Andersen and KPMG said in joint statements March 25 that they had ended their week-long merger talks after deciding that their conflicting roles in the collapse of HIH Insurance Ltd. would make a union impossible. Andersen was the auditor for HIH, which collapsed last year with debts of A$5.3 billion ($2.8 billion). KPMG was appointed liquidator of HIH.

The decision came in the wake of Andersen's New Zealand partners' announcing Friday of a handshake agreement to merge with Ernst & Young. This news followed the decision Thursday by Andersen's partnerships in Hong Kong and China to bolt the KPMG talks for a merger with PricewaterhouseCoopers.

In Australia, the end of the talks between Andersen Australia and KMPG was almost pre-ordained. The collapse of HIH has become the subject of a Royal Commission and a government-mandated investigation examining whether the decisions or actions of directors, officers or advisers to the company contributed to its failure. The Royal Commission has no power of prosecution, but its findings could be used by authorities to make civil or criminal charges.

The Australian Securities and Investments Commission has already secured civil convictions against three former HIH directors for the misuse of $10 million of HIH funds used to buy the company's shares in the weeks before its collapse.

"Combining the Andersen practice with KPMG in Australia would create a conflict of interest in the HIH liquidation process," KPMG Australia chief executive Lindsay Maxsted said in a statement. "After due consideration, both firms have mutually agreed to end discussions."

Andersen Australia chief executive Garry Hounsell said the HIH Insurance case meant that the combination of the two firms in Australia would be difficult. "The difficulty was acknowledged in our initial discussions and it is unfortunate that we have not been able to resolve the matter," he said.

Andersen has said it is pursuing other avenues including, according to newspaper reports, talks with Ernst & Young and Deloitte Touche Tohmatsu. An Andersen spokeswoman said Monday there would be no further comment.

However, talks with other merger partners could also be complicated by a potential exposure arising out of the collapse of HIH. Andersen has also reportedly canvassed a potential initial public offering.

Andersen Australia has a 2,000-strong workforce. Its business includes audit, tax, consulting, corporate finance and legal. -- Giles Parkinson is editor of afr.com, the Web site of the Australian Financial Review.