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Andersen's client exodus accelerates after indictment

| Saturday, March 16, 2002

CHICAGO (AP) — Arthur Andersen LLP's weakening hold on its major corporate clients got shakier Friday in the wake of its criminal indictment, with three blue-chip companies firing the troubled auditor and others indicating they may do the same.

Sara Lee Corp., Northeast Utilities and Brunswick Corp. all severed decades-long relationships with Andersen as their auditor — Sara Lee since 1965, Northeast Utilities since 1977 and Brunswick since 1942.

All three Fortune 500 corporations said the decision was made before Thursday's indictment of Andersen, with Sara Lee chairman and CEO C. Steven McMillan citing the fact that the company's viability as an audit firm was already "in great jeopardy."

But Abbott Laboratories Inc. specifically cited the indictment as cause for further concern. The North Chicago-based drug and medical products maker called a special meeting of its board of directors to review its 39-year auditing ties with Andersen, which it had endorsed publicly just three days earlier. It said it had been making contingency plans in case Andersen was indicted.

Sara Lee, a $5 billion consumer goods company, is the biggest of the companies to end ties with Andersen Friday. The Chicago firm said it had made no decision on a new auditor.

Northeast Utilities Systems, based in Berlin, Conn., picked Deloitte & Touche to replace Andersen. The New England energy supplier said it began looking to replace Andersen months ago, calling the decision extremely difficult because it had received "exemplary" auditing service from Andersen but was concerned about its future.

Brunswick Corp. hired Ernst & Young as its auditor. Spokesman Dan Kubera declined comment when asked about the role of the Enron controversy in his Lake Forest, Ill.-based company's decision to drop Andersen.

Andersen already had lost more than a half-dozen Fortune 500 clients this month. Petroleum refinery operator Valero Energy Corp. jointed that fast-growing list Thursday, disclosing in a filing with the Securities and Exchange Commission that it had ousted Andersen and hired Ernst & Young in a decision made two days earlier.

A smaller firm, Minnesota-based Polaris Industries Inc., the world's largest snowmobile manufacturer, announced yesterday that it, too, was dumping Andersen for Ernst & Young.

Andersen spokesmen did not immediately return telephone calls yesterday seeking a reaction to the slew of client defections.

The moves follow defections earlier this month by Delta Air Lines, FedEx Corp., Freddie Mac, Household International, Merck & Co. and SunTrust Banks.

Others are almost certain to follow as corporations file annual proxies and hold annual meetings. Smithfield Foods acknowledged after Thursday's indictment that it was considering replacing Andersen, and Waste Management, American Home Products Corp. and UAL Corp., parent of United Airlines, all said their relationship with Andersen is under review.

A federal grand jury indicted Andersen for shredding documents related to its auditing client Enron, which filed for bankruptcy in December.

"The indictment in itself does not mean guilty," said Arthur Bowman, editor of Atlanta-based Bowman's Accounting Report, an industry publication. "But in the client's mind, it's associated with guilt. And it's difficult to imagine a CEO or chairman standing before shareholders endorsing an indicted CPA firm as auditor."

While swapping auditors can be costly and inconvenient for major corporations, "the risk of staying with them is they may not be there to work for you in three months or six months," he said.

Andersen insisted Thursday there are no plans to file for bankruptcy protection, even though experts say that may be its best hope to stop the exodus of clients and employees and find a buyer.

Spokesman Charlie Leonard acknowledged, however, that the indictment means "a significant hit to the business."

Filing for Chapter 11 bankruptcy would almost certainly signal the end of Andersen's 89 years as an independent company — if Thursday's indictment by a federal grand jury didn't do so already, according to those who track the industry.

Bowman said industry observers still see a bankruptcy filing as an option, since that's the likeliest way to seal a deal with another member of the Big Five accounting firms. An acquisition by a major firm, he said, could happen as early as next week.

"Every one of them would like to get Andersen if the price is right, and the price has to include no extension of liability," he said.

Some of Arthur Andersen's lost clients


Troubled accounting giant Arthur Andersen LLP has lost an increasing number of large clients this year, including the following (replacement auditor in parentheses):

  • Abbott Laboratories (undetermined)
  • Brunswick (Ernst & Young)
  • Delta Air Lines (Deloitte Touche Tohmatsu)
  • FedEx (Ernst & Young)
  • Freddie Mac (PricewaterhouseCoopers)
  • Hard Rock Hotel (Deloitte Touche Tohmatsu)
  • Household International (KPMG)
  • Introgen Therapeutics (Ernst & Young)
  • Kerr-McGee (Ernst & Young)
  • Kos Pharmaceuticals (Ernst & Young)
  • Merck (PricewaterhouseCoopers)
  • Northeast Utilities (Deloitte Touche Tohmatsu)
  • Riggs National (KPMG)
  • Sara Lee (undetermined)
  • SunTrust Banks (PricewaterhouseCoopers)
  • Valero Energy (Ernst & Young)

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