Arthur Andersen Catches a Break

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Aldo Cardoso

Did Arthur Andersen just get its call from the governor? Former CEO Joseph Berardino resigned last month convinced that the Justice Department's decision to indict the firm had been its death warrant; former Fed chief Paul Volcker, appointed earlier this year to oversee a restructuring effort, thought so as well. And the I-word has sparked a stampede of clients and overseas partners.

But Justice has apparently turned merciful. The Wall Street Journal reported Thursday that the government is willing to forgo the felony conviction and settle its Enron obstruction-of-justice case against Andersen out of court if the accounting firm admits that it illegally shredded documents; it's a deal Andersen seems likely to take. The news came as the firm tapped an acting CEO — Andersen Worldwide Board of Partners chairman Aldo Cardoso, whose primary job will be to sell off as many overseas affiliates as he can — and a new adviser, investment bank Gleacher Partners, to carry out Volcker's plans.

All of which seems to finally put the firm on the path toward the born-again Andersen that Volcker envisions — tightly focused on accounting and auditing (no more consulting), squeaky clean and conflict-of-interest free. The idea is to resell Andersen to clients as a purveyor of what the auditing business was supposed to provide all along — a Good Housekeeping seal of approval that investors could trust.

Now, if that were any way to make money, the Big Five accounting firms wouldn't be in the one-stop-shopping consulting/accounting ethical jungles they're in today. The Big Five firms last year earned some three-quarters of their fees from consulting. It's where the real money is; the auditors have become just a way for the consultants to get their foot in the door.

But in the post-Enron world understandability of earnings reports is all the rage. Companies like Disney are voluntarily handing their auditing and consulting businesses to different firms, and legislation to clamp down on the accounting business is on the tip of Washington's tongue. The new Wall Street scrutiny just might reinvigorate a market for boring bean counters in green eyeshades — and make it possible for a tightly focused company like the new Andersen to charge a premium for unassailability.

Of course, as it tries to walk the straight and narrow to redemption, Andersen is faced with a lot of assaults. Negotiations between Andersen and litigious Enron shareholders have reportedly set a settlement figure at $250 million; another $217 million is due for a civil fraud case in Arizona. There's another $200 million in outstanding loans made to Andersen's overseas partners and guaranteed by the firm; creditors say they'll call them in immediately if those partners go elsewhere. And although those firms will owe Andersen hefty financial penalties of 1.5 times last year's revenues for defecting, collecting would almost certainly mean another long legal battle.

One reason the Justice Department is talking deal could be that the pro-business, anti-regulation Bush Administration has an interest in seeing if a reborn, back-to-basics Andersen in the Volcker model could survive on integrity premiums. Certainly a new breed of cold-eyed auditor sought for its very scrutiny — and the investor confidence a passing grade would bring — would take some pressure off the SEC and other federal watchdogs whose responsibilities (and budgets) Bush would prefer not to increase.

But for Andersen, which is set to announce massive layoffs as early as next week and is still scraping together enough cash to fund its daily operations, much less its legal liabilities, the immediate challenge isn't testing the Volcker paradigm — it's hanging around long enough to even have a chance to try. For all the relief the governor's voice must have given Arthur Andersen Thursday, the phone could still have rung too late.