Firms Ready to Grab Andersen Clients, Staff

By ANTHONY PALAZZO

Staff Reporter

L.A. accounting firms large and small are quietly gearing up for an all-out war for accounting firm Arthur Andersen’s clients and its staff. Andersen, which last week was charged with obstruction of justice in the Enron scandal, saw its attempts to find another Big 5 merger partner fizzle, threatening its ability to survive.

Andersen is the fourth-largest accounting firm in Los Angeles County, with nearly 900 accounting professionals, or 11 percent of the 7,480 accountants working in the area’s top 50 firms, according to Business Journal research. In 2001, Arthur Andersen’s local revenue totaled $184 million, down from $210 million in 2000 providing a broad target for rival firms to shoot at.

“This is an opportunity for all of those firms to build their client base,” said Arthur Bowman, editor of Bowman’s Accounting Report in Atlanta. “It’s a tricky situation, however, as you don’t want to appear to be a vulture.”

Indeed, feelings are mixed among accounting professionals who feel sympathy for colleagues at Andersen, yet can’t ignore the void that its collapse would create in the marketplace.

“It turns my stomach when people challenge and question our integrity as a profession,” said Anthony Anderson, Pacific Southwest managing partner for Ernst & Young. Last week, Ernst & Young dropped out of talks on a possible merger with Andersen, due to liability concerns. Deloitte Touche Tohmatsu also dropped out, and chances of a pact

with KPMG LLC are now considered doubtful. If Andersen’s partners can’t sell the practice, they may leave and merge into other firms, said Bowman. They may also start their own firms.

Ernst & Young is the area’s largest firm with more than 1,300 accounting professionals. As of yet, it hasn’t mounted a full-on campaign for Andersen’s clients or for its people. “We have been pretty much hands off until now, and we’re going to just wait and see how it shakes out,” Anderson said.

Nevertheless, a client exodus from Andersen already has begun. “I spoke with a non-Arthur Andersen Big 5 partner today, and he said that, nationwide, they’ve got about 100 (requests for proposals) that they’re dealing with right now. That’s huge,” said Thomas J. Schulte, managing partner of RBZ LLP, the second-largest locally headquartered firm with 98 accountants. (Normally, public companies begin thinking about switching auditors later in the year.)

Big 5 firms are constantly trying to establish relationships with their rivals’ clients, said an accountant at one of Andersen’s Big 5 rivals. “You may go in and try to sell a client (a single) service to make inroads,” she said. “It’s probably happening more now with Andersen clients that (rivals) want.”

Among local companies that have left Andersen as clients since the Enron scandal are Walt Disney Co.’s ABC Family Worldwide unit, which hired PricewaterhouseCoopers, and Keystone Automotive Industries, which returned to Ernst & Young. The ABC Family switch was a result of Disney’s purchase of the Fox Family operation from News Corp. last year, said Disney spokesman Ken Green. Pricewaterhouse is Disney’s auditor.

Keystone backtracks

But the Keystone move was directly related to Enron. Keystone had recently switched to Andersen from its long-time auditors, Ernst & Young, said Gary Maier, an outside spokesman for the company. Keystone quickly backtracked after Enron and returned to E & Y.;

“The truth of the matter is Keystone never even got much involved (with Andersen),” Maier said. Keystone’s board, he said, thought its involvement with Andersen “would be a distraction.”

While it’s unlikely that second-tier firms stand to pick up Andersen’s largest remaining local clients, these firms stand to pick up some smaller public companies. In Los Angeles, there are plenty of those.

“Over the past couple years we have continued to see significant opportunities with the middle-market clients of all the Big 5 firms,” said Mark A. Bagaason, Southern California managing partner with Chicago-based Grant Thornton LLP, which counts Countrywide Credit Industries, K-Swiss Inc. and Edelbrock Corp. among its local clients. “Those opportunities are probably accelerating now as Enron and the other problems come to light.” (Grant Thornton has 68 local accountants, and nearly 700 offices nationwide.)

One Andersen customer is Stamps.com Inc. Chief Executive Ken McBride said the company is sticking with Andersen for now, while remaining watchful. “We’re happy with what they’ve done and for now we’re sticking with them,” he said.

Since the Enron scandal surfaced, L.A.-based Good Swartz Brown & Berns has stolen at least one of Andersen’s clients, newsletter publisher Bowman said. He didn’t know its identity, and Good Swartz managing partner David Swartz declined to say. “We picked up several Andersen clients before the Enron scandal. I would assume those opportunities would continue,” he said. “Frankly we’d be interested not only in clients, but really their staff, too.”

Getting staff

Managers at other local firms agreed. “A lot of the partners that drop out of these firms will go to local firms and strengthen them and bring them expertise,” said Mannon Kaplan, managing partner of North Hollywood-based Miller Kaplan Arase & Co. His firm handles only smaller, private clients, and he lost a number of people to Big 5 firms over the past several years. (For 2001, Miller Kaplan remained seventh on the Business Journal list of accounting firms, with 123 accountants, up from 118 in 2000.)

But Kaplan also remembers the merger of Ernst & Whinney with ailing Arthur Young back in 1989, which yielded a tax partner who is still with Miller Kaplan. The same thing happened in the 1990 collapse of accounting firm Laventhol & Horwath under a huge liability burden. “We got two partners from them,” Kaplan said.

Another area where local firms see opportunities is among privately held firms, even charities, which formerly sought the prestige of having a Big 5 accounting firm.

“It’s going to be interesting to know how many of those people take a look at having a Big 5 representing them, knowing that they’re paying more than if they were using a large local firm or regional firm,” said Schulte. “We’re starting to see a lot more movement in that area than we’ve seen in a long time.”