Under pressure from creditors, employees and investigators, Kenneth L. Lay last night resigned as chairman and chief executive of Enron Corp. That's only the latest fallout from the nation's largest corporate bankruptcy filing ever. Now, questions are being raised over the future of the company's auditor, Arthur Andersen, one of the nation's oldest and largest accounting firms.

For years, Arthur Andersen was at the top of its game. The biggest of the Big Five accounting firms, it boasted more clients, more money, and-many said-more talent than its rivals. Andersen also seemed to make fewer mistakes. "In the past, when something [bad] happened, it never happened to Andersen," says Scott Whisenant, a University of Houston academic who has been tracking audit firms for nearly a decade.

No more. Today, Arthur Andersen ranks fifth among the accounting firms. It has had to answer some disturbing questions about the accuracy of its accounting. In the past few years, the firm has agreed to two multimillion-dollar settlements stemming from lawsuits related to the financial losses of former clients Sunbeam and Waste Management. Andersen also incurred a $7 million civil penalty-the largest such fee ever assessed by the Securities and Exchange Commission-for filing false or misleading audits.

Now it faces fallout from the failure of Enron. Will the embarrassing losses and ensuing investigations-including congressional hearings-mean the end for the nearly 90-year-old company? "This is an industry that lives on integrity. That's the only reason they exist," says Dean McMann, chief executive of the Ransford Group, a Houston-based consulting firm. "This is such an attack on such a major brand-one that is not going to withstand a criminal finding."

Andersen's top executives have been scrambling to reassure clients that the collapse of Enron was not the result of any accounting irregularities. Enron suffered "an economic failure"-Andersen CEO Joseph F. Berardino said during an appearance on NBC's "Meet the Press" last weekend.

Nonetheless, the accounting firm has dismissed and demoted various executives for destroying documents related to the Enron audit. On Jan. 15, Andersen fired lead audit partner David Duncan for directing what it called "an expedited effort" to destroy hundreds of e-mail messages and documents related to its audit of Enron during a two-week period after the SEC requested information. Andersen also put three Houston partners on leave and relieved four others of management responsibilities, including D. Stephen Goddard Jr., who ran the Houston office. "This was a painful decision, but it was absolutely the right thing to do," said Berardino in a statement. "We are prepared to take all appropriate steps necessary to maintain confidence in the integrity of our firm."

In Sunday's television appearance, Berardino said Duncan displayed, at the least, "extremely poor judgment" in discarding the audit documents. Still Berardino insisted that, overall, he has found "nothing that is illegal" about the way in which Arthur Andersen conducted its audits of Enron.

Congress isn't so sure. A House committee wants Berardino, Duncan, attorney Nancy Temple and risk manager Michael Odom to testify explain the shredding of Enron-related documents. (In an appearance today, Duncan refused to testify, invoking his Fifth Amendment protection against self-incrimination.) And the audit firm is likely to be the target of a number of lawsuits filed by angry Enron shareholders who are looking for a way to recoup some of the hundreds of millions of dollars they lost.

Enron shareholders range from state pension funds to Oklahoma oil explorers-all of which claim to have lost millions. In Connecticut, the state attorney general is even considering whether Andersen's license to practice in that state should be revoked.

"These firms are not financed in a way to pay exorbitant legal bills," says McMann. "This could still go away, though it doesn't look like it will. It could also be the end of the firm."

Unlike Enron, Andersen is not bankrupt. With 3,000 clients, the firm's revenues totaled $9.3 billion last year. But experts say the firm could face billions of dollars in damages from Enron's financial failure. Even a settlement for tens of millions of dollars would be devastating. "Andersen has the kind of exposure here that is of a magnitude never before seen by any firm," says Mark Cheffers, chief executive of AccountingMalpractice.com, which advises accounting firms on how to reduce liability risk. "They are going to have a terrible time defending themselves."

The University of Houston's Scott Whisenant says Andersen faces a three-pronged threat from the collapse of Enron: losing money (and credibility) through lawsuits, losing staff and losing clients. Berardino insists the clients are sticking by the firm. "Our clients are standing by us because we do good work," he said Sunday, adding, "I don't think we're finished at all."

While longtime client R.R. Donnelley & Sons says it is "monitoring the situation" at the firm, spokeswoman Vera Panchak says Arthur Andersen is auditing its 2001 books. She adds that Donnelley-the nation's second-largest printer-has no plans at this time to discontinue its relationship with the accounting firm.

But can Andersen hold on to its employees? "The tragedy will be more of a brain drain than a client drain," predicts McMann, the chief executive of the Ransford Group. His firm has received about 1,000 resumes, phone calls and e-mails from Arthur Andersen employees throughout the country over the past 10 days-more than the group has ever had at one time from employees at a single company. On average, McMann says Ransford would get between 30 to 40 inquiries from a particular financial firm during that time period. He compared this to the jump in inquiries from employees at Ernst & Young when it sold its consulting division to Cap Gemini, Europe's largest computer-services company. But that was just a few hundred. "This is an avalanche," he adds. "I've never seen this phenomena before."

Still, he adds that many of the employees were just testing the waters, and it's too early to tell if they are serious about jumping ship. Similarly, Whisenant says that the case is so public and tempers so high right now, that it's hard to predict who will be left standing when the dust settles. "There's probably a little too much finger-pointing at the accounting firm now and not enough at [Enron] management," he says, adding that-at this point-the chances of Andersen following Enron's lead and declaring bankruptcy remain "very small."

"But if criminal actions were shown to have occurred at Andersen and if indictments are brought against them," he adds, "Well, that is a different story altogether."