NEW YORK (CNN/Money) - Former Federal Reserve Chairman Paul Volcker recommended Friday that a seven-man board take control of embattled accounting firm Arthur Andersen LLP, which has suffered numerous client and overseas partnership defections after being indicted for its destruction of Enron Corp. documents.

Volcker said the new board would make changes in Andersen's operating leadership, realign senior management if necessary, and implement the reforms he called for earlier. Volcker has said Andersen should split its audit and consulting units.

Andersen in February named Volcker to head an independent board that would work to implement changes in the firm's audit practices. Volcker served as chairman of the Fed from 1979, when he was appointed by President Jimmy Carter, until 1987, when current chairman Alan Greenspan was named by President Ronald Reagan.

Volcker said Friday that a change in control at Andersen would require certain conditions be met. The former Fed Chairman proposed that the Department of Justice consider modifying its approach. Last week, the DOJ indicted Andersen for obstructing justice when it shredded Enron Corp. documents.

Volcker said a dismissal of the government's indictment without prejudice or a suspension would permit the agency to exercise its "discretion in a prudent and timely manner at the same time supporting the rebuilding of the firm."

Volcker, who would chair Andersen's new board, also appealed to the Securities and Exchange Commission to conclude its pending investigation. The former Federal Reserve Chairman suggested capping Andersen's liability in class action litigation to an amount consistent with the firm's diminished resources.

Also, a critical mass of Andersen audit partners must commit to staying and rebuilding the firm, Volcker said.

Andersen said Friday that Volcker's proposals work to resolve its issues with the DOJ, the SEC and other claimants.

"We hope that the Department of Justice will carefully consider Mr. Volcker's proposal and come to a conclusion based on the best interests of our capital markets," Andersen said in a statement.

Volcker's recommendations come as Andersen inches toward a merger of its non-U.S. businesses with KPMG International. However, not all the member firms of Andersen Worldwide SC, the umbrella organization of Andersen, have signed onto the proposed combination.

Andersen's New Zealand operations broke ranks Friday and inked a deal to join rival Ernst & Young. A day earlier, Andersen's Russian practice said it would combine with Ernst & Young while the Andersen practice in Hong Kong agreed to join PricewaterhouseCoopers.

Andersen, once the most powerful accounting firm in the world, failed in negotiations last week to merge or sell its business to rivals Deloitte & Touche and Ernst & Young.

However, KPMG Canada said Friday that it is in talks to merge with Andersen. The two firms have commenced due diligence and are addressing legal and business issues, the firms said.

"We are working towards an agreement," KPMG Canada Chairman and CEO Bill MacKinnon said in a statement.

If consummated, the combined firms would operate as KPMG in Canada and have combined revenue of $570.5 million (C$900 million) and more than 5,000 employees.

More clients continued to desert Andersen Friday in the wake of the DOJ indictment last week.

Houston-based Waste Management Inc., the nation's largest trash hauler, fired Andersen Friday as its outside auditor and picked Ernst & Young. The Chicago Mercantile Exchange also decided to replace Andersen as its outside accountant and has started a selection process to pick a new one, the company said in a statement.

Hartford Financial Services Group also dropped Andersen after 30 years while Choicepoint Inc. said it would replace Andersen with Deloitte & Touche. Occidental Petroleum and Apache Corp. also dumped the auditor Friday.

The current defections follow actions by Abbott Laboratories, Sara Lee Corp., Brunswick Corp. and Northeast Utilities which, immediately after the DOJ indictment, switched auditors last week.

The Securities and Exchange Commission is also investigating Andersen's role as auditor for three telecommunications firms whose accounting practices currently are under review by the SEC. The agency is looking at the embattled firm's suggestions on capacity swapping and accounting methods used by Global Crossing Ltd., Qwest Communications International Inc. and WorldCom Inc., the Wall Street Journal reported.