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Andersen Affiliates Bolt for Rivals

March 21, 2002

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Andersen’s overseas affiliates have begun jumping ship as the once-venerable accounting firm struggles to survive its role in Enron Corp.’s collapse.

The company’s Hong Kong and Chinese affiliates said Thursday they would merge with PricewaterhouseCoopers. Hours later, Andersen’s Russian partners announced a deal with Ernst & Young.

The defections came as Andersen Worldwide, the umbrella body for Andersen’s global entities, continued talks with yet another Big Five accounting rival _ KPMG _ about combining international operations.

Andersen, which has been seeking to sell the overseas affiliates after failing to unload its troubled U.S. operations, voiced regret at the moves.

``Their decision will have no impact on the continuing effort to substantially complete transactions between Andersen Worldwide’s non-U.S. member firms and KPMG,″ the company said in London.

A KPMG spokesman said his firm was ``very positive″ about the way negotiations with Andersen are going but declined to say when a deal might be announced.

``The process continues,″ said Gavin Houlgate in London. ``These things take time.″

Andersen affiliates have been discussing combinations with competitors since the American arm of the Andersen Worldwide group was indicted last week for alleged obstruction of justice for shredding documents related to longtime client Enron.

Under Andersen’s structure, the affiliates outside the United States are not involved in the Enron scandal, although the damage to the brand name has been widely felt.

Arthur Andersen LLP, as the U.S. arm of Andersen is known, pleaded innocent Wednesday and a trial is scheduled for May 6.

But the increasing loss of clients, and now the splintering of its overseas operations, has many wondering how much of Andersen will be left by the time a trial verdict is reached.

Accounting industry expert Robert Bricker said the international defections won’t help Andersen, but their losses aren’t devastating because they have no direct impact on U.S. audit revenues.

``So far the rate of client loss is pretty much a trickle,″ said Bricker, a professor at the Weatherhead School of Management at Case Western Reserve University. ``If they can make it through proxy season, which lasts about another six weeks, and then make it through the trial, then maybe they have a shot″ to survive.

Like many observers, he still considers that a long shot. But if it does survive, he said, the reforms enacted by overseer Paul Volcker _ particularly separating auditing from consulting _ have the potential to make it a ``model auditor″ for clients looking to avoid conflict-of-interest problems.

Andersen has lost at least 58 public companies as clients since Jan. 1 and gained only two, according to Auditor-Trak, a service of Atlanta-based Strafford Publications Inc. Joining the exodus Thursday was San Diego-based Iomega Corp., which plans to switch to Ernst & Young. Andersen had 2,300 publicly-traded clients last year.

Andersen has held talks with rivals about selling part of its U.S. operations, but negotiations have been hindered by concerns about Andersen’s legal liabilities.

Chicago-based BDO Seidman, the sixth-largest U.S. accounting firm, continues to talk with Andersen. BDO Seidman counsel Scott Univer said: ``The status is unchanged. Hopefully we’ll have more for you early next week.″

Earlier this week, Andersen’s Asia-Pacific affiliates had unanimously supported a global combination with KPMG, excluding Arthur Andersen LLP, saying they would pursue it even if similar talks with KPMG in Europe fell through.

But the Andersen accountants in Hong Kong and China decided it would be better to go off on their own with PricewaterhouseCoopers, which is slightly larger in Hong Kong, said Yvonne Chan, marketing manager of Andersen in that city.

No layoffs are planned, Chan said, as the Hong Kong and China firms create a 6,000-person operation in Hong Kong, a top regional finance center, and China, which is expected to grow and provide opportunities for Western businesses as it opens its economy as part of the WTO.

The Andersen name will vanish in Hong Kong and China, Chan said, adding that ``some colleagues are pretty emotional″ about seeing it go.

Andersen, which has about 900 employees in Hong Kong and 1,400 in mainland China, will be joined with PricewaterhouseCoopers in a deal that simply combines their operations into one with no money changing hands, Chan said.

The announcement involving Andersen’s operations in Russia means the firm’s name will disappear from that country, too. Ernst & Young Ltd and Arthur Andersen ZAO, the Russian practices of the two accounting firms, disclosed their intention to combine practices ``on an expedited time track.″

``Ernst & Young’s firm culture is much like our own, and its international support network offers our clients the essential support they need,″ said Hans Jochum Horn, general director of Arthur Andersen ZAO.


AP Business Writer Dirk Beveridge in Hong Kong contributed to this report

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