Smaller Rivals Could Gain if Andersen Falls

By LIZ PULLIAM WESTON and JERRY HIRSCH

March 15, 2002 12 AM PT

TIMES STAFF WRITERS

If Andersen fails under the weight of Thursday’s criminal indictment, the demise could cause costly disruptions for some of the world’s biggest companies while offering a bonanza for smaller accounting firms looking to expand.

The possible death of the fourth-largest accounting firm also could reduce pressure for reforms, some experts worry, and leave the industry even more rife with conflicts of interest.

“If this industry gets down to just four [big] firms, that’s a problem,” said Lynn Turner, former chief accountant at the Securities and Exchange Commission. “Whenever you get that type of power in a small group, you don’t get the competition or policies that are best for the public.”

Andersen’s chances of survival narrowed dramatically Thursday, accounting experts said, after it was indicted by a federal grand jury in Houston on suspicion of obstruction of justice for shredding tons of Enron Corp. documents.

Andersen had tried to stave off the indictment in a letter to prosecutors Wednesday that called the criminal proceedings a potential death sentence because of the devastating effect on the firm’s reputation.

Accounting experts said Thursday that the indictment would almost certainly speed up the exodus of clients and employees that began after Andersen revealed in January that it had destroyed Enron-related documents. Such outflows quickly could cripple the firm. “At the end of the day, [Andersen] will be gone,” said Arthur Bowman, editor of Bowman’s Accounting Report. “The client losses so far are just a signal of what’s coming.”

Other companies are reaping the windfall. Smaller national and regional firms say they are scooping up many of Andersen’s smaller clients and collecting resumes from the troubled company’s employees.

“This is creating more opportunities for us,” said Mark Bagaason, managing partner for the Southern California practice of Grant Thornton. “We’re getting a lot of calls and [requests for proposals] from companies and resumes from Andersen people.”

Growth at second-tier companies probably has limits, however. The gap is huge between the smallest of the Big Five and the next-largest accounting firm, and most experts don’t expect to see any of the smaller firms stepping in to fill Andersen’s shoes any time soon.

“Our firm looked at that strategy at one time, but I don’t expect to see anything like that happening,” said Roger Peters, a managing partner at McGladrey & Pullen. “The General Motors of the world are never going to come to a firm like ours in the second tier, and we couldn’t service them anyway.”

The firms ranked sixth, seventh and eighth in the accounting world in terms of U.S. revenue--BDO Seidman, Grant Thornton and McGladrey & Pullen, respectively--concentrate on mid-size companies with revenue under $1billion. Combined, the three firms conducted just 800 SEC audits last year, compared with Andersen’s 2,407.

“We’re able to do some big companies, but we don’t have the troops” to do huge audits of multinational firms, said Scott M. Univer, general counsel for BDO Seidman, which counts Steelcase Inc. and Barnes & Noble Inc. among its clients. “We can’t put 500 auditors out in the field on a company at the same time.”

The complex and unique needs of the world’s largest firms can be handled by only accounting firms with the Big Five’s resources, agreed accounting expert Bowman.

“If Andersen suddenly implodes,” Bowman said, “a lot of clients will be trying to find auditors who understand their industries and their needs.”

Anticipating the potential chaos, the SEC, in an unusual move, said Thursday that it may allow Andersen’s corporate clients to file unaudited reports if the accounting firm goes out of business.

A more orderly demise, such as a sale of assets in Bankruptcy Court, would cause less disruption but still would be expensive, accounting experts warned.

“One implication ... is increased costs on the economy,” said Mark DeFond, a professor at USC’s Marshall School of Business. “How substantial those costs will be is another question, but it will definitely be more disruptive and costly for companies to switch firms.”

Andersen had hoped to avoid disruption through a merger, but talks with rivals Ernst & Young and Deloitte & Touche, a unit of Deloitte Touche Tohmatsu, broke off Wednesday.

Andersen has lost a steady stream of high-profile clients, including its largest, Merck & Co. Others, such as Oracle Corp., have publicly endorsed the firm and promised to stand by it.

It’s not clear how many other companies are preparing to leave. Fleetwood Enterprises Inc., the Riverside-based maker of recreational vehicles, said it is weighing its relationship with Andersen.

Other Southland-based Andersen clients, including Korn/Ferry International and Edison International, declined to comment.

Andersen’s troubles, which stemmed from its dual roles as auditor and consultant to Enron, may prompt other Big Five companies to distance their SEC work from their consulting activities, some accounting experts said.

But others fear Andersen’s demise would leave the remaining four firms even more entrenched against reforms that could prevent the kinds of conflicts of interest that led to Enron’s downfall.

“It makes me uneasy,” said Paul Volcker, former Federal Reserve Board chairman and head of a panel that Andersen asked to review its operations. Volcker said it’s possible that Andersen’s demise could reduce pressure on the remaining companies to change.

Others reject that assertion, saying the accounting industry is still likely to face change.

“Reforms would stem from the Enron collapse,” USC professor DeFond said, “and that isn’t going away.”

Times staff writer Kathy M. Kristof contributed to this report.