firm would not enter such a plea.
Analysts have suggested that pleading guilty to such a charge might result in Andersen not being able to perform audits. According to today's New York Times, Andersen's lawyers described the Justice Department charges as "a gross abuse of governmental power," and have suggested an impropriety in charging the entire firm with the wrongdoings of a small group of partners in Andersen's Houston office.
The Department of Justice is to decide on Thursday how it will proceed in actions against Andersen. Meanwhile, The New York Times is reporting that officials from the Securities & Exchange Commission are talking with the rest of the Big Five firms on how to handle the simultaneous transfer of auditors by almost 20 percent of the country's publicly traded companies should Andersen collapse.
New Reports of Document Destruction
New reports have surfaced that indicate that the Enron document shredding that occurred at Andersen's Houston office last fall was more widespread than was originally thought.
According to today's New York Times, lawyers for Andersen have provide government prosecutors with information indicating that partners in Andersen's Houston office directed the destruction of Enron documents in at least two other Andersen offices - Portland, OR, and London.
The quantity of documents that might have been shredded in these offices has yet to be determined. Investigators have found that at least 26 trunks of records as well as 24 other boxes of Enron-related paper were shredded in Andersen's Houston office in the three days after it was disclosed that the SEC was to investigate Enron.
Client Defections Continue at Andersen
Two more large audit clients turned their backs on Andersen in recent days. Energy and chemical company Kerr-McGee Corp. decided to end its 37-year relationship with Andersen and chose Ernst & Young to provide the company with audit services. "Our needs are better served by Ernst & Young," said a spokeswoman for Kerr-McGee.
Household International, America's second largest consumer finance firm, which operates under the familiar names of HFC and Beneficial, voted to oust Andersen in favor of KPMG. Household referred to the current uncertainty about the future direction of Andersen as a reason for the decision.
See a listing of Andersen client defections to date.