Global Policy Forum

by Jonathan D. Glater

If Arthur Andersen is bought by another of the Big Five accounting firms, the profession's best chance for reform could be fatally undermined, accountants say.

Because Andersen has been under pressure to restructure and change basic practices after signing off on inaccurate financial reports by the Enron Corporation (news/quote), many in the profession expected it to be a leader in reform efforts. But a merger with Deloitte & Touche Tohmatsu, now under discussion, would probably eliminate much of that pressure and as a result, lessen demands for other firms to change their practices.

There would also be less competition among accountants. That may mean less competitiveness over prices, some analysts warn, and perhaps more opportunities for collusion by companies and their accountants, the kinds of opportunities that allowed Enron to fail.

Experts say that reducing the Big Five to the Big Four would hurt the ability of many corporations to pick their auditors. "It obviously reduces the choices, that's a given," said Arthur W. Bowman, editor of Bowman's Accounting Report. "But it actually reduces them further than people acknowledge, because even though these are giant firms with billions of dollars in revenue, they are not equally competent in every industry."

Andersen, for example, is known for its depth in transportation and energy, Mr. Bowman said. An Andersen merger with Deloitte makes sense, he said, because even thought it is the second-largest firm over all, Deloitte's accounting and audit practices are smaller than those of the other three firms — Ernst & Young, PricewaterhouseCoopers, and KPMG. "Deloitte is the most natural fit," he said. Andersen has a larger accounting practice.

Deloitte is under pressure to build its accounting and auditing practices because it plans to separate them from its Deloitte Consulting unit. Critics have attacked the industry for having a conflict in selling consulting services to companies that they audit. Auditors are less likely to stand up to clients about questionable accounting for fear of losing their consulting business, critics say.

Andersen has already created a special oversight board with broad powers, and has asked a former Federal Reserve chairman, Paul A. Volcker, to lead it. It is not clear what Mr. Volcker's role would be if Andersen becomes part of Deloitte. But Deloitte would be unlikely to agree to be bound by his recommendations, as Andersen has. If a Deloitte-Andersen merger heads off restrictions on what other services auditors can sell, most accountants will be relieved. vIf Andersen does not survive to change itself, it is less likely that other firms will be forced to make changes in how they do business, a former Andersen partner warned. Until several years ago, the former partner added, Andersen was in the vanguard of the profession, and advancing the efforts to restore public confidence in audits would have given it a chance to reclaim that role. "Arthur Andersen was the firm that was the innovator and the reformer that led the whole profession," the former partner said. "That's not been true for the last 10 years, but it was true for the 50 years before."

Andersen was also known for its willingness to invest in educating and training accountants, Mr. Bowman said. "One of the reasons Andersen has never done a major merger is because it has a very unique culture," he said.

If a merger means that training will be lost, he said, the profession will have lost something valuable. It is unlikely that another accounting firm will be able to make the jump to Big Five status, accountants said. The gap between the five largest firms, which have a virtual lock on auditing the largest corporations, and the next tier is wide. Arthur Andersen, the smallest of the five, had 85,000 employees and worldwide revenue of $9.3 billion in the fiscal year ended Aug. 31. BDO Seidman, which claims the No. 6 slot, had 22,000 employees and worldwide revenue of $2.2 billion last year.

Still, some smaller accounting firms have begun poaching the smaller publicly traded clients of the Big Five, said Kenneth A. Lefkowitz, a chairman of the mergers and acquisitions practice group at the law firm of Hughes Hubbard & Reed in New York. "Clients are talking about interviewing those firms that two or three yeas ago, they might not have considered," he said.

Unlike law firms, accounting firms can work for companies on both sides of a deal, Mr. Lefkowitz said. "Company A acquires company B, and they're both represented by Arthur Andersen. What ultimately happens in that scenario is you do a `Chinese wall,' " he said. Each company uses certain Andersen employees who do not work with or discuss confidential client information with the Andersen staff working for the other company, he said. "It's really not going to be an issue."

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