R.I.P Andersen?

As the story of Andersen’s involvement with the collapse of the seventh largest company in the US unfolds, more and more auditors are asking the same question: is this the end of Andersen?

The sacking of David Duncan, the partner in Houston who is most heavily implicated in the disposal of Enron documents, is the latest in a series of events that has thrown the world of Andersen and chief Joe Berardino into turmoil.

Had Andersen been a public company, investors would have been crying for the head of Berardino long ago.

The Andersen chief has now been left to fight for the firm’s professional life, but his struggle suffered as it became clear he only had partial facts when he first appeared before a US congressional committee in December.

Making details available
The firm has been remarkably candid in revealing details as soon as they became known, and it is no surprise to learn it is using the expertise of an external crisis management consultancy as it battles to limit damage to its reputation.

That’s why the world knew very quickly that not only had David Duncan been sacked, but three other Enron partners were on ‘administrative leave’ and a further four senior partners in the Houston office had been relieved of their managerial responsibilities.

But as the admissions have moved from ‘an error of judgement’ through to wholesale destruction of documents, so the profession’s reaction has shifted from ‘but for the grace of god go us’ to one of increasing horror.

Publicly, senior figures in the profession are saying that Andersen is ‘a bloody good firm’. Privately, it’s another story, which is adding fuel to the rumours of an Andersen meltdown or merger with another Big Five firm.

Andersen considering its options
And even if Andersen doesn’t go wholesale to another firm, it is almost certain that partners and their staff will be considering their own positions.

One senior commentator said: ‘If I were head of audit at a Big Five firm, I would have already been on the phone to half a dozen of its partners.’

It is not as if Enron is an isolated controversy – prior to the current disaster, the firm paid $75m (£52m), without admitting liability, over its work at Waste Management Inc, and a further $110m (£77m) to settle a lawsuit concerning its audit of Sunbeam Corp.

It is also under fire for its role at Australian insurer HIH Insurance, which collapsed last year leaving behind liabilities of $2.5bn.

So how have the events in the US affected the firm, and its clients, in the UK?

Clients in the UK
Andersen has positioned itself very firmly as a global partnership, and as such it will not be able to keep the bad news and suspicions away from its client based over here. Last week Accountancy Age reported that only two of the firm’s seven FTSE-100 clients said they were ‘very happy’ with their auditor, with the rest refusing to comment, though an insider at one of the companies said they were ‘watching and keeping the situation under review’.

A spokesperson for the firm said it was keeping clients informed at every stage. ‘We are talking to them constantly, making sure they understand what is going on so there are no surprises,’ she said.

And it is understood that privately, Andersen has found its clients to be ‘very supportive’ of the firm in the UK. But it will take more than private support to ensure the continued existence of a firm that was once the fastest growing of the Big Five.

Legal action will hit all partners
Even if legal action were to be restricted to the US it could still hit partners around the world, though the firm will have ensured it operates as separate legal entities in jurisdictions outside the States. But to quote one informed commentator: ‘They will have to sink or swim together.’

So Andersen faces two major risks aside from any legal threats – the damage that is being done to its reputation, and the damage that will be done if clients, and more importantly its best people, start to walk out of the door.

Andersen is, of course, no stranger to damaged reputations.

Back in 1982, Arthur Andersen, as the firm was known until recently, was the auditor of Belfast-based car manufacturer De Lorean, which went under amid allegations of high-scale fraud.

Unfortunately for Andersen, the UK government had pumped £77m into the company and was not happy – the affair helped ensure Andersen missed out on lucrative government work for over a decade, at a time when its competitors were getting fat on the privatisation programme.

On this occasion the firm survived the damage to its reputation. But the De Lorean affair will be seen as small beer in comparison.

Any successful litigation will almost certainly exceed the firm’s insurance cover. Estimates put Andersen’s cover in the region of $500m – but Enron investors have lost $80bn.

There is a near precedent of a firm disappearing under a mountain of litigation. In 1995 Binder Hamlyn was told by the UK High Court it would have to pay record damages of £110m to US security firm ADT, a figure way in excess of its insurance cover.

This was later settled at £53m, saving its 150 partners from personal bankruptcy. But by then the firm had all but disappeared into one of the then Big Six firms.

Ironically, it was Andersen that had swallowed them up.

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