Dissension is growing within Andersen, and many of the firm’s top officials worry that there may not be much left of the accounting giant by May, when it is scheduled to face a criminal trial.
At the same time, others among Andersen’s 1,700 partners wonder how much worse it can get, with the firm already having lost at least 150 audit clients, nearly a dozen overseas affiliates, part of its lucrative U.S. tax practice and more than 7,000 of its 26,000 U.S. employees.
They want Andersen to aggressively fight the obstruction-of-justice charge and civil lawsuits stemming from its role in the collapse of Enron Corp.
The division within Chicago-based Andersen is evidence of how difficult it has become for executives and advisers to craft and execute business, legal and public relations strategies as the firm reels from the Enron scandal. Firm officials are voicing their differences even as negotiations continue with the Justice Department that could settle the potentially fatal criminal charge against Andersen.
Pressure on Andersen to reach an agreement increased Tuesday, when David Duncan, the Andersen partner who oversaw the firm’s Enron work, pleaded guilty to obstruction of justice for destroying audit documents. Duncan agreed to testify for the government against his former employer.
Even as Andersen lawyers talk with prosecutors, the firm’s internal unrest has become an obstacle, those close to the firm and the case acknowledge.
“Can the firm survive until the trial in May?” said one source knowledgeable about the settlement talks. “The truth is, Duncan’s plea changes the overall status of everything we had been discussing.”
With Duncan’s testimony secured, it remains unclear what would motivate prosecutors to settle with Andersen for less than a guilty plea. Such a conviction would automatically prohibit the once-legendary firm from auditing books of publicly traded U.S. companies. Officials at the Securities and Exchange Commission, however, have expressed a willingness to consider making an exception if Andersen strikes a plea deal with prosecutors.
Yet some in Andersen see no value in settling the criminal case and instead want to go to trial. The trial is scheduled to begin May 6 in Houston, where Enron was based.
“Some partners want to go on regardless of Duncan,” said the source familiar with the case. “The partners think they have nothing left to lose at a trial.”
Said another former employee, who recently left Andersen: “The trial is three weeks away. I don’t know how much of the firm will be left by then.”
The former employee, who spoke on condition of anonymity, said some partners still say, “I didn’t shred documents.” As a result, they are unwilling for the firm as a whole to plead guilty for actions that they say were limited to Duncan and others in the Houston office.
Federal prosecutors have alleged that Andersen’s destruction of Enron documents was a coordinated effort involving top firm officials in Chicago as well as partners and high-ranking employees as far away as London and Portland, Ore.
Meanwhile on Thursday, there was fresh evidence of the confusion swirling within Andersen.
It was disclosed that an Andersen partner had written a letter to an audit client, a North Dakota bank holding company, saying the accounting firm no longer could continue its work. The partner, Dale J. Kent, told Bismarck-based BNCCorp Inc. that it couldn’t guarantee that it could finish its work for the company because of Enron fallout.
“Given the uncertainties in our practice, it is not in our or your interests to proceed as your auditors if there is a possibility we cannot complete what we started,” Kent said.
Kent wrote the letter, citing an SEC rule requiring Andersen to assert “that we have the appropriate continuity and skills available to complete [clients’] work.”
Andersen officials in Chicago said Kent had made a mistake.
“The partner who authored the letter made a faulty judgment about the resources available to complete the audit work,” said C.E. Andrews, managing partner for the U.S. audit practice. “Arthur Andersen, at the time this letter was sent and today, has all the necessary resources to serve this client and complete all of our work.”
Kent could not be reached for comment.
Some within the firm are increasingly looking at the option of bankruptcy, firm sources said, though Andersen officials continued to say this was not an option.
“A deal with Justice and bankruptcy are not mutually exclusive,” said Richard Measelle, a former Andersen CEO.
He said partners could look at bankruptcy as a way for the firm to reorganize and survive as a smaller organization focused solely on auditing, not consulting.
But Andersen spokesman Patrick Dorton said: “We have no intention to pursue that course.”
Andersen’s U.S. operation is a limited liability partnership. Such partnerships are established so plaintiffs, like those suing Andersen, cannot seize partners’ personal assets, said Marcus Cole, a visiting professor at Northwestern University Law School.
There would be little for the plaintiffs to claim if Andersen went bankrupt, he said.
“With a professional partnership like this, the assets of the firm are walking and breathing,” Cole said. “The value of the firm rests in the human capital of the firm.”
Douglas Baird, a professor at the University of Chicago Law School, said the youngest Andersen partners have the most to lose if the firm disbands.
“When you are made a partner, typically the firm will lend you money to buy your share of the partnership,” Baird said. “If you are a young partner at Andersen, the partnership you bought is worth less, but you still have to pay the money back.”
Also Thursday, Chicago Mayor Richard Daley urged area firms to hire the 1,200 local Andersen workers laid off Monday.
“These people have families, mortgages, car payments and tuition bills, just like the rest of us,” Daley said. “We want to keep these talented employees in Chicago.”
