Andersen pins hopes of survival on new chief

If Andersen's struggle for survival were the chess game it increasingly resembles, the resignation this week of Joseph Berardino would be a rook sacrifice ­ the abandonment of an important piece in the hope of creating an opening for victory. "Victory" in Andersen's case has, of course, a modest definition: that in some diminished shape or form, the venerable accounting firm will still exist a year hence as an independent concern. But the odds seem stacked against that.

Andersen's senior partners have gathered in London to try to find a replacement for Mr Berardino, the former chief executive, who can help Andersen merge its businesses around the world with rivals such as KPMG. At the same time the axe is hanging over almost 6,000 jobs in the US as the group moves to reduce overheads after client defections.

Mr Berardino acknowledged as he announced his departure in person on Monday evening, live on CNN, he had become "an impediment" to the efforts of Paul Volcker, the former chairman of the Federal Reserve, to save Andersen. But even so, bankruptcy was an option which had to be considered, as Andersen prepares to be tried on criminal charges arising from the Enron debacle.

The conventional wisdom is that, unless the indictment is withdrawn, Andersen is doomed. In fact, the obstruction of justice case may not be as open and shut as it appears, despite the shredding by Andersen employees of Enron-related documents even when they knew the Security and Exchange Commission had ordered an inquiry into the crumbling energy company.

In the fortnight since the indictment was unsealed on 14 March, after Andersen refused to make a plea bargain with Justice Department prosecutors, it has won a couple of useful victories: an early date of 6 May has been set for the trial; the government may be barred from bringing any further Andersen executives before a federal grand jury.

Andersen in other words is gambling that government lawyers do not have the evidence to secure a conviction. Increasingly, their chances of doing so may depend on whether they can persuade David Duncan ­ the partner in charge of the Enron audit who refused to testify to Congress ­ to co-operate with the inquiry.

From the moment the indictment was announced, many experts have been baffled at why the government turned on its head the normal practice in cases of corporate wrongdoing: bringing criminal charges not against a few individuals who committed the alleged criminal offence, but an entire company.

The standard argument is Andersen must be severely punished to serve notice that the auditing business must clean up its act. But that is not the only reason the Justice Department is playing hardball, even when no indictments have been brought yet against anyone at Enron, where the fraud originated.

Andersen, investigators say, is a serial offender. The company had to pay a $7m (£5m) fine arising from the Waste Management affair, where Andersen signed off on profits that proved to have been overstated by $1.7bn between 1992 and 1997, and more recently paid $217m to settle claims arising from the failure of the Baptist Foundation of Arizona. Andersen is also in the hot seat over the collapsed Global Crossing communications group, for which it was the auditor.

Apart from Mr Duncan, the key individual now is Mr Volcker. For three decades Mr Volcker, unmissable for his 6ft 8in physique and penchant for malodorous 30-cent cigars, has been a fixture of the global financial scene; as the Treasury's point man on international monetary affairs, then as the Fed Chairman and most recently as multi-purpose troubleshooter and wise man.

His task, in his own words, was to "sprinkle a little holy water" on the unholy mess at Andersen. But even Mr Volcker's reputation for integrity and rigor failed to sway the Justice Department lawyers. Volcker was astonished and angry when the indictment was handed down. He argued a $750m out-of-court settlement between Andersen and Enron shareholders had been within reach, and overly hasty action risked killing a company that could be turned into a model for the future auditing industry, disentangled from the lucrative consultancy work that may have oiled the slope to disaster.

Many believe it was the pursuit, encouraged by Mr Berardino, of consulting business that led Andersen to take its eye off its core activity. In 2000 alone, for instance, Andersen earned $25m in auditing fees, but $27m for other consulting work from Enron ­ its largest single client.

Perhaps Mr Berardino's departure, coupled with the reforms Mr Volcker promises and the possibility the former Fed chairman could take formal charge of Andersen himself, will now melt the stony heart of Justice. But even though a new Andersen board will be announced in the next few days, it might already be too late.

Clients are dropping Andersen daily, while partners are trying to jump ship. And without its network of foreign partnerships, Andersen may lose the ability to conduct the largest multinational audits that distinguishes the "Big Five" accounting firms from the rest.

But everywhere the same problems crop up: how much is Andersen worth, given the criminal charges it faces? What about shareholder lawsuits and potential legal liabilities? And given the defections of the customers and partners ­ the main assets of any financial services company ­ will there be much worth saving by the time a deal is struck? In this sense, the sacrifice of Mr Berardino has answered nothing.