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. Last Updated: 07/27/2016

Former Fed Chairman Blasts Auditor Merger

LOS ANGELES -- Efforts by the troubled Andersen accounting firm to sell itself to a larger rival is a desperate act that threatens reform of the nation's financial reporting system, former Fed chairman Paul Volcker, who heads a panel reviewing Andersen's operations, said Monday.

Andersen has talked to both Deloitte & Touche Tohmatsu and Ernst & Young about a business combination in recent days, people familiar with the talks said.

But Volcker said such an acquisition would reduce competition and blunt momentum for major reform in the accounting industry.

"The other accounting firms have said quite openly they don't like the reforms we are suggesting and it seems they would like Andersen to go away," Volcker said. "The worst result for the nation would be the disappearance of Andersen and no reforms."

Volcker noted, however, that Andersen is "desperate" to survive in the face of a possible criminal indictment. The already wounded company has been bleeding clients, and on Monday lost two more: FedEx Corp. and Riggs National Corp., a banking company.

As a former Federal Reserve Board chairman, Volcker's views carry weight on Capitol Hill, experts said. But one said Volcker's view that competition is needed would have little sway with the Justice Department, which is considering an indictment of Andersen for its shredding of Enron documents.

"Volcker has great influence on Congress but not at Justice, where the decision will be made," said John Coffee Jr., a law professor at Columbia University.

Perhaps the only way Andersen can protect itself from indictment would be an agreement to cooperate with the government's investigation of top Enron executives, such as former chairman Ken Lay and former chief executive Jeffrey Skilling, he said.

Volcker, who guided the Federal Reserve from 1979 to 1987, is heading a special independent panel empowered by Andersen to make changes in its management structure and business practices in the wake of the Enron scandal.

Volcker on Monday released his blueprint to reform Andersen's business practices, a model he believes can extend to other accounting firms. He released the plan earlier than expected, fearing that delay would hurt Andersen's chances of survival.

His plan would split Andersen into separate accounting and consulting companies to avoid conflicts where auditors overlook irregularities so as not to lose the lucrative consulting work.

The accounting company would focus on the auditing and tax preparation disciplines that are the traditional functions of the industry. It would also rotate the lead partners on each audit every five years and provide for more oversight of the technical and analytic decisions that go into auditing a company's books.

Although Volcker's panel was empowered to make changes, the fate of the proposal was clouded by the prospect of Andersen being acquired by a competitor.

A spokesman from Andersen, Ernst & Young and Deloitte said their respective firms would not comment on the specific merger reports.

But people familiar with the Deloitte & Touche talks said the two accounting firms have discussed a wide range of options -- everything from a merger, to the sale of the entire Andersen firm, to the purchase of parts of the accounting company's business.

An agreement could come as early as this week if the firms can devise a way to solve Andersen's huge liability resulting from its work for Enron, the Houston-based energy trader that filed for bankruptcy on Dec. 2. Andersen's Enron liability also is an issue in the Ernst & Young talks.

Opponents of such a transaction extend beyond Volcker to the plaintiff of a class-action lawsuit against Andersen.

"We will not tolerate any situation where Andersen partners protect their assets and go with their lives unscathed while there are thousands of investors who suffered billions and billions of dollars in losses," said Trey Davis, a spokesman for the University of California Board of Regents.

The UC system is the lead plaintiff in a class-action lawsuit against Andersen and Enron's senior management over the loss of investment money from Enron's collapse.