Arthur Andersen says bankruptcy not an option for beleaguered accounting firm

Friday, March 15th 2002, 12:00 am

By: News On 6

CHICAGO (AP) _ The future is up in the air for the accounting firm indicted for shredding Enron-related documents, but Arthur Andersen says one option is off the table: bankruptcy.

In a conference call with reporters, company spokesman Charlie Leonard said Thursday that ``there is no plan for bankruptcy.'' But many experts say Andersen may be making a mistake by ruling out a Chapter 11 filing, which could help the company find a buyer to salvage its operations.

``Going into Chapter 11 is in everybody's interest except competitors','' said Ashish Nanda, an associate professor at Harvard Business School. ``It might stop the vicious cycle of clients walking away and of that leading to professionals and partners walking away.''

While insisting that a bankruptcy filing was not in the works, Leonard acknowledged that the company is likely to be hurt by Thursday's indictment on obstruction of justice charges.

``We're looking at a significant hit to the business,'' he said.

Regardless of whether a Chapter 11 filing would ultimately benefit Andersen, those who track the industry say such a move would almost certainly signal the end of the firm's 89 years as an independent company.

``A bankruptcy would be a business strategy to save and protect as many jobs and assets as possible. But it means Andersen itself is done,'' said Arthur Bowman, editor of the industry publication Bowman's Accounting Report.

The criminal indictment by a federal grand jury may already effectively spell the company's demise, Bowman and other observers said.

``I don't see an independent Arthur Andersen in the future, no matter what they do,'' said Michael Perino, a securities law expert at St. John's University School of Law in New York. ``If they do file a bankruptcy action, the only likely outcome is that the remaining pieces get bought up by somebody.''

In an effort to restore its tarnished reputation, Andersen recruited former Federal Reserve chairman Paul Volcker in February to lead an oversight board that would make sweeping reforms at the firm.

Volcker's board released its first set of recommendations on Monday, including plans to split Andersen into separate accounting and auditing units. But the fate of the reform process is uncertain now that Andersen has been indicted.

Volcker, in an interview minutes before the Andersen indictment was announced, said that on Wednesday he had told a panel of experts he had assembled that the outlook for Andersen was ``rather dim.''

The panel decided that it would stay together even if Andersen went under, to promote reforms in the accounting industry, Volcker said.

Numerous Fortune 500 clients have fired Andersen as their auditor in the past two weeks, including Delta Air Lines, FedEx Corp., Merck & Co. and SunTrust Banks.

Some of the remaining clients who are worried about Andersen collapsing may stay on if the company gets federal bankruptcy protection, Nanda said, because of the difficulties large corporations face when they switch auditors.

A Chapter 11 filing would enable the Chicago-based company to convert the more than three dozen lawsuits filed against it into bankruptcy claims. Its previously rejected offer of as much as $750 million to settle all claims might get new consideration, since claimants would otherwise have to wait in line in bankruptcy court behind banks and other secured lenders.

But Andersen filing for bankruptcy, and being bought by a rival firm, might lead to a new set of problems. Turning the Big Five into the Final Four would lessen competition in the auditing market, which Perino said would lead to higher auditing fees.

The only comparable precedent to Andersen's situation is when Laventhol & Horwath _ then the nation's seventh-largest accounting firm _ filed for bankruptcy in 1990 and collapsed under malpractice lawsuits. Andersen, formerly the world's biggest accountant, has fallen to No. 5.

Jonathan Hamilton, editor of Public Accounting Report, an industry publication, blames Andersen's collapse on a slew of mishandled audits of companies like Sunbeam, Waste Management, Baptist Fund and Global Crossing.

``It's kind of like the boxer _ is it the one final punch that puts them out or the 500 over six rounds?'' Hamilton said.