Andersen Announces Layoffs

Taking a "painful" but inevitable step after suffering critical damage from its role in the Enron scandal, Arthur Andersen LLP announced plans Monday to lay off 7,000 employees as the 89-year-old accounting giant fights for its survival.

The dismissals, which will pare its U.S. work force of 26,000 by more than a quarter, come with the firm's reputation in tatters, its overseas network fast disintegrating and more U.S. companies replacing it daily as their auditor.

Whether they help the firm stay in existence remains to be seen. Industry observers say Andersen still urgently needs to reach a settlement with the Justice Department to remove the criminal charge that has driven off scores of clients.

"This is a recognition of reality by Andersen," said Ashish Nanda, an associate professor at Harvard Business School. "Instead of a large global firm with multinational clients and multiple services, it's going to be a significantly smaller, primarily North American audit firm — if it survives."

Andersen said the layoffs will take place over the next several months, with the audit practice and administrative services bearing the brunt. Company headquarters and other large U.S. offices, including Atlanta, Los Angeles and New York, will be hardest hit.

"To take this step in our history is obviously a very painful and difficult step, but a necessary step given the market realities we're dealing with today," said Grover Wray, Andersen's U.S. managing partner for people.

"Of all the issues we have confronted recently, none compare to the actions we are now forced to take with our employees," said Larry Gorrell, managing partner of Andersen's U.S. operations. "This decision is even more painful in light of the loyalty, commitment and the hard work that our employees have demonstrated during this difficult time."

Gorrell said other, unspecified cost-cutting measures also are being taken.

The cuts will be felt most sharply in Chicago, where 5,300 people work at headquarters and another 1,200 at Andersen's training center in nearby St. Charles, Ill. Chicago Mayor Richard Daley said he was saddened at the news.

"These layoffs not only adversely affect individual employees and their families, but hurt the local and regional economy as well," Daley said.

A mixture of shock and resignation characterized the mood at headquarters, where many if not most employees still were unsure of their fate Monday afternoon.

"No one can believe this is happening," said Mimosa Unno, 22, who works in the audit division in Chicago.

Tax accountant Julie Luptak expressed the frustration and anger of many employees that their jobs and firm may disappear because of actions they had nothing to do with. "It wasn't our fault," she said. "I'm proud to be here."

Since its audit client Enron Corp. went bankrupt in December, Andersen has been hit by a barrage of lawsuits by Enron shareholders and creditors. It also has lost dozens of blue-chip corporations as clients and at least 10 overseas affiliates have bolted to rival firms — the latest being its Norwegian partners, who announced Monday they are merging with Ernst & Young.

Auditor Trak, a unit of Atlanta-based Strafford Publications Inc., said Monday that Andersen has lost 148 public audit clients this year.

The exodus of clients began in February and turned into a flood after the firm was indicted March 14 on a criminal obstruction-of-justice charge for allegedly destroying Enron documents while the Houston energy trader was under federal investigation. Andersen's lawyers have been meeting with Justice Department officials about a possible settlement before the trial, scheduled to begin May 6.

Desperately in need of cash, Andersen also continues to talk to competitors about selling businesses and transferring many of its approximately 1,700 U.S. partners. The firm reached preliminary agreements last week with Deloitte & Touche and KPMG for the transfer of partners and sale of some regional offices.

The consulting business may be next to go. Former Federal Reserve Chairman Paul Volcker, head of a special oversight board named by Andersen in February, is working to reform Andersen and keep it alive as an audit-only firm.

But with Enron's creditors eyeing Andersen's dwindling resources, the breakup of Andersen is being challenged. Insurers and other Enron plaintiffs are seeking a court injunction in Houston to block Andersen from selling its assets in the United States and abroad.

At an initial hearing Monday, an attorney for the embattled firm said the proposal to require that Andersen give the court 30 days' notice of any assets sale could scare off buyers.

"This is a very sad, very difficult situation for everyone," attorney Sharon Katz said of the steps the firm is taking in an effort to survive. "Over time the assets of this company are losing value. If they cannot act quickly, they will not be able to do any of these transactions and the value will be lost."

The hearing is to be resumed April 17.

Until the recent defections of overseas partners, Andersen Worldwide — the legal umbrella for Andersen's businesses including U.S. arm Arthur Andersen LLP — employed 85,000 people at 84 member firms.