Andersen Negotiating Merger; Volcker Announces Changes

Andersen is immersed in heavy negotiations with rival Big Five firms, hoping to reach an agreement to form some sort of business combination by the end of this week. Early reports [1] indicated that talks with Deloitte Touche Tohmatsu were in advanced stages, but all of the other four accounting giants have been speaking with Andersen. In addition, reports [2] have emerged indicating that KPMG is interested in acquiring Andersen's European operations.

Ernst & Young officially confirmed on March 13 that they are not interested in a business combination with Andersen as long as the Enron-related liabilities remain unresolved.

Industry experts say that a deal with one of the large accounting giants could be announced as early as the end of this week.

Geoff Brayshaw, president of Australia's Institute of Chartered Accountants, expressed concern [3] about a potential merger, warning businesses that they face less choice and that conflicts of interest will escalate if the Big Five becomes the Big Four. "If someone wants to do independent work and you don't want to have the auditors do it, you're down to three [choices]. You very quickly start to lose the competitive market of the work you want the firm to do if you can't ask people to do something because there's already an association."

Paul A. Volcker, chairman of the Independent Oversight Board that was created to develop a plan to protect the integrity of Andersen's audits, announced [4] the decisions that the board has made to date. Should Andersen not reach a merger agreement with another Big Five firm, Volcker's group is calling on Andersen to separate its auditing and consulting practices and follow a disciplined procedure to better assure the integrity of the audit process.

Volcker also stated that, should Andersen remain independent, it will not be a strict "audit only" firm, but will continue to provide certain tax services as well as helping clients with due diligence for mergers. However, Mr. Volcker's report stated, "As this reorganization is completed, there will be no partner interlocks, no revenue- or profit-sharing, and no cross subsidies between the 'auditing' and 'consulting partnerships.'"

Meanwhile it appears that Andersen will add federal obstruction of justice charges [5] to its list of investigations and lawsuits.