The Andersen brand will vanish after the takeover, which will create the second-largest accounting firm in Australia behind behemoth bean counter PricewaterhouseCoopers. The rival firms had been negotiating for the past three weeks.

Rival Deloitte Touche Tohmatsu, which was also in the running to acquire Andersen's Australian practice, ended talks before the announcement yesterday.

The financial terms of the takeover were not disclosed.

Ernst & Young chief executive officer Brian Schwartz, who will remain at the helm, said the deal would deliver "certainty and opportunity for Andersen's people and clients''.

The takeover was subject to normal due diligence and partner votes in the coming weeks.

A spokeswoman for the Australian Competition and Consumer Commission said the ACCC would look at it although it did not require ACCC approval to go ahead.

The new entity is expected to begin operation from mid- to late May 2002.

It will include Andersen Legal, but Andersen's burgeoning consulting business, which has about 170 employees, will be jettisoned. Ernst & Young sold its consulting practice to Paris-based IT firm Cap Gemini two years ago.

"Ernst & Young will be working with Andersen to divest the consulting practice over time,'' Mr Schwartz said.

Andersen CEO Garry Hounsell, who will remain with the firm, was confident the deal would quarantine any potential liabilities flowing from bankrupt US energy trader Enron and the failed insurer HIH. ``With respect to Enron, we don't believe that any liability will flow down to the Australian firm or its partners,'' Mr Hounsell said.

"HIH, we will need to watch that one going forward, but if there is any liability, that would be to the account of the ex-Andersen partners.

"The Andersen partnership at the present time has insurance. A possible claim has been notified and we are covered by that so we just go forward from here.''

As for Andersen being swallowed up by its rival, Mr Hounsell said the two practices shared sufficient common ground. ``Culturally we were very similar, and we feel we will come together across the full breadth of both organisations very well,'' he said.

"Both firms have a wonderful client list without any significant conflicts. In the end it made perfect sense to my partners that this was the right solution for them and our people going forward.''

Deloitte Touche Tohmatsu CEO Dominic Martino said yesterday that his team had not been able to secure a satisfactory deal.

"We entered discussions on the basis that the firm could put in place a structure that would not expose us to any liabilities from HIH, Bond Corporation and Andersen globally, and on the basis that we could be confident that their best clients and people would come across,'' Mr Martino said.

"At the end of the day this was not possible.''

The latest development means Andersen's Australian arm will join the New Zealand and Russian practices, which have already thrown in their lot with E&Y. In China and Hong Kong, Andersen's offices have reached a deal with PricewaterhouseCoopers. The Ernst & Young win comes just three days after Andersen and KPMG abandoned a local merger because of their respective roles in HIH: Andersen was its auditor and KPMG is now its liquidator.

With the likelihood that KPMG as liquidator acting for unsecured creditors, would sue Andersen, negotiators were unable to reach a deal that could quarantine potential liabilities.

-- By Leon Gettler