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Andersen board unveils reforms, but may be too late


Arthur Andersen is rushing to show that it's serious about reforming itself in the wake of the Enron Corp. scandal. But for many of the troubled accounting firm's clients, it's too little, too late.

Even as Andersen's oversight committee announced its first series of reforms Monday, another major client dumped Andersen as its auditor. FedEx Corp. followed the lead of other blue chip companies, including Delta Air Lines, Freddie Mac, Merck & Co. and SunTrust Banks.

Paul Volcker, the former Federal Reserve chairman who is overseeing the board charged with making over Andersen, acknowledged that the reforms may not come in time to save the firm.

``What we have here is a run on the bank because everyone else is running,'' Volcker told reporters. ``If everybody leaves, there's no firm left. Obviously it's not good for the country for 2,500 businesses looking around for a new auditing firm overnight.''

The three-member board had intended to finalize its first set of reforms later this month, but accelerated its schedule as reports emerged that Andersen could face a federal indictment and was already in talks about a possible business combination with another major accounting firm.

The board ordered Andersen to split its auditing and consulting services to eliminate any conflict of interest. It also imposed several internal measures to ensure more discipline among Andersen's auditors.

Negotiations began quietly last week between New York-based Deloitte Touche Tohmatsu and Chicago-based Arthur Andersen LLP, said a source familiar with the talks, speaking on condition of anonymity. News of the talks were first reported Monday by The New York Times and The Wall Street Journal.

However, the reforms mandated by Volcker's board could make Andersen a less appealing merger partner, said Ed Ketz, an accounting professor at Penn State's Smeal College of Business.

Ketz said several of the reforms were meaningful, such as requirements that Andersen rotate the partner that deals with a particular audit client at least every five years and forcing auditors to wait for a certain amount of time before being hired by an audit client.

Due to the rapid pace of client defection and the restrictions forced by Volcker's board, however, Ketz said Andersen has ``significantly higher'' chances of going under now than it did two weeks ago.

``I think they're trying to stop the defection of clients,'' Ketz said. ``These seem to be good, substantive changes, but it seems to be too late. ... I feel sorry for Andersen.''

Even if Andersen's best option out of its predicament is to try to merge some of its assets with another accounting firm, serious difficulties arise in insulating a potential merger partner from the legal liabilities Andersen faces for its audits of Enron Corp.

``The issue for an acquirer is 'I want those assets but I don't want the liability,''' said Steven Kaplan, a University of Chicago finance professor who specializes in mergers and acquisitions.

Deloitte spokesman Matthew Batters declined comment Monday on the discussions, but said the company ``can confirm that we are involved in scenario planning exercises to address the current and future issues facing the profession.''

Andersen spokesman Patrick Dorton said the firm ``is considering many options to enable us to continue to successfully serve our clients and promote the career opportunities of our people.''
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