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Andersen Rivals to Pick Up Nevada Gaming Companies

22 April 2002

by Chris Jones and David Strow

LAS VEGAS -- As rumors swirled that Arthur Andersen LLP was on the brink of collapse late last week, the company's top local executive was reluctant to speculate on the future of the accounting firm's Las Vegas office, its local clients or employees.

Should the 89-year-old company fail, however, sources outside the company have identified rivals Deloitte & Touche LLP and PricewaterhouseCoopers (PWC) as the two most likely candidates to take on Andersen's lucrative gaming clients, as well as many of its Nevada employees.

Chicago-based Andersen on Thursday ended talks with the Justice Department that could have settled criminal charges stemming from Andersen's alleged wrongdoings on behalf of its former client Enron Corp. The government is now preparing for a criminal trial scheduled to begin May 6.

Many experts said the failure to reach a settlement could mark the end of Andersen. But Steve Comer, managing partner of the firm's Las Vegas office, said Friday he would not speculate on Andersen's future because the company's situation is changing so rapidly.

"There are so many things up in the air," Comer said. "I would hope that we'd have a good idea about what's going on in a week or so, but right now I really don't want to talk about it. ... The situation is so fluid, but we're trying to work through it."

Comer said Friday that Andersen's local offices has about 70 to 80 employees. While he declined to discuss how the company's recent troubles have affected its employee base, his latest total was below the estimated 100 employees he cited for a Feb. 21 story in the Las Vegas Sun.

Whether Andersen stays in business or not, its days as the gaming industry's dominant supplier of auditing services may be limited, following an order by New Jersey gaming regulators last month that casino firms operating in that state had to sever ties with the firm. Covered by this order are Harrah's Entertainment Inc. and MGM MIRAGE.

Andersen's other major gaming clients in Las Vegas include Mandalay Resort Group and Station Casinos Inc., and both are unaffected by the New Jersey order. In fact, on April 9, Station indicated in its proxy statement that it has renominated Andersen to serve as its auditing firm in 2002. Shareholders will have the opportunity to vote on this selection at Station's May 22 annual shareholders meeting.

But sources say Andersen's gaming business could be on the move much sooner than that. PWC has been mentioned as a possible buyer, but most now believe the business will soon be on its way to Deloitte & Touche.

"I'm surprised it hasn't happened already," one source said, speaking on condition of anonymity. "My expectation is that sometime, literally any day now, we should hear something."

Factors in the pending move include not only the New Jersey order, but the failed talks with the Justice Department and the potential of an Andersen bankruptcy.

"There's a real sense of urgency to get something put together," the source said. "There's real value to that practice, and I think Andersen's trying to figure out how to maximize its value."

Companies wouldn't have to automatically appoint Deloitte as their auditor if such a move occurred. However, it is expected gaming companies would go with Deloitte in such a case, since they are familiar with Andersen's Las Vegas auditors.

On April 4 Andersen and Deloitte announced an agreement that allowed for "a significant number" of Andersen's U.S. tax partners and tax professionals to join Deloitte & Touche as early as April 30. Terms of the agreement -- which has yet to be finalized -- were not disclosed.

Calls to Deloitte's Las Vegas office were redirected to its corporate headquarters in New York. Spokeswoman Deborah Harrington could not comment on whether any Las Vegas-area employees would be affected by the proposed exchange with Andersen.

Still, Harrington added that Deloitte has already taken on 14 former Andersen clients and will evaluate the addition of others should they become available.

"We're always competing with the other firms for clients and we'll continue to do that," said Harrington, whose company handles auditing duties for Park Place Entertainment Corp. and Boyd Gaming Corp.

David Nestor, a New York-based spokesman for PWC, said Friday his company has also expressed interest in adding ex-Andersen employees and clients, although he could not comment specifically on his company's intentions in Nevada.

Nestor said PWC currently handles accounting for Las Vegas Sands Inc., Coast Resorts Inc. and various tribal casinos, among others. He would not rule out the possibility of taking on additional gaming clients should they sever ties with Andersen.

"If they fit with our strategies and people, we're interested in talking to Andersen's clients and employees in specific areas," Nestor said.

Fellow Big Five firms Ernst & Young International and KPMG were also mentioned as companies that could possibly take on some of Andersen's Nevada clients through offices located outside the state, sources said.

Resolving the situation will prove crucial in the gaming industry, as Andersen does far more than auditing of the companies' financial statements.

The Nevada Gaming Control Board collects 6.25 percent of casinos' gross gaming revenues as a tax, and uses its own auditors to verify these revenues.

However, the control board requires casinos that gross more than $6.7 million a year in gaming revenues to use a firm to produce audited financial statements that are presented to the control board.

"We rely on those very heavily, because it provides us with information that helps monitor the casinos and their financial position," said Gregory Gale, chief of the control board's audit division. "Overall, they give us a very good handle on their financial health or lack of financial help."

In addition, any casino that produces more than $3 million in annual gaming revenues must use an auditing firm to ensure that the casino is in compliance with internal control standards set by the control board. For example, auditing firms must review certain cash transactions to ensure that the casino is in compliance with Nevada's anti-money laundering regulations, Gale said.

"The Gaming Control Board doesn't have enough personnel to be out there constantly reviewing compliance," Gale said. "It's not like we have agents stationed on premises."

Because of the role of Andersen in the regulatory process, Board Chairman Dennis Neilander said he was "of course" concerned about speculation that Andersen was in financial trouble.

"But I've been in contact with Arthur Andersen's people, and I'm confident they are continuing to carry on the business they need to to service clients in Nevada," Neilander said.

With the turmoil surrounding Andersen, Gale said some resumes from Andersen personnel have been arriving at the control board. But none have been hired, he said.

"Unfortunately, the governor ordered a hiring freeze, so we haven't been able to avail ourselves of any Arthur Andersen personnel recently," Gale said. "Obviously if the hiring freeze lifted, we'd like to consider their personnel, because they're very well qualified."

Glenn Bougie, a partner with the Las Vegas office of the accounting firm McGladrey & Pullen, said in the event of its collapse, Andersen's local employees would likely be hired by whatever firm picks up its former accounts.

"If one of the firms exits the market, its clients will still need people to do its audits," Bougie said. "I think those people will likely be able to find work, but it may be that a lot of them end up going to work wherever their clients end up."

Mike Micone, vice president for the Las Vegas office of the staffing agency Accountants Inc., said his firm has already received some calls from current Andersen employees who inquired about their employment prospects.

Micone said recent improvements in the national economy have created new demand for accountants and said he expects local firms are likely to hire many ex-Andersen employees should the company fail. Other Andersen castoffs could be forced to relocate outside the Las Vegas Valley, seek employment with smaller local companies or be out of work altogether, he said.

"There will be some whose skill sets or salaries won't fit right away and they could end up on the open market," Micone said. "Still, I think the larger CPA firms will pick up a lot of these local people."

Carl Rowe, a director with the Las Vegas-based accounting firm Fair, Anderson & Langerman, said Friday he believes some Andersen exiles may not be a good fit for smaller accounting firms, which typically need their employees to handle more diverse tasks than are required at larger firms.

"The larger firms ask their people to be specialists, but we need our people to be more broad-based," Rowe said. "People who think there's going to be a huge influx of Arthur Andersen employees into smaller Las Vegas accounting firms are probably wrong. ... Those (employees) are going to stick to the other Big Five companies because their skills are a better fit."

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