AYB321 Strategic Management Accounting
MID-SEMESTER CASE STUDY
Semester 2 2013
Arthur Andersen LLP 
Introduction and Overview
It is difficult to find an example of a more spectacular business failure than the recent collapse of Arthur Andersen. Within a few years, Andersen moved from one of the largest professional service organisations in the world to almost complete collapse. The impact of the firm's failure on its employees, customers, investors, and the general public is hard to overstate. Its once proud reputation had been reduced to shambles. Even the President of the United States joked:
We just received a message from Saddam Hussein. The good news is that he's willing to have his nuclear, biological and chemical weapons counted. The bad news is he wants Arthur Andersen to do it.
The dramatic demise of Andersen (along with the failures of companies such as Enron and Global Crossing) has raised concerns among managers throughout the world. They want to understand what caused the collapse of the company so that they can take actions to avoid similar fates.
Over the years, Andersen's business environment and strategy changed in material ways. Their management responded by making associated changes in their organisational architecture (decision right, performance evaluation and reward systems). Part 3 of this book has argued that ill designed organisational architectures can result in poor performance and even company failure. An important question is whether Andersen's failure can be traced to inappropriate organisational choices. An even more critical question is whether other managers can learn from Andersen's mistakes. We believe that the answer to both questions is yes.
Our case study begins by summarising the history and events that led to the collapse at Arthur Andersen. This discussion is followed by a series of questions that ask the reader to analyse the demise of Andersen in the context of the framework introduced in this book. Our purpose is not to present all the relevant analysis ourselves. Rather it is to provide readers with the opportunity for an integrated analysis and capstone discussion of an important business problem that relies on material drawn from across the chapters in Part 3 of this book. It also provides a forum for discussing the root causes of the recent business scandals that have rocked the international business community.
Arthur Andersen: The Early Years
A 28-year-old Northwestern accounting professor named Arthur Andersen started his own business in 1914. Andersen's strategy was to offer high-quality accounting services to clients – promoting integrity and sound audit opinions over higher short-run profits. Soon after Andersen formed the firm, the president of a local railroad demanded that he approve a transaction that would have lowered his company's expenses and increased its reported earnings. Andersen, who was not sure he could even meet his firm's payroll, told the president that there was "not enough money in the city of Chicago" to make him do it. The president promptly severed his relationship with Andersen. However, Andersen soon was vindicated when the railroad filed for bankruptcy a few months later.
In the 1930s, the federal government adopted new laws to require public companies to submit their financial statements to an independent auditor every year. These regulatory changes, along with Andersen's reputation, helped the firm to grow. During these formative years, the organisation continued to promote its "four cornerstones" of good service, quality audits, well-managed staff and profits for the firm. Quality audits were valued more than higher short-run firm profits. Leonard Spacek, who succeeded Andersen as managing partner in 1947, produced more company folklore when he accused powerful Bethlehem Steel of overstating its profits in 1964 by more than 60 percent. He also led a crusade to motivate the Securities...
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