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Andersen Client Exodus Accelerates

March 16, 2002

CHICAGO (AP) _ The exodus of blue-chip clients from Arthur Andersen LLP accelerated Friday with four more Fortune 500 companies bolting, reflecting increased concern the end might be near for the now-indicted auditing giant.

Sara Lee Corp., Abbott Laboratories Inc., Northeast Utilities and Brunswick Corp. all severed decades-long relationships with Andersen as their auditor, and others also said they were considering firing the Chicago-based firm.

Combined, the four paid Andersen more than $15 million in auditing fees in 2001. But more than the lost revenue, their hasty departures are an ominous sign for a firm whose business appears to be in free fall.

Accounting industry experts said the stream of defections is likely to turn into a flood in coming days after Thursday’s criminal indictment of Andersen for shredding documents related to its audits of collapsed energy trader Enron.

``Chances are now much greater than before that Arthur Andersen as we know it will not exist,″ said Itzhak Sharav, an accounting professor at Columbia University. ``There is no great reason for clients to stay with them, assuming that sooner or later this indictment will spell the end of the firm.″

Trying to stem the client exodus, Andersen has held talks with other Big Five accounting firms in recent days about a possible sale of some or all of its assets. But talks have faltered over concerns about Andersen’s liabilities from the Enron case.

KPMG was still holding talks with Andersen on Friday, according to a person familiar with the matter who spoke on condition of anonymity. A spokesman for KPMG declined to comment.

Industry observer Arthur Bowman, editor of Atlanta-based Bowman’s Accounting Report, said an acquisition of Andersen by another member of the Big Five could happen as early as next week if daunting obstacles to a deal can be eliminated.

``Every one of them would like to get Andersen if the price is right, and the price has to include no extension of liability,″ he said.

Andersen spokesman Patrick Dorton declined to comment about merger talks or the latest loss of clients. ``We’re gratified that so many clients stay with the firm. People continue to work hard every day on the accounts of every single one of our clients,″ he said.

The mood inside headquarters was described as ``grim″ by Gail Scherquist, who works in human resources.

``We haven’t heard anything about a merger. We’ve just heard that talks are ongoing,″ said Scherquist, 34, as she emerged from the building Friday afternoon.

``It’s been a pretty tough week. At first it seemed like Monday was the worst day, and then every day after that has been more bad news,″ she said. ``There’s 5,300 people working here, and we didn’t do anything wrong.″

Andersen had provided auditing services for Sara Lee since 1965, Abbott since 1963, Northeast Utilities since 1977 and Brunswick since 1942.

All of the corporations either had decided to oust Andersen before the indictment or, in Abbott’s case, had made contingency plans that were approved Friday in an emergency board meeting.

Sara Lee chairman and CEO C. Steven McMillan, whose company’s headquarters are located two blocks from Andersen’s in downtown Chicago, said the decision became necessary ``once it became clear that Andersen’s viability as an audit firm was in great jeopardy.″ The $5 billion consumer goods firm, the largest of the latest clients to cut ties, paid Andersen $6.6 million in auditing fees last year. It said it had made no decision on a new auditor.

Abbott, based in North Chicago, made no comment about the Enron scandal or indictment and said it had not selected a new auditor. Chairman and CEO Miles White voiced ``high regard″ for Andersen’s professionalism.

Northeast Utilities Systems, based in Berlin, Conn., picked Deloitte & Touche to replace Andersen. The New England energy supplier said it began looking to replace Andersen months ago, calling the decision extremely difficult because it had received ``exemplary″ auditing service from Andersen but was concerned about its future.

Lake Forest, Ill.-based Brunswick hired Ernst & Young as its auditor.

Andersen, which had about 2,300 public audit clients last year, already had lost more than a half-dozen Fortune 500 clients this month. Petroleum refinery operator Valero Energy Corp. joined that fast-growing list Thursday, disclosing it had hired Ernst & Young.

The moves follow defections earlier this month by Delta Air Lines, FedEx Corp., Freddie Mac, Household International, Merck & Co. and SunTrust Banks.

According to Atlanta-based AuditorTrak, which monitors the industry, Andersen has lost 43 audit clients since the start of the year _ including 12 it has quit itself _ and gained just two. Most of the recent defections are not included in that total since they did not take immediate effect.

Other corporations are almost certain to follow as they file annual proxy statements and hold shareholder meetings. Smithfield Foods acknowledged after Thursday’s indictment that it was considering replacing Andersen. Waste Management, American Home Products Corp. and UAL Corp., parent of United Airlines, all said their relationship with Andersen is under review.

A federal grand jury indicted Andersen for shredding documents related to its auditing client Enron, which filed for bankruptcy in December.

``It’s difficult to imagine a CEO or chairman standing before shareholders endorsing an indicted CPA firm as auditor,″ said Bowman.

Andersen is the fourth-largest auditing firm, with $3.97 billion in U.S. revenue and $9.21 billion worldwide last year, according to Bowman. It ranked behind PricewaterhouseCoopers, Deloitte & Touche and Ernst & Young and ahead of KPMG in U.S. revenues. Worldwide, it ranked ahead of only Ernst & Young among the Big Five.

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AP Business Writer Seth Sutel contributed to this report.

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