Paying the price - TheStreet

CPA Joseph Bachar, managing partner of Israel's fourth largest accounting firm Luboshitz Kasierer, had no idea in November 2001, what was about to happen to him.

The Enron collapse had already begun gathering momentum and as Dynegy backed down from buying the company a few analysts and commentators began raising questions about the functioning of Enron's auditors ¿ Arthur Andersen ¿ but no one thought for a moment what could happen in the accounting sector in the coming months.

In December, Enron went into bankruptcy and more and more attention was focused on Andersen in media coverage of the affair. By now Bachar already understood that being connected to the global Andersen firm was not going to be good for Luboshitz Kasierer¿s reputation, but he had no idea where that would lead.

In January, the U.S. Congress launched an enquiry into the Enron collapse, and its accountants were summoned to provide some answers. And Bachar knew that this was a serious crisis, but he had no idea he was only weeks away from seeing the firm¿s biggest clients jumping ship. In February, Professor Paul Krugman declared in a New York Times article that the Enron collapse is one of the most significant economic events of the past decade and will leave a larger imprint on the economy than the events of September 11. Andersen, losing clients rapidly, appointed former Fed chief Paul Volcker as chairman to try and regain customer and market confidence.

At this point Bachar admits the affair will have a material impact on Andersen, but says it is not related to the firm in Israel.

In March, the first estimates sneak out that Andersen could also declare bankruptcy due to client desertion and Enron-related lawsuits.

Bachar is still optimistic. "Andersen will continue to exist, it is a strong company and it will pull through. In Israel we have not lost a single client, not even companies that are publicly traded in the U.S."

In April, accounting firms the world over begin to desert Andersen and merge with the local affiliates of its competitors.

Bachar is still reserved. He admits examining mergers with competing firms, a few clients announce they are considering switching accountants, and one even publishes a statement that if Bachar doesn't find a new major international partner within a month ¿ the company will leave Kasierer.

May 7, 2002. In the U.S. Andersen's criminal trial starts and in Israel, Bachar will officially inform the partners and employees of Luboshitz Kasierer that the firm will be swallowed by one of the other major accounting firms in Israel, apparently Kesselman and Kesselman.

If the deal doesn't collapse, the name "Luboshitz Kasierer", synonymous with accounting in Israel for almost fifty years, will disappear from the nameplate of any accounting firm, and it appears that Bachar, managing partner for the past seven years will have to give up his status. The terms of the merger have not been made public but senior sector sources estimate that Luboshitz Kasierer arrived at the bargaining table exhausted by previous negotiations with all the other players.

Why was Luboshitz Kasierer forced to merge at almost any price and give up a huge portion of its reputation, status and identity? No one in the Israeli office is connected even remotely to anything even remotely related to Enron, and most of its clients are Israelis who have no direct or indirect contact with Andersen. The answer is one word: Globalization.

Despite the fact that in the past six months it has looked like Israel's strong connection to the financial world was waning against the backdrop of the security situation ¿ apparently the globalization process had established firm roots here. The business, cultural and organizational relationships between the Israeli economy and the rest of the world are still strong, and are unlikely to be cut off.

The accounting sector is a clear example: In the past five years, the sector has consolidated quickly into the U.S. model ¿ five major firms that control most of the market. During that time the norm was established that without a major international affiliation, it was impossible to be large firm.

In large areas of the Israeli economy, mostly in the public sector but in the private sector as well, there are managerial and cultural norms that are unacceptable in the rest of the world. But there is a long line of sectors that joined the globalization trend and adopted internationally accepted norms.

Until a year ago, most companies saw the positive side of globalization: the opening of new financing, marketing and know-how channels. Now, due to the economic crisis in the U.S. and the collapse of the capital markets, they are beginning to realize that everything comes with a price.

When Bachar chose to join Andersen seven years ago, he didn't think for moment that the firm could collapse and force him to choose between losing clients at a dizzying pace or being swallowed up by a bitter rival.

The cruel and rapid process that Bachar endured in the past two months, has been endured recently by many Israeli technology companies and is likely to happen to a long line of companies in a variety of sectors.

But it won't happen only in the business sector: the Israeli economic leadership, which has enjoyed the fruits of globalization until now in the form of huge sums of foreign currency flowing into Israel and new markets, will face Bachar¿s dilemma in the next few months. Either fall in line with international rules quickly, or risk losing a large portion of the achievements and growth of the past ten years.

The way things look now, the upper echelons of the Ministry of Finance which recently submitted a budget that economists believe will lead us into a huge deficit, refuse to recognize the new reality and the price we will pay the moment the world understands we refuse to play by its rules.