CDNow

(CDNW)

shares fell 31% Wednesday after its accounting firm,

Arthur Andersen

, cast a shadow over the financial future of the online music retailer.

Andersen accountants reported in CDNow's annual report that the Fort Washington, Pa.-based company faces "substantial doubt about its

CDNow's ability to continue as a going concern."

CDNow's shares fell 1 3/8, or 27%, to 3 11/16, in a high-volume selloff, continuing a yearlong slide in which the stock had traded as high as 23 1/4. (CDNow's shares closed down 1 9/16, or 31%, at 3 1/2).

CDNow said it could meet debt-payment obligations until Sept. 30, but cautioned that might not find the financing necessary to continue its operations thereafter.

The company said it was actively seeking financing of a merger partner following the failed merger on March 13 with

Columbia House

, a music club owned jointly by

Sony

(SNE) - Get Report

and

Time Warner

(TWX)

.

Disappointed by a scrapped merger deal that would have put CDNow back on solid financial ground, investors rushed to sell the stock on March 13, which was the company's highest volume trading day in a year.

After scuttling the merger, Sony and Time Warner said they would invest $51 million in CDNow, including $21 million in cash to acquire 8%, or 2.41 million shares. The two lending companies also agreed to extend the re-payment period on a $30 million loan.

Jason Olim, CDNow's president and chief executive, said in an interview after the derailed merger, "This was not an entity we all wanted to be shareholders in."

Joel Sussman, the company's chief financial officer, said that the company's goal was to stretch its resources until the end of the year and that it would take less than six months to find another investor or partner. with the help of investment bankers

Allen & Co.