This week has witnessed the potential beginning of the end of what is known as the Big Five, because accountancy firm Andersen may not be with us for very much longer in its current form.
It has been revealed that the embattled firm has, for the past couple of weeks, been in negotiations in an attempt to sell itself off to fierce rival Deloitte Touche Tohmatsu.
According to initial reports from the US, talks between the two firms have been ongoing since the beginning of the month to put together a deal which could create the second largest firm in the world, with fee income in the region of £1,400m in the UK alone.
Andersen clients, such as Airtours which last month voted to retain the firm as its auditor, could therefore find themselves dealing with a much larger accountancy firm. Although the details have so far not fully emerged, and although no deal has yet been concluded – if indeed it ever will be – advanced talks began in earnest last week.
At the same time, under-pressure Andersen learned it could be facing a potential indictment on obstruction of justice charges in the Enron investigation. At this stage it is unclear whether the talks are for the firms to merge globally or just in the US. If it is the latter, the Andersen UK business will have to arrange its own future.
The firm is now talking to prosecutors to see if a resolution of the criminal case it faces over the Enron debacle can be reached before an indictment is made public.
The exact terms of the potential deal with Deloittes are still unclear, and it is understood no decision has yet been reached on whether Andersen would be sold as a whole or in pieces. However, the Andersen name, only changed in 2001 from Arthur Andersen at a cost of millions, is likely to disappear from the accounting industry if and when the deal is done.
Despite public protests from the firm, regarding its perceived image, and the fact it can repair any damage it may have suffered, privately, a number of Andersen people fear its image – following the Enron affair – is irreparable and that the only way to progress is to rid itself of its brand altogether.
If a deal is done, there will be no more Big Five, just four years after we mourned the loss of the Big Six, when Coopers & Lybrand and Price Waterhouse merged.
Instead a Big Four would emerge, and although this may not be a surprise to many, as insiders have been predicting such a situation for quite some time, it is a scenario that would create all sorts of possibilities and complications.
Internally, would there be any duplication of partners and a need to trim people off the payroll? One would assume the official line would be that this is not the case, but it wouldn’t be a big surprise to see small numbers at a time being ushered out of the door, as has been seen in previous deals.
One also assumes, if the deal went ahead, Deloittes would insist on the Enron affair being ring-fenced, so it was not caught up in any future legal actions, but leaving the way clear for the entity formerly known as Andersen to trade under its new name – in the same way Coopers did amid the Barings turmoil as it merged with Price Waterhouse.
The talks between the two are been taking place in New York, led by the firms’ chief executives, Joe Berardino from Andersen, a now increasingly powerful James Copeland from Deloittes, and a handful of senior partners.
One would assume that if the merger took place, Deloittes would really hold the aces as it would effectively be bailing Andersen out of a hole.
Andersen has gone on record repeatedly suggesting it is considering its options to enable it to continue to serve its clients and promote the career opportunities of its people.
A US spokesman for Andersen says: ‘We are committed to making changes to our business that will restore the public’s trust, enhance the quality and independence of our audit practice, and allow all of our practices to thrive.
Whether the firm feels the only way to restore the faith is to take the drastic option of disappearing as a brand – the firm has never merged before, and has in the past spoken of itself as not being a good potential partner because of its unique culture – only time will tell.
But for now, the firms are refusing to comment on what they say is speculation, however informed it may be.
Additionally, with rumours abounding of potential defections from Andersen both internally and from audit clients, now the emergence of the talks has occurred, both parties will want a conclusion sooner rather than later.
They are not the only ones. FDs and audit committees at Andersen’s audit clients – they have lost 30 in the US already this year – will also want a rapid conclusion, as many of them may be spared having to make a decision on where to take their business.
On the flip side, big business, particularly the FTSE-250, is not likely to be happy to see competition for its work once again drop, and then there is the issue of whether four firms could provide the complete range of services required. There is also the issue of what the SEC and European Commission would make of the competition aspects.
But what is for sure, the two firms recently agreed on one important issue. Andersen says it will no longer provide outsourced internal audit, an issue which received the complete backing of Deloittes as it was in the process of spinning-off its consulting arm.
One suspects we will soon find out whether they agree on a raft of other issues and whether that is enough to make them believe a happy marriage can be created.
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