Defections sting Arthur Andersen
CHICAGO -- Blue-chip corporations have joined the increasing exodus of clients from Arthur Andersen LLP, including Delta Air Lines on Thursday, intensifying questions about whether the accounting giant can survive the Enron scandal.
Delta's firing of Andersen as its auditor after 53 years came a day after Freddie Mac took the same action. Including recent defections by Merck Inc. and SunTrust Banks, Andersen is known to have lost about three dozen public companies as auditing clients this year.
That's just a small percentage of its total U.S. public audit clients -- 2,311 as of Aug. 31. But experts say the quickening pace of defections and the size and influence of companies lost add up to potentially fatal consequences for Andersen stemming from its role as chief auditor for the collapsed Houston energy trader.
"Normally you gain some clients and lose some at this time of year," said Itzhak Sharav, an accounting professor at Columbia University. "But what you have now is a one-way street. It's very hard for them to get other clients to replace the ones that defect.
"At least in the minds of many, it's a sinking ship."
The extent of the sudden losses appears to be unprecedented among Big Five accounting firms, Sharav said, with more companies expected to dump Andersen in the next few weeks in annual regulatory filings and at shareholder meetings.
Andersen spokesman Patrick Dorton acknowledged that "a few" companies have severed ties because of "concerns about the negative publicity," but played down the effect.
"We certainly regret the loss of any one of these small number of clients," he said. "But we are gratified that the vast majority of Andersen's more than 100,000 clients around the world remain with the firm."
Andersen, which admitted that its employees shredded Enron-related documents, is under investigation by Congress, the Securities and Exchange Commission and the Justice Department.
The company either was dismissed or resigned as auditor of 31 public companies from Jan. 1 through Wednesday, according to AuditorTrak, an Atlanta service that compiles auditor changes. That does not include Delta, Freddie Mac, Merck -- whose decision awaits formal approval by shareholders -- private organizations or any dismissal that takes effect in the future. It gained just two new public auditor clients.
The other four biggest U.S. accounting firms combined have 39 losses in 2002. Their total of new clients was not available.
Andersen had 23 losses at the same time a year ago, 14 in 2000 and 16 in 1999.
"Until two or three weeks ago, their client losses were comparable to last year at the same time. You didn't see an Enron effect," said AuditorTrak's executive editor, Jon McKenna. "That's changed. Now they're starting to lose some of their blue chippers."
Twenty-one of Andersen's losses were firings and 10 came when the Chicago firm itself dropped clients, actions typically taken for cost and other reasons.
Lost fees from the five departed blue-chip clients -- Merck, Freddie Mac, Delta, SunTrust and Enron, which fired Andersen in January -- amount to between $75-million and $100-million based on 2001 totals, according to industry analyst Arthur Bowman.
"Since we're talking about a multibillion-dollar firm, that doesn't appear to be a great deal, except that these are premier clients who influence other clients," said Bowman, editor of Bowman's Accounting Report in Atlanta. "These kinds of events have a deeper impact than appears on the surface."
In a sign of potential future defections, Bowman said three other large Andersen clients -- Georgia Pacific, FedEx and Southern Baptist Convention -- all have invited other accounting firms to submit proposals.
Delta is retaining Andersen to perform some tax and other consulting services. It did not comment on what role the Enron scandal had played in its decision to hire Deloitte & Touche as its auditor.
University of Toronto accounting professor Ramy Elitzur said Andersen is being treated as the industry's pariah despite its stellar past reputation and the fact that other top firms also have been involved in cases of negligence.
"They are in dire straits," he said. "Probably the only option at this point is to merge with another firm that will salvage them."
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