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Volcker plans Andersen shakeup

Former Federal Reserve chairman Paul Volcker offered a plan Friday for Arthur Andersen LLP's survival that includes replacing top management and installing an independent board that he would head. He said the plan would succeed only if the federal indictment of the firm was dismissed and if a cap is placed on the firm's financial liability from the Enron scandal.

"All that has to come together to make this initiative viable and successful," Volcker said at a hastily arranged news conference.

The changes outlined by Volcker go much further than recommendations made by his committee earlier this month, which included a proposal to split Andersen's auditing from its consulting services.

While the latest proposal is reasonable and could save the company from imploding, it should be seen as a "Hail Mary defense," said Itzhak Sharav, an accounting professor at Columbia University's business school.

"The problem he will have is convincing the Justice Department" to dismiss the indictment, he said. "They look at it as prosecutors who feel the company did not live up to obligations and should be punished."

Volcker, who heads an oversight committee charged with making sweeping reforms at the firm, said he would chair the new Andersen governing board. Other members would include former U.S. Sen. John Danforth; C. Michael Cook, the former chief executive of Andersen competitor Deloitte Touche Tohmatsu; and former U.S. Comptroller General Charles Boucher.

The new board would fire top managers, Volcker said, but declined comment on whether chief executive Joseph Berardino would be among those told to leave.

"There will no doubt be changes at the top," he said.

Volcker said the plan hinges on the Justice Department dismissing the obstruction of justice indictment against Andersen. He suggested it could be dismissed without prejudice, meaning the charge could be reinstated by prosecutors if they feel reforms at Andersen are insufficient.

Lawyers suing Andersen for its audits of Enron would have to agree to limit damages to an amount Andersen could pay without going out of business, he said. And the Securities and Exchange Commission would have to end an investigation soon without issuing a fine that could bankrupt the company, Volcker said.

Volcker's proposal came as a slew of client defections and the splintering of its international operations gathered steam Friday.

Occidental Petroleum Corp., Waste Management Inc., Apache Corp., ITT Industries Inc., ChoicePoint Inc. and a pair of hometown corporations _ Northern Trust Corp. and the Chicago Mercantile Exchange _ all joined the fast-growing list of big companies to fire Andersen as their auditor. The total now stands at more than 70 since the start of the year.

Interestingly, Waste Management had been Andersen's largest embarrassment before Enron. The Securities and Exchange Commission alleged that Andersen inflated the company's earnings by more than $1-billion in the 1990s. In 1998, the trash hauler restated earnings from 1992-97 and Andersen paid Waste Management a settlement amount that never was disclosed.

Last June, Andersen agreed to pay a $7-million SEC fine, though the firm did not admit or deny the agency's allegations that it "knowingly or recklessly" issued false and misleading audit reports.

Abroad, the firm's New Zealand partners followed the lead of those in China, Hong Kong and Russia, jumping to another Big Five rival _ in this case, Ernst & Young. Andersen partners in Britain, Canada, Malaysia and elsewhere also were reportedly in talks about possibly leaving Andersen for a competitor.

That extended a breakup of Andersen's overseas affiliates that began a day earlier despite the efforts of Andersen Worldwide _ the umbrella body for its global entities _ to merge its non-U.S. operations with those of KPMG.

"Whatever Andersen lives on as, if it lives on, it will not be the big full-service firm it is now," said accounting industry expert Arthur Bowman following the latest Andersen setbacks.

To prevent Andersen from collapsing, Volcker said, a significant number of senior Andersen partners must be persuaded to stay with the firm and participate in its rehabilitation.

"They have to decide," Volcker said. "This is a partnership; no one can compel them to do anything."

Despite heavy recruiting by Andersen's rivals, only a limited number of those partners are reported to have bolted so far, largely because of the noncompete clauses in their contracts. Under those clauses, if a partner leaves and takes along a client, they or their new firm would have to pay Andersen 1{ times the first year's fees, plus other costs.

Volcker said he told company officials about his proposal approximately an hour before he announced his plan Friday afternoon in New York. He would not characterize the response, but said he thought company officials needed time to examine the plan.

In a statement, Arthur Andersen said the proposal was a "positive and constructive proposal that works to resolve the difficult issues with the SEC, the Department of Justice, and other claimants." The accounting firm said it hopes the Justice Department will consider the plan and "come to a conclusion based on the best interests of our capital markets."

Volcker would not give odds on the chances of the plan succeeding. "It's no use in me speculating," he said. "In a week we'll know."