QUESTIONING THE BOOKS: Andersen's China Offices Broke Ranks In the Interest of Clients, Veteran Says
FROM THE ARCHIVES: March 25, 2002
By SARAH MCBRIDE
Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- Allan Aw ticks off the milestones of his long accounting career: Trainee with the old Arthur Young in London, starting in 1973. Tax accountant in the firm's Hong Kong office in 1976. Partner in 1986. Managing partner in 1995.
"You have to understand," he says, leaning forward in his desk chair and revealing an Andersen staff photograph on the credenza in his Arthur Andersen & Co. office in this city's Central district. "I've been with the firm a long time. I'm an Andersen person."
So when his office signed a memorandum of understanding Thursday to sever ties with Andersen Worldwide SC and affiliate with rival PricewaterhouseCoopers, it was a move Mr. Aw couldn't have conceived of just weeks ago. But the hardest decision of his career was triggered when he walked into his 25th-floor office early the morning of Friday, March 15, and checked his voice mail.
Go to Questioning the Books1
Arthur Andersen LLP, according to a message from Chief Executive Joseph Berardino, had been indicted on a criminal obstruction-of-justice charge, as federal prosecutors continued probing the collapse of Enron Corp., a longtime U.S. audit client. Mr. Aw and his partners had known for days that the Chicago-based firm faced a possible indictment, though until that point, he said, "we thought [Andersen lawyers] could negotiate a way around it."
The voice mail was "the straw that broke the camel's back," Mr. Aw recalls. It set in motion a lightning-fast round of negotiations for a deal that could well herald the crumbling of Andersen Worldwide, a Switzerland-based umbrella of partnerships that took decades to assemble. The PwC pact, which also includes partners in Andersen's China offices, comes as the U.S. operations face a wave of partner defections and many clients have begun racing to line up alternative auditing arrangements.
Many U.S. audit partners stand to lose hundreds of thousands of dollars invested in the firm, as Enron's creditors and shareholders, among others, seek compensation for their huge losses. Thousands of the firm's U.S. employees could be jobless in an uncertain economy. And as Mr. Aw's story illustrates, the fallout extends far overseas; about 85,000 people work in Andersen's global network. The Hong Kong and China offices, with about 2,000 employees combined, represented one of Andersen Worldwide's fastest-growing international affiliates. Also last week, the Russia and New Zealand offices voted to leave the network, agreeing to align with rival Big Five accounting firm Ernst & Young.
The Andersen practice Mr. Aw heads is among the smallest of the Big Five practices in Hong Kong, though it audits a handful of the biggest companies, including phone company Pacific Century Cyberworks Ltd. and CNOOC Ltd., the Hong Kong-listed Chinese state oil company.
In his simple office, furnished with Scandinavian-style furniture and a large scroll painting of black and orange carp, he recalls that, until the indictment, "I still didn't personally feel [the Enron developments] would really hurt us." But he recollects having felt "uncomfortable" as Enron's woes grew: a $586 million downward revision of its earnings last fall, followed by the admission in early January by Andersen's U.S. audit practice that thousands of Enron-related documents were destroyed by the accounting firm's Houston office.
Indeed, even after the acknowledged document destruction, business continued pretty much as usual in Hong Kong through February, executives say. Andersen counts some of China's biggest corporations as clients, including China International Capital Corp. and Tsingtao Brewery Co. Because publicly traded Chinese companies are required to publish annual financial results by April, Andersen was in the middle of a busy season. "There were so many things to do, it just didn't seem like a big problem," one Andersen executive says.
But Hong Kong and China partners did see some clients' concern brewing. "We had to continuously meet with audit committees locally," Mr. Aw says. "We were trying to convince them they need not worry."
The hand-holding seemed to be paying off, and Mr. Aw felt relaxed enough to head to Japan's Hokkaido Island with his family for the Lunar New Year in mid-February.
The pace of worry picked up during the second week of March, after the firm learned it might face an indictment and its global management advised partners that it would be necessary to consider a merger with Deloitte Touche Tohmatsu. "That was fine," Mr. Aw says. "Deloitte is a very good firm." During a period of about three days, Andersen and Deloitte partners based in Hong Kong exchanged e-mails, talked by phone and set up an informal meeting. Many partners knew each other, professionally and socially. "Talks were cordial and constructive," he says, describing them more as "exploring and fact-finding" than deal structuring. A partner at Deloitte confirms this version of events.
Meanwhile, concerns about the possible indictment grew. "I obviously had a whole series of discussions with my partners," Mr. Aw says. They talked about stewardship -- leaving the firm a better place than when they joined -- and striving to be the best, Mr. Aw says. "With that in mind, we said, 'Let's look for the best firm.' Global can give us their recommendations, [but] we must try to be objective in evaluating what they offer to us."
Meanwhile, the talks with Deloitte were starting to unravel in New York. Early on the morning of March 14, Hong Kong time, partners were told the deal was off. Instead, for the non-U.S. global partnership, there were talks with Ernst & Young. It was then that Mr. Aw, along with others such as China lead partner Albert Ng and senior Hong Kong partner Nellie Fong, started talks with the local offices of the other big firms. Mr. Aw says he and Mr. Ng felt "torn between the need to be supportive of global deals and the need to do the right thing for our partners and clients" in Hong Kong and China.
On Monday morning last week, Ernst & Young met in Singapore with representatives from roughly a dozen Andersen operations throughout Asia. Later that day, Mr. Aw says, Andersen's global management said a global E&Y deal was off -- and talks with KPMG LLP were on. E&Y International Chief Executive William Kimsey says his firm still is interested in a global deal with Andersen, excluding the U.S. Mr. Aw chuckles at the memory of the announcement of this third set of talks.
"How reliable is that deal?" he thought at the time. He and Mr. Ng "clearly felt that we must begin to seriously explore" options independent of the overall firm. Mr. Ng hopped on a plane to Hong Kong that evening after a preliminary KPMG presentation; Mr. Aw returned Tuesday after another KPMG presentation.
To the Hong Kong and China partners, PwC was an obvious choice; with about 3,500 staff in their region, it is by far the biggest presence and a good match for Andersen's relatively small team. Talks moved ahead quickly. On Thursday morning, Mr. Ng, Ms. Fong, and Mr. Aw met with all the Hong Kong and China partners. "We asked for their blessing, [to] authorize us to basically finish our initial discussions." The partners gave the nod.
Also Thursday morning, Messrs. Aw and Ng called Mr. Berardino in the U.S., where it was still Wednesday night. "It was a pleasant, polite conversation," Mr. Aw says. "Joe was supportive and sympathetic." The memorandum of understanding was signed that afternoon.
John Prasetio, Andersen's area managing partner for Asia-Pacific, says, "I am saddened by the decision of our colleagues in China and Hong Kong to take a different path. However, I appreciate the need for some countries to move faster than what we can offer under the global proposition. Their decision will not diminish the effort to substantially complete transactions between Andersen Worldwide's non-U.S. member firms and KPMG."
Mr. Aw won't discuss financial terms, or what sort of penalty the partners might have to pay to leave Andersen's network. One of the biggest obstacles to affiliates splitting from the Andersen network has been the threat of a severance fee equal to 1.5 times the affiliate's annual revenue. "That's something that is very sensitive," Mr. Aw says. "We hope to settle with the global firm in a very amicable matter."
But some other executives are fast becoming more outspoken on the issue. "The reality is that the Andersen network has fallen apart," says John Judge, chief executive of Ernst & Young New Zealand, which announced Friday it would merge with Andersen New Zealand. Any contractual obligations between Andersen New Zealand and Andersen Worldwide fell apart because of events in the U.S., he contends. A person familiar with the Russia and New Zealand deals said little or no money changed hands. Mr. Kimsey, the E&Y global chief, said, "They are combinations and not acquisitions."
Of U.S. partners from whom Mr. Aw has heard, some "wish us luck. Others would say they're disappointed." One thing is certain: No champagne is being broken out. "We haven't celebrated," Mr. Aw says. "We are in mourning."
-- Karby Leggett in Shanghai, Richard Borsuk in Singapore and Gabriel Kahn in Hong Kong contributed to this article.
Write to Sarah McBride at sarah.mcbride@awsj.com2
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Updated March 25, 2002
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