The Impact of Management Planning on the Demise of Arthur Andersen The planning function of management is critical to the success of any organization. Innovative ideas, perfect products, and highly skilled employees fail to become assets if no plans are in place for how these assets will be used to achieve the organization’s goals. In the case of the once, highly successful accounting firm, Arthur Andersen, management’s failure to plan effectively for crises led to its demise. Management Planning at Arthur Andersen
In today’s business environment, successful planning involves analyzing inside and outside factors that affect the organization. Strategic decisions should be guided by market knowledge with objectives that are open to change (Lamond, 2004). During a crisis, planning becomes even more important to an organization’s sustainability. For Arthur Andersen, strategic planning by management should have been implemented with regard to how the Enron crisis would affect organizational goals, a tactical plan to address the situation publicly and internally, an operational plan for conducting business during the crisis, and contingency planning to analyze every way possible to keep the organization from failing as a result of the crisis. Crisis Management Planning
Legal issues, ethics, and corporate social responsibility all had major impacts on the planning by Arthur Andersen management during their times of trouble. According to James and Wooten (2005), organizational crises can be classified into two types: sudden (such as natural disasters, sabotage, hostile takeover, technology disruption) and smoldering (such as rumors/scandals, mismanagement, workplace safety, class action lawsuits). Because sudden crises are often seen as out of the control of people’s hands, the public is often sympathetic and understanding of a company’s reaction to this type of event. Smoldering crises, however, are perceived to be mostly the result of management failings and are often more damaging to an organization’s reputation (James and Wooten, 2005). With the nation still stunned by the tragic events of 9/11, discoveries of fraudulent activities at Enron and WorldCom—two major clients of the Arthur Andersen accounting firm—captured the public’s attention. Within a few months, close to $200 billion of stockholder and employee investments had vanished (Doost and Fishman, 2004). Partners at Arthur Andersen panicked—shredding a good part of the evidence. Such charged decision-making is driven by adrenaline-fueled emotions and all too often leads to costly mistakes (Malhotra, Ku, and Murnighan, 2008). Such was the case for Andersen, since their panicked reaction, more than the frauds themselves, led to the rapid ruination of this prestigious consulting and auditing firm along with their clients. Legal Issues
In June, 2002, a federal jury convicted the Arthur Andersen firm of obstruction of justice for destroying accounting documents related to its work for Enron Corporation. During the summer of 2001, Enron was not Andersen’s only crisis—in July, 2001, a dispute with the Securities and Exchange Commission (SEC) was settled regarding Andersen’s work for Waste Management Corporation, and the lead Andersen partners were sued by the SEC on its audit of Sunbeam Corporation. By the middle of August, 2001, Enron warned Andersen of the possibility of an accounting scandal, and, within a month, a crisis-response group was formed by Andersen (Ainslie, 2006). Ethics
On October 8, 2001, Andersen attorney, Nancy Temple, let partners know that an SEC investigation was highly probable regarding the Enron case. Two days later, a Houston-based Andersen partner urged personnel to comply with the document retention policy, noting “if it’s destroyed in the course of normal policy and litigation is filed the next day, that’s great…we've followed our own policy and whatever there was that might have been of interest to somebody is gone and irretrievable” (p....
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