Breaking Up Is Hard to Do

Will Andersen be acquired? Possibly.

Several press reports yesterday indicated that Andersen senior management was trying to broker a deal with rival Deloitte Touche Tohmatsu. But given the lawsuits facing Andersen, not to mention a possible indictment from the SEC, selling the company may not be so easy. Indeed, some observers wonder if it wouldn't make more sense for possible suitors to wait to see if Andersen is forced into bankruptcy. At that point, another Big Five firm could acquire Andersen's assets on the cheap.

If the embattled Big Five accountancy is to remain independent, however, it must divide its auditing and consulting practices. This according to Paul Volcker, the former Federal Reserve chairman who was brought in by Andersen to determine the future of the firm.

"I am asking them to sever relationships with the consulting side," Volcker told Reuters and other reporters. "There would be no financial movement, no financial incentives to shift business from one to the other, no revenue sharing, no profit sharing. No nothing."

Volcker recommended that services like strategic planning, legal work, executive recruitment, and some areas of "aggressive" tax planning unrelated to auditing must be placed into partnerships that are separate from Andersen's auditing business.

Whether Andersen's management goes along with Volcker's recommendations remains to be seen. A substantial restructuring would likely threaten the businesses of some very powerful partners—partners who could leave and take their clients with them. But Volcker insists his suggestions will be carried out. "I wouldn't call them recommendations," said Volcker, who heads a special investigative panel at Andersen. "We have the power of decision."

"All the cards are on the table," he added. "They are all face up. Are we going to have an indictment, are we going to have a merger, or are we going to have reform?"

Volcker and Andersen better do something fast. The reeling accounting firm lost another major client on Monday. FedEx Corp. announced it hired Ernst & Young to replace Andersen as the company's independent auditors. (To see a list of Andersen's top 10 public clients—and those that have dumped the firm—click here.)

Ernst & Young will officially take over when Andersen completes its review of the fiscal quarter ended February 28, 2002. "The appointment of Ernst & Young was made after careful consideration by the Board of Directors, its Audit Committee and management of the company, and concludes an extensive evaluation process," said FedEx management in a statement. "The decision to change auditors was not the result of any disagreement between the company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure."

That seems to be the standard disclaimer these days.

SEC Probing WorldCom, Qwest
The Securities and Exchange Commission Monday asked WorldCom and Qwest Communications for information as part of its investigations of the two telecom giants.

WorldCom management said the request addresses the following areas:

• WorldCom's September 2000 pretax charge associated with wholesale accounts.

• Disputed customer bills and sales commissions.

• The company's accounting policies for goodwill and implementation of FAS 142.

• WorldCom organizational charts and personnel records for former employee.

• Loans by WorldCom to officers or directors.

• Integration of WorldCom's and MCI's computer systems.

• WorldCom's tracking and review of analysts' earnings estimates.

• Federal or state agency investigations of WorldCom.

Management at WorldCom, which said it plans to cooperate with the commission, added that it believes all of its policies, practices, and procedures comply with all accounting standards and laws.

Meanwhile, Qwest reported that the SEC is interested in its accounting policies, practices, and procedures for 2000 and 2001, including revenue recognition and accounting treatment of:

• Sales of optical capacity assets, particularly sales to customers from which the company agreed to purchase optical capacity.

• The sale of equipment by Qwest to customers from which Qwest bought Internet services or to which Qwest contributed equity financing, including equipment sales to KMC and Calpoint.

• Qwest Dex, particularly changes in the production schedules and lives of some directories.

"The SEC informed Qwest that this informal inquiry is not an indication that it or its staff believes any violation of law has occurred, nor should Qwest consider the inquiry an adverse reflection on any entity or security," noted Qwest management in a statement.

The company's management added that it believes "its accounting policies, practices and procedures for all periods, including 2000 and 2001, comply with all applicable requirements. There can be no assurance that the SEC will agree."

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