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. Last Updated: 07/27/2016

Plea Deadline Passes as Andersen's Suitors Flee

NEW YORK -- Arthur Andersen LLP's attempt to salvage some of its value by selling part or all of its accounting operations stumbled badly after two rivals cut off merger negotiations.

Within hours Wednesday, Deloitte Touche Tohmatsu and Ernst & Young announced separately that they weren't interested in buying any of the assets of Andersen, the "big five" accounting firm under intense scrutiny for its role in Enron Corp.'s collapse.

Worries about Andersen's legal liabilities for its role in the collapse of Enron were behind the firms' decision to stop merger talks.

Andersen said Thursday morning that the Justice Department had imposed a 9 a.m. deadline for the firm to agree to plead guilty in the Enron scandal or face immediate indictment for destroying documents. The deadline passed without word of any agreement.

Criminal charges would be "the death penalty" for Andersen and "a gross abuse of government power," the accounting firm said in a letter Wednesday to the department.

A guilty plea could bar Andersen from performing audits and approving financial reports that companies file with the Securities and Exchange Commission, the core of its business -- unless Andersen were granted a waiver.

Deloitte said negotiations between the two companies that started last week ended Wednesday "due to Andersen's unresolved litigation and legal issues."

Ernst & Young said it concluded "that as long as Enron and other Andersen litigation matters are unresolved, it is not in the best interests of our people, clients, and our firm to pursue such a combination."

Experts agree that the biggest stumbling block to a sale of Chicago-based Andersen is its potentially huge liability costs related to Enron's bankruptcy. Andersen auditors signed off on questionable accounting practices that, when uncovered late last year, led to the company's collapse.

The decision by Deloitte and Ernst & Young to back off from a deal significantly raises the possibility that Andersen could "default, probably within the next month or so," said Ed Ketz, an accounting professor at Penn State's Smeal College of Business.

An Andersen spokesman did not immediately return a telephone message left Wednesday night seeking comment.

Other possible suitors -- most notably KPMG and PricewaterhouseCoopers -- probably won't be interested in buying parts or all of Andersen, Ketz said.

"It looks really bad for Andersen," he said. "The obvious reason is that you'd like to have Andersen's assets without the liabilities."

Deloitte said its executives initially hoped that Andersen would continue as an independent firm, but entered into the merger talks only after "insufficient progress was being made toward that goal."

Experts say Andersen is in dire straits and at risk of going under because it is losing important clients with no end in sight.

Household International, the United States' second-biggest consumer finance firm behind Citigroup Inc., became the latest major firm to drop Andersen as its auditor.

In a statement Wednesday, Household said its board chose KPMG to replace Andersen, pending final approval by stockholders at its upcoming annual meeting.

The company cited the "uncertainty" surrounding Andersen, which has been embroiled in controversy since the collapse of Enron, one of its biggest clients.

The decision came two days after FedEx Corp. dropped Andersen, following the lead of Delta Air Lines, Freddie Mac, Merck & Co. and SunTrust Banks.

The 88-year-old firm has already been ordered to split its consulting and auditing practices by a special panel it established in response to the Enron scandal.

Andersen has reportedly offered to settle lawsuits from shareholders, creditors and employees for $750 million, though leading shareholders have told Reuters they are looking for at least twice that figure and do not expect a quick resolution.