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Andersen in DOJ settlement
Accounting firm could reach resolution with agency officials this week; talks to rival Deloitte.
March 11, 2002: 7:29 PM EST

NEW YORK (CNN/Money) - Embattled accounting firm Arthur Andersen LLP, which is trying to settle claims related to its role in the collapse of Enron Corp., could reach a resolution with the Department of Justice this week, a source familiar with the situation told CNN/Money.

Andersen is in talks with agency officials regarding charges stemming from the accounting firm's destruction of Enron-related documents, sources said. With the decree, which will likely not come before Wednesday, Andersen hopes to avoid criminal obstruction-of-justice charges.

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Andersen admitted in January that its employees shredded Enron documents. Since then, the Chicago-based firm has tried to place the blame solely on fired partner David Duncan, who said he was advised by an in-house lawyer at Andersen to destroy documents.

Both Andersen and the DOJ declined to comment.

News of a resolution comes as Andersen is in talks with rival Deloitte Touche Tohmatsu to merge or sell all or part of its business, a different source familiar with the discussions told CNNfn Monday.

Andersen is considering many options, firm spokesman Patrick Dorton said. "We are committed to making changes to our business that will restore the public's trust, enhance the quality and independence of our audit practice, and allow all of our practices to thrive," Dorton said, declining to comment further.

Deloitte Touche Tohmatsu confirmed that it is involved in "scenario planning exercises" to address current and future issues addressing the accounting industry. "It's inappropriate for us to discuss these planning exercises in public," Deloitte spokesman Matthew Batters said.

Former Federal Reserve Chairman Paul Volcker, who is now heading an independent board to implement changes at the accounting firm, said Monday that Andersen should separate its consulting and auditing units. Currently, the company still handles some consulting such as strategic planning, executive recruitment and tax planning.

A group of Andersen senior partners must have "central and unambiguous" authority over interpretations of accounting standards. Company auditors should then refer difficult questions to the group, Volcker said. Compensation of audit partners should also be based on audit skills and not recruitment of non-audit or consulting services.

Looking for a merger

Chicago-based Andersen, the smallest of the Big 5 firms that include Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte, also has pitched a merger to other members of that group.

Andersen has had discussions with Enrst & Young, press reports said Monday. Industry observers have also said that KPMG could make an offer to acquire Andersen and end a bitter feud between the firms. Nearly three years ago Andersen tried to poach the Canada offices of KPMG only to have its attempt scuttled by George Shaheen, then CEO of Andersen Consulting (now Accenture).

A merger of Andersen and Deloitte would make the combined company the largest U.S. based accounting firm, surpassing PricewaterhouseCoopers, with $9.5 billion in revenue. A merged Andersen-KPMG would also rank as the top accounting firm in the nation, would have $9.3 billion revenue in the U.S. and rank as the largest U.S. accounting firm. An Andersen-Enrst merger would place second to PwC with $8 billion in revenue, according to Art Bowman, of Bowman's Accounting Report.

"If Andersen could fit with anyone it would have to be Deloitte," Bowman said. "Their business approach is similar."

Both KPMG and Ernst & Young declined comment.

Any sale of Andersen would depend on that firm's ability to wall off any Enron-related liabilities from its merger partner, press reports said.

However, any talks could prove fruitless because of the potentially huge liability Andersen faces for the handling of the Enron audits and the destruction of the bankrupt energy trader's documents. The firm's sale efforts run in tandem with negotiations it is having with the U.S. Justice Department in hopes of striking a settlement deal as early as this week, the Wall Street Journal reported.

Andersen hopes to avoid criminal obstruction of justice charges for the admitted destruction of documents related to its audit of the bankruptcy energy trader Enron. An indictment of the 88-year-old accounting firm could prove a fatal blow to the fifth-largest U.S. accounting firm, with 2,300 public audit clients.

One possibility being explored by Andersen is a Chapter 11 bankruptcy filing, with a sale or merger completed under court protection from creditors and litigants.

Although the Journal reported two people in the Andersen camp say that Deloitte expressed interest in Andersen, and that talks were alive into the weekend, another person familiar with the situation said the world's third-largest accounting firm is not interested in an Andersen deal. The potential exposure of a merger partner to Enron-related issues in spite of a Chapter 11 filing could prove a formidable deterrent to any pact.

The talks, which have been taking place in New York, are being led by the firms' chief executives, Joseph Berardino of Andersen and James Copeland of Deloitte, according to the New York Times. A handful of partners from both firms as well as legal and financial advisors also have been involved.

A Deloitte-Andersen deal makes sense since the two have complementary businesses and their combined strength would make them a close second behind the No. 1 U.S. accounting firm, PwC, the Journal reported.

Additionally, Andersen clients might hang on if they knew they'd be dealing with a combined firm. A deal also would please Andersen partners who risk losing their retirement nest eggs and salaries as legal costs and defecting clients erode the firm's bottom line.

In addition to criminal charges, Andersen also faces possible regulatory action by the Securities and Exchange Commission as well as lawsuits from companies and individuals hurt by Enron's collapse, the Times reported Monday.

Meanwhile, Andersen spokesman Patrick Dorton declined to comment to the Journal about the Justice Department talks or any possible deal.  graphic