Efforts to find a merger partner stalled Wednesday when Ernest & Young, the fourth-largest of the Big Five accounting firms, decided not to bid for Andersen's assets because of pending litigation and liabilities from the Enron collapse. Deloitte Touche Tohmatsu, regarded as the most likely merger partner, pulled out Wednesday night.
James Copeland, Deloitte's chief executive officer, said his firm wanted to help Andersen and hoped the firm would survive. Deloitte is the number two accounting firm.
"Unfortunately, we were unable to find our way through to a solution," Copeland said in a New York Times interview.
PricewaterhouseCoopers, the largest of the Big Five, is not interested in Andersen and KPMG reportedly is not prepared to step in to salvage the company.
In a letter to the Justice Department Wednesday night, Andersen's lawyers said evidence of criminal conduct was lacking and that criminal charges would be "the death penalty" for Andersen. The firm risked the threat of a felony indictment Thursday unless it reached an agreement with prosecutors.
Chicago-based Andersen, the smallest of the U.S. accounting giants, had 2,300 clients and global revenues of $9.3 billion last year but has lost more than 30 top clients, including FedEx, Merck, Delta Air Lines, Household International Inc. and Freddie Mac, since the December Enron bankruptcy and revelations of widespread document shredding at its Houston office.
The Chicago Sun-Times reported Andersen had told lawyers suing the firm that it may seek Chapter 11 federal bankruptcy, a move that would put more than 40 lawsuits on hold and protect it from creditors. A source told the newspaper Andersen had prepared a bankruptcy petition for immediate filing.
There is precedent for a bankruptcy filing by a major accounting firm. In 1990, Laventhol & Horwath, then the seventh-largest U.S. accounting firm, went bankrupt and eventually liquidated after it was hit by more than 100 lawsuits related to failed savings and loans.
Earlier this month, Andersen offered as much as $750 million to be paid over five years to settle all civil liabilities connected to Enron.
Former Andersen CEO Richard Measelle, who retired in 1997 after 37 years with the firm, told the Chicago Tribune a bankruptcy would be a "genuine disaster" and a "true tragedy" for the 90,000 past and current employees.
Measelle headed Andersen when the U.S. Securities and Exchange Commission found former client Waste Management Inc. had overstated its earnings by more than $1.4 billion.
Former Federal Reserve Board Chairman Paul Volcker, who was brought in by Andersen to suggest reforms, this week recommended the firm break up into separate auditing and consulting units to eliminate perceptions of conflict of interest.