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SUGGESTED KPMG MERGER WOULD SHRINK MARKET, SAY LOCAL AUDITING FIRMS

Andersen Slovakia wants to go its own way

KPMG has said that it is in merger talks with auditing firm Andersen's non-US operations, following a weakening of Anderson's position since the company was indicted for obstruction of justice by the American administration.
The indictment, which came on March 14 after Andersen admitted shredding documents related to its client, the failed American energy giant Enron, is likely to bring long-lasting legal battles and has put Andersen on death row.
While some of Andersen's largest European branches have started intensive merger negotiations with KPMG, a member of the 'Big Five' group of top global auditing firms which includes Andersen itself, to secure the future of their business, the smaller Slovak Andersen operation has to wait for the results of the talks to know its future.


THE WHOLE truth and nothing but the truth: Auditor David Duncan on Capitol Hill.
photo: TASR

KPMG has said that it is in merger talks with auditing firm Andersen's non-US operations, following a weakening of Anderson's position since the company was indicted for obstruction of justice by the American administration.

The indictment, which came on March 14 after Andersen admitted shredding documents related to its client, the failed American energy giant Enron, is likely to bring long-lasting legal battles and has put Andersen on death row.

While some of Andersen's largest European branches have started intensive merger negotiations with KPMG, a member of the 'Big Five' group of top global auditing firms which includes Andersen itself, to secure the future of their business, the smaller Slovak Andersen operation has to wait for the results of the talks to know its future.

However, neither Andersen's partners nor representatives of its competition in Slovakia considered a merger the best solution for the auditing firm and the market, and said many administrative hurdles faced KPMG's suggested merger of branches in 83 countries.

According to Santiago Pardo, a partner at Andersen in Slovakia, the most suitable solution would be to maintain the name of Andersen without any merger taking place. "We feel sad about the whole situation. We need to look to the future from the point of view of providing better service to our clients and better career opportunities for our staff. The best way to do it would be under the Andersen name.

"But a combination with some of the 'Big Five' group is also a possibility, and if we feel that it is required then we will do it. I personally am excited about the idea of merging with KPMG," Pardo said.

However, KPMG representatives do not seem excited by the prospect of absorbing their competitor.

"The problems Andersen is facing could happen to any of us. We're not happy about the situation, and I personally would rather see Andersen on its own. If there's an agreement on a merger, the market would be too small. It's small anyway. Ten years ago there were eight or nine top auditing firms, not five. Now there's a strong possibility that it will shrink even further," said Michele Lodi-Fé, KPMG's managing partner in Slovakia.

However, in merging with Andersen, KPMG in Slovakia would become serious competition for PricewaterhouseCoopers, which is considered the strongest of the 'Big Five' in terms of clients. PricewaterhouseCoopers has not showed an interest in negotiations with Andersen, having gone through a merger of its own in 1998.

Although a series of scandals in the US have damaged Andersen's name and several of its important clients have left, Lodi-Fé believed that the reputation and image of KPMG would not suffer if they merged with Andersen.

"Andersen is in trouble because of the limited number of people. It has very good people. The market will recognise it and whoever gets Andersen will improve its own quality," Lodi-Fé said.

Andersen, which has a particularly strong client base in the Slovak financial sector, including Tatra Banka, Všeobecná úverová banka (VÚB), Istrobanka and insurer Slovenská poisťovňa (SP), is likely to bring these clients to any merger taking place.

According to Pardo, Andersen in Slovakia has not lost any of its clients in the aftermath of the firm's troubles in the US. After the privatisation of the Slovak banking and insurance sector which brought Italian IntesaBci to VÚB, the Austrian Bawag to Istrobanka and German Allianz to SP, none of the new owners has expressed an intention to replace Andersen with another auditor, even though their mother companies use different firms.

"Not one of our clients has communicated with me that it was intending to replace us with a different auditing firm," Pardo said.

"Our clients here in Slovakia are looking into the crisis Andersen has in the US but are not reacting negatively, which in the end is the most intelligent approach. Audits for this year have been signed and are about to be finished, so all our clients have another half a year to assess the situation," Pardo said.

Milan Vrškový, the head of the supervisory board at Tatra Banka, one of Andersen's biggest clients, said that the bank was not considering replacing its auditor. "Andersen is a huge company and we for sure would not draw consequences from what has happened in the US. It's a totally different country," he said.

According to Lodi-Fé, a snowball effect may still come after the indictment on Andersen in the US. "But so far I have not heard anything but questions like 'Are you after Andersen's clients?'"

Whatever the eventual fallout of the Enron scandal and the KPMG announcement, auditors said that it would not dramatically shake up the auditing market in Slovakia.

"The Slovak market is small and saturated. And if a merger takes place, clients will just start thinking 'Big Four' instead of 'Big Five'," said Ivan Bošeľa, the president of the Slovak Chamber of Auditors.

However, Pardo said that lessons from what had happened to Andersen would have to be learned. "The market is going to be much more demanding in terms of quality, so audits will be done under less pressure, of course for higher fees. I think that even if a merger takes place, no one is going to relax because now they see that the risk is too high."

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