As Chicago-based Andersen fights for its corporate life in a Houston courtroom, the accounting giant has been hemorrhaging clients at a breathtaking rate, reinforcing serious questions about what, if anything, will be left to carry on, even if it wins its legal battle.
Since the scandal surrounding Enron Corp. exploded and Andersen was indicted on a federal obstruction-of-justice charge, auditing clients have been leaving in droves–nearly 600 in the past three months alone.
Although a full accounting of client losses is elusive, because not all companies are required to tell regulators when they change auditors or how much they pay them, a Tribune analysis of the most recent proxy statements from 575 companies that have announced a switch since March 1 reveals that Andersen has lost clients that paid it more than $1 billion in fees in those fiscal years.
The total losses for Andersen since the scandal erupted, of course, are even larger–that figure, for example, doesn’t include its firing in January by Enron, which paid Andersen and the former Andersen Consulting unit $52 million in auditing and other fees in 2000, the most recent data available.
For Andersen, which had U.S. revenues of roughly $4 billion last year, the vast client losses–along with the prospect that a felony conviction could prohibit the firm from auditing publicly traded companies–have accelerated a rapid disintegration. The company has been selling off chunks of its operations seemingly every day, and thousands of employees and partners have left the firm.
The company has said it intends to survive in a smaller form, but a range of experts–from academics and accounting industry observers to former Federal Reserve Chairman Paul Volcker, who was drafted to try to rescue Andersen–have essentially written it off as a viable player in the accounting and consulting industry.
“All the audit bags are packed,” said Allan Koltin, the head of Chicago-based Practice Development Institute Inc., which offers consulting advice to accounting firms.
“There won’t be anything left soon. Even people in leadership positions at Andersen are now firming up where they are going to go when the lights finally go out.”
The disintegration of Andersen leaves the other Big Five accounting firms to pick up the pieces, and its roster of marquee clients. Of the client losses in the past three months, more than 530 have disclosed who their replacement auditor will be. The big winners have been Ernst & Young, which has won 156 clients that billed Andersen more than $245 million in their most recent fiscal years, and Deloitte & Touche, with 112 clients and nearly $300 million in fees.
Chicago-area clients leave
And despite high-profile support for Andersen employees from Mayor Richard Daley and Rev. Jesse Jackson, Chicago-area companies also have been replacing Andersen as their auditor.
Of the 22 companies among Chicago’s Top 100 in 2001 that employed Andersen to monitor their books that year, all but Chicago-based Corus Bancshares Inc. have since switched. Those companies alone accounted for $110.7 million in business, according to their most recent proxy filings with the Securities and Exchange Commission.
In all, more than 30 Chicago-area companies have announced they have replaced Andersen since March 1, with Deloitte & Touche collecting 15 clients.
The size and scope of the losses run the gamut of Corporate America, from blue chips–including Dow industrials component International Paper and Chicago-area giant Abbott Laboratories–to microcaps.
It’s impossible to calculate precisely how much business Andersen would have had from the lost clients this year–fees can vary widely from year to year, especially in the lucrative consulting area.
The fees paid by the companies ranged from $44.4 million by Northwestern Corp. of Sioux Falls, S.D., a regional utility and network provider, which included more than $39 million related to the implementation of a customer-service software system, to $35,126 from Portland, Ore.-based AVI Biopharma Inc., all but $8,500 for auditing services.
Consulting fees draw scrutiny
The implosion of Enron, and the surrounding furor over Andersen’s role, has put intense scrutiny on the importance of consulting and other non-audit fees to the nation’s accounting giants, and whether those fees compromise auditor integrity and independence.
Among the former Andersen clients who revealed their fees, roughly 70 percent–or more than $700 million–went for “other” fees, including consulting and financial information system design.
But Andersen’s losses, of course, are not limited to the client side.
Since the company announced in early April that it was laying off 7,000 of its 26,000 U.S. employees, the remainder of its American business has dwindled rapidly, much like its overseas network, where more than half of Andersen’s 84 international affiliates have decided to merge with rival firms.
For its part, Andersen has vigorously defended itself against the government indictment, and argued since it began selling off business units in April that it is reducing the scope and scale of its U.S. practice to align staffing and costs with its reduced revenue base.
“Andersen will clearly be a much smaller and different firm as a result of what the Justice Department did,” spokesman Patrick Dorton said.
Overall, at least 500 Andersen partners and almost 9,000 employees in the United States are tentatively set to go to rival firms as a result of the deals the company has struck over the past six weeks.
KPMG Consulting is set to gobble up 3,200 partners and employees in Andersen’s U.S. consulting partnerships, Deloitte & Touche has taken 2,000 tax employees, including 200 partners, and Ernst & Young has struck deals with more than 16 Andersen U.S. offices, for close to 1,500 partners and staff in a wide range of businesses, from auditing to mergers and acquisitions specialists. RHI is also taking about 50 partners and 710 employees to start a new business risk-consulting arm, tentatively being called Protiviti.
Local firms hire staffers
Smaller, local and regional accountants, such as Gleeson, Sklar, Sawyers & Cumpata, have been chipping away at Andersen’s core group of employees, according to Art Bowman, editor of the industry newsletter Bowman’s Accounting Report. He has spoken to more than 200 accountants in various recent meetings and estimates that 10 percent to 20 percent have picked up Andersen staff.
Even though the last of its main rivals, PricewaterhouseCoopers, may have come late to the party–wary of potential legal and financial liabilities faced by Andersen as a result of Enron’s collapse–it is now bidding to snap up large parts of the remaining business, primarily its mid-market audit and financial-services practice.
The final destination of the mid-market practice, which deals with small and medium-size privately owned firms, is unlikely to be as clear-cut as previous deals. A preliminary agreement with Chicago-based Grant Thornton for the entire national practice was stymied by Chicago-based rival BDO Seidman when it appealed directly to partners, offering a viable alternative.
With PwC, the nation’s largest accounting firm, now also in the running, it is unlikely that a deal for the entire U.S. mid-market business will be struck, Koltin said, and, instead, separate practices will spin off in different directions.
For several months, Koltin has been suggesting that Andersen was doomed, particularly after the March decision by the Justice Department to indict the firm on a charge of obstruction of justice from the destruction of documents relating to its audits of bankrupt energy firm Enron.
“I used to think [Andersen] could carve out a specialty area or niche, but now I don’t think so,” Bowman said. “I don’t know what they would have of real value to add to their clients. And if they’ve gotten rid of key offices and people, it’s hard to call themselves a national firm or even regional.”
