As client defections continue at the Andersen accounting firm in the aftermath of the bankruptcy of longtime client Enron Corp., a rift has appeared between Andersen and its Big Five rivals.
On Monday, venture capital firm Harris & Harris Group Inc. became the latest client to sever ties with Andersen. Meanwhile, the other four of the nation’s Big Five accounting firms have hired a prominent lobbying practice to influence legislators in the wake of the Enron crisis–pointedly excluding Andersen from their new coalition.
Apparently concerned by Andersen’s decision to appoint former Federal Reserve Board Chairman Paul Volcker to enact sweeping reforms to its business practices, the other big accounting firms appear determined to avoid Andersen’s woes and the major steps observers say are necessary to rehabilitate the bruised firm’s image.
Vin Weber, senior partner of the lobbying firm Clark & Weinstock, the firm hired by Andersen’s Big Five rivals, said the other firms face different problems than Andersen and are worried that legislators will overreact to the Enron crisis and hobble the accounting industry with restrictive regulations.
“The problem with Andersen is that they are in such a difficult position and such a different position than the rest of the profession that it is hard to know how to deal with them,” Weber said. “What exactly is Andersen capable of saying about a public policy question?”
The coalition that retained Weber’s firm is made up of PricewaterhouseCoopers LLP, KPMG LLP, Ernst & Young LLP, Deloitte & Touche and the accounting industry’s largest trade association, the American Institute of Certified Public Accountants.
“For now, given Andersen’s different position, we will separately pursue our long-term policy changes,” said Geoffrey Pickard, vice president of communication for the institute. “They are not being kicked out of the institute in any way, shape or form.”
How split occurred
One industry observer familiar with the split gave this account of the events leading to the exclusion of Andersen from the coalition:
“The other firms’ attitude and view of Andersen began to change dramatically with the announcement of Paul Volcker’s role and the set of reforms announced by [Andersen Chief Executive Joe Berardino] in early February,” the source said. “The other firms want some distance between those reforms and some of the more tinkering things they are willing to do.
“It culminated on Wednesday of last week, when Volcker named other distinguished individuals to the oversight board. Andersen was notified it would not be welcome in this lobbying group literally three hours after Volcker made his announcement.”
Andersen spokesman Patrick Dorton, meanwhile, said the firm remains committed to “fundamentally change our audit practice.” He added: “Regardless of the circumstances, Andersen will continue to work on an agenda of setting new standards for audit quality.”
Andersen has already announced a limited set of reforms, for example saying it would no longer provide in-house auditing services for the publicly traded businesses it audits. Volcker said Wednesday that his focus would be on maintaining the firm’s audit quality and he would look hard at any business practice that may hinder the integrity of the process.
Response to lawmakers
The lobbying campaign by Andersen’s rivals appears to be a response to the increasingly harsh tone of lawmakers, who have become far more critical of the relationships between the Big Five accounting firms and the companies they serve.
Some legislators, for example, have proposed that companies be required to change auditors every five years. That, Weber said, is the kind of issue on which the members of the coalition may try to influence lawmakers.
Some industry observers say the accounting industry needs to reform itself, but perhaps without national legislation.
Roman Weil, professor of accounting at the University of Chicago Graduate School of Business, favors the idea of changing auditors every five years. But he thinks the industry should voluntarily adopt that as a principle, rather than have the federal government impose it with legislation. “I don’t think we need a law,” Weil said.
For Andersen, the most pressing issue may be the departures of some of its clients. The Chicago-based accountant audits more than 2,300 publicly traded companies, with client losses trickling out steadily since Enron filed for bankruptcy Dec. 2.
Andersen was dismissed by 16 companies and resigned as auditor in 10 other cases, according to Auditor Trak, an Atlanta-based accounting industry database. That is substantially more than any of its rivals but still relatively few in comparison to the firm’s $4.3 billion in annual revenue.
Auditor Trak’s list of 26 clients that no longer employ Andersen’s auditing services includes SunTrust Banks Inc., which recently ended a 60-year relationship with the accounting firm and instead hired rival PricewaterhouseCoopers to audit the bank’s books. The figures do not include Harris & Harris Group’s decision Monday or Friday’s announcement by pharmaceuticals giant Merck & Co. that it would no longer use Andersen.
Andersen contends that much of the turnover can be traced to ordinary changes in the accounting profession, which typically result in a 5 percent shift in business annually. “We are gratified that virtually all of Andersen’s more than 100,000 global clients remain with the firm,” Dorton said.
