Capstone Case Study – Arthur Andersen LLP
Bus 680 – Economics for Business Decisions
1. Discuss the environmental, strategic and organizational changes that occurred over the life of Andersen in the context of figure 11.1.
While Andersen started off as a stable environment, once changes started being made to the main focus of the company many changes were expedited. While still successful in it’s auditing business, other opportunities arose that allowed for quicker and more dynamic revenue growth. This strategic shift from auditing only to offering a number of other services (automated bookkeeping, information technologies, consulting, corporate staffing) eventually led to a rift within the company, the separation of operations into two companies under one umbrella, and the eventually severance of those two companies into two wholly separate corporate entities. Once the two companies (Andersen Consulting and Arthur Anderson) split, Arthur Andersen, which was originally the auditing only arm, but had dipped back into the consulting business even though it should not have per it’s agreement with AC, went full force into offering the full range of services. In the quest for the biggest sale and to drive non-audit revenue, managers were compensated based on sales targets instead of performance or quality of work. This lack of quality control and change in the focus of the business was the beginning of the downward projection of AA. The fact that there were changes in all three areas, environmental, strategic and organizational, made it difficult for there to be tight control at AA and almost made it acceptable to make questionable decisions as long as the clients got what they wanted and revenues continued to come in.
2. Evaluate Andersen’s claim that their problems on the Enron audit were due to a few “bad partners” in the organization. If you agree with this claim, discuss what you think were the root causes of the problem.
It was AA’s decision to hire 40 auditors from Enron, then augmented by 150 of their own staff, and place them within Enron as it’s in house accounting staff. Since the staff was on site at Enron, attended Enron meetings, and made decisions in the best interest of Enron and not with the idea of doing quality work, it is hard to put stock in AA’s claim that it was only a few “bad partners”. Also, AA made the decision to break up it’s own Professional Standards Group and re-locate members of that group to local offices. Once that happen though, their power was usurped and held no water. If they questioned decisions, they were removed. It is up to the company to make decisions that not only help generate business, but protect the company and it’s employees from any questionable situations or circumstances where unethical scenarios might play out.
3. Suppose you were Andersen’s managing partner in the early 1990’s. Would you have done anything differently than the actual management (assuming you knew only what they did at the time)?
There are a couple of things that I could have done had I been the managing partner for Andersen in the 1990’s. I think the separation of the consulting business and the accounting business into two companies was actually a good move. The fact that AA eventually started to offer and go after non-auditing services business with clients was where a mistake was made in my opinion. If I were a partner at AA I would have strictly enforced the agreement that we would be sticking with auditing business only. While offering a lower margin than the consulting business, it was a solid foundation and allowed more oversight, tight controls and decreased the likelihood that questionable decisions would be made. I also would have kept the Professional Standards Group in tact to oversee and review all aspects of the operation. Splitting up the group and assigning individual members to local offices basically neutered their...
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