Who Goes Up if Andersen Goes Down?

PwC stands to win the bulk of AA's former clients. But some secondary firms may benefit as well.

Just when you thought it couldn’t get any worse for Arthur Andersen.

Late on Thursday, the Department of Justice (DOJ) charged the besieged accountancy with obstruction-of-justice. The charge stems from the firm’s apparent wholesale destruction of documents related to its audit of Enron Corp. Earlier in the day, Andersen had rejected a plea bargain agreement with the DOJ. The sticking point: Apparently, Andersen management was concerned that a guilty plea would jeopardize the company’s ability to submit audits to the Securities and Exchange Commission.

Not surprisingly, Andersen’s lawyers called the indictment “a gross abuse of government power.” Reportedly, the firm will seek a dismissal of the charge.

They’d better do it fast. Andersen has already lost a handful of its top twenty five clients, and three from its top ten (Merck, Enron, and Freddie Mac). This week alone, Federal Express, Kerr-McGee, and Household International dumped the firm. Yesterday, SouthTrust Corp. announced it too has decided to replace Andersen as the company’s accountant. And word is that management at International Paper, currently Andersen’s fourth largest account, is considering throwing over the auditor.

Obviously, a long, protracted court case will only speed the exodus of Andersen clients. Moreover, if the Chicago-based accountancy is convicted on the obstruction-of-justice charges, the company would probably have little choice but to seek Chapter 11 bankruptcy protection. The real question may then be: if Andersen does go bust, who stands to benefit?

The bulk of Andersen’s clients — particularly clients with international operations — would undoubtedly sign on with the remaining Big Four auditors (PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG, Ernst & Young). Indeed, Andersen’s recent troubles have presented the firm’s four main rivals with a poachers delight. But to date, it appears partners at those accountancies are not aggressively courting Andersen’s clients. “This is an opportunity for firms to win some business, yes,” says Arthur Bowman, who publishes Bowman’s Accounting Report. “But you have to do it without looking like a vulture.”

Industry watchers point out that Andersen has traditionally maintained a strong practice in the utilities and transportation sectors. That would seem to bode well for E&Y and Deloitte, since both firms have strong practices in those sectors. “It’s often about who has the perceived specialties,” explains Bowman. “Many managers want auditors who understand their industries.”

But in the early going, it appears that the biggest of the Big Five, PricewaterhouseCoopers, has gained the most from Andersen’s difficulties. Last week, for instance, PwC won the business of former Andersen client Merck. That was a huge pick up for PwC. The pharmaceuticals giant had been Andersen’s largest public client.

In addition, PwC has also signed up several other notable Andersen defectors. The list includes venture capital firm Harris & Harris and SunTrust Banks. SunTrust was a particularly painful loss for Andersen –the bank had been a client of the Chicago-based firm for sixty years.

What’s the Rush?

This is not to say the other Big Five members won’t win their share of large Andersen clients. Cases in point: last week, Delta Air Lines hired Deloitte Touche Tohmatsu after dumping Andersen. Likewise, Federal Express brought in Ernst & Young to replace Andersen. And on Wednesday, KPMG scooped up Riggs National Corp., another long-time Andersen client.

Interestingly, industry watchers say second-tier accounting firms like Grant Thornton and BDO Siedman stand to gain new clients from Andersen’s fall from grace. Afterall, they point out, Andersen has some 2,300 clients. If the company goes belly up — and does it fast — the other Big Five firms would not likely be able to handle the flood of new accounts.

One observer also notes that, in some eyes, the recent spate of financial scandals and corporate restatements has tainted all of the Big Five firms — and not just Arthur Andersen. That, in turn, may lead managers at some small and mid-sized companies to seek out small and mid-sized accounting firms. “I’ve talked to a number of local and regional firms,” says one industry watcher. “And they say they have picked up some of Andersen’s privately held clients.”

Of course, it’s possible that Andersen will survive its current predicament. But despite recent press reports, don’t expect anybody to buy Andersen any time soon. While DTT, E&Y, and KPMG have reportedly put out feelers about buying the Chicago-based firm, it’s not likely those initial inquiries will amount to much. As St. John University law professor Anthony Sabine told CNNfn: “If I’m a Deloitte Touche, if I’m a PricewaterhouseCoopers, I’m going to sit back and let them [Andersen] implode, collapse under their own weight and just cherry-pick off their best clients, their best talent.”

Certainly, you have to wonder why any accounting firm would be willing to buy Andersen’s assets at top dollar. What’s more, if Andersen does eventually apply for bankruptcy court protection, the accounting firm would be able to convert the dozens of lawsuits filed against it into bankruptcy claims. That might shield a potential acquirer from much of Andersen’s liabilities. “The other firms aren’t going to touch Andersen,” says Bowman flatly, “unless it goes into Chapter 11.

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