Arthur Andersen Case Study

“Arthur Andersen Case Study”

Samantha Lucas

Krutik Patel

Fahad Mohammed

University of the Potomac

Bus 560

Final Exam

May 21, 2017

Professor Valadez, C.

ARTHUR ANDERSEN CASE STUDY

Q1. Discuss the environmental, strategic, and organizational changes that occurred over the life of Andersen in the context of Figure 11.1

Several environmental strategic and organizational changes occurred at Arthur Andersen’s.

With the advent of technology, besides providing auditing service, the firm also started providing computer consulting services, as the demand for information technology increased. In the 1930’s, the establishment of new laws by the federal government, required companies to submit company financial reports to an independent auditor, which also helped the firm to grow.

Strategic Changes: the four pillars on which the firm once operated: good services, quality audits, well managed staff and profits for the firm were given utmost importance, rather than higher short-term profits. Quality audits led to Andersen’s growth and increased reputation, despite the auditors not being that wealthy in the initial years. However, after the formation of two separate entities, Arthur Andersen’s changed its strategy which primarily was about generating revenue by reducing expenses, far from what they used to adhere in their formative years.

Organizational Changes: The new ‘2X’ performance evaluation system was brought into effect, where the partners who brought in business in their area of expertise were expected to get double the revenue, which was of some other field and those who managed to do so were rewarded and those who couldn’t were penalized.

Q2. Evaluate Andersen’s claim that their problems on the Enron audit were due to a few “bad partners” in the organization. If you disagree with this claim, discuss what you think were the root causes of the problem.

Arthur Andersen was Enron’s external auditor, who failed in responsibilities, and claimed that the problem with Enron’s audit were due to a few unscrupulous partners in the organization was incorrect.  It can be agreed that this problem can be dated back to when Andersen incorporated the organizational strategic and environmental changes after the separation of the firm, into separate entities. The strategy adopted by Arthur Andersen, concentrated on generating maximum revenue and reducing costs, which required partners to retire at an early age, which in turn contributed to higher revenues and cost reductions.  However, the firm was left with fewer and lesser experienced auditors and partners. The strategy formulated by partner Steve Samek to take on double the business in work outside their area of expertise, than what they usually have in their area of expertise, which in this case was auditing. Also, one of the major root causes of the problems overlooked by Arthur Andersen.

Q5. Discuss the relation between the “hard” and “soft” elements of a firm’s corporate culture in the context of this case?

The McKinsey 7-S model involves seven interdependent factors which has been categorized as “hard” or “soft” elements. “Hard” elements would include: strategy, structure and systems.  “Soft” elements would be: shared values, sills, style and a firm’s staff.

 “Hard” elements are easily defined or identified and management has the ability to influence them directly.  “Soft” elements are said to be much more difficult to describe as they are less tangible and influenced by culture.  However, soft elements hold equal importance as hard elements, in order for an organization to be successful.

According to the Arthur Andersen case, it seems as though the “soft” elements of corporate culture were directly related to or resulted in a side effect of change in the “hard” aspects of corporate culture.  During the company’s existence it seems that “tradition was everywhere”.  The soft elements were the physical designs of their offices, dress codes and physical appearance.  

Hard elements consist of quality control which exerts all aspects of the business and companywide standards.  While changes occurred with the “hard” cultures, such as focusing on high revenues as opposed to an outstanding quality of work, changes were also noticed with the “soft” elements.  

The dress code of managing partners were not as shrill, company logos were introduced and the company’s enormous wooden office doors, were merely metaphoric to represent the strength, and sturdy operations of the company.

Q6. Do you think that the problems at Andersen were unique to them or did they exist at the other big accounting firms? Suppose you were the top partner at one of the other major accounting firms at that time of Andersen’s demise. What actions, if any, would you take in response? Explain.

I don’t think the problems at Andersen were unique to them, but they did in fact contribute to their demise, which allowed other companies to learn from Andersen’s experience (Kelly & Earley, 2009).  However, one feature that distinguished Andersen from other massive accounting firms was its one – “firm” concept, which emphasized a unified organization across the world to provide clients with consistent and quality service, while maintaining the firm’s independence.  

However, the firm’s gradual deviation from its culture eventually led to its demise, which is a common repercussion (Niece, J. M., & Trompeter, G. M., 2004).

 Providing I were a top manager or partner at the time of Andersen’s demise, I would have requested my firm’s practices reviewed via internal investigation, and perhaps reviewed by the SEC, abide by my ground rules and policies and provide quality accounting and auditing services.  Additionally, I would operate the two entities separately in order to avoid clashes. Also, ensure all employees at respective firms were well motivated, so as to avoid being lured by potential profitable opportunities. Moreover, recruiting appropriate candidates would play a chief role in selecting individuals interested in learning more than earning profits.

        In the event of any malpractices, correct and make the necessary changes that would be best suited for the organization.   It is evident that during Andersen’s demise, all accounting firms suffered a credibility backlash.

Andersen like other major accounting firms in respect to recidivism, experienced audit failures during the period of the 1990’s and early 2000’s (Kelly & Earley, 2009).  Arthur Andersen also played a significant role in the Enron case, where shareholders such as Waste Management, Global Crossing, Sunbeam and WorldCom suffered major losses, estimated at an approximate three hundred billion dollars (Byrne 2002).

The firm in its formative years primarily focused on producing and providing quality audits to its clients, rather than earning higher profits. Subsequently the focus shifted to earning higher profits and bringing in maximum business, post the split of the firm, which any firm would have practiced in order to survive in the industry. However, an equilibrium between the elements would be required, in order to sustain the market and find a balance where firms would commonly dwindle as in the case of Arthur Andersen.

Q7. In 2000, the SEC proposed new regulations that would limit consulting work by accounting firms. This proposal was not passed by Congress. Do you think that the legislators were trying to act in the public interest when they failed to pass this proposal? Explain.

The SEC proposal to restrict the consulting services at accounting firms was done in order to retain quality and consistency of the audits provided by accounting firms, as these firms were indulging in practices to earn more profits and to bring in new business by offering consulting services. Hence, the SEC proposed a new regulation that would restrict the accounting firms to solely participate in accounting and auditing activities, rather than providing non-audit services.     However, legislators failed the public and did not act in their best interest; because they succumbed to the pressure from auditing lobbyists.  At which, Steve Samek led lawsuits, payouts, fines etc. and led the charge to oppose the proposal.