In order “to offer high-quality accounting services”, Arthur Andersen (AA), a Northwestern accounting professor started a business to offer services to clients promoting “integrity and sound audit opinions over higher short-run profits”. The company’s “four cornerstones” was good service, quality audits, well-managed staff, and profits for the firm. Their strategy was to focus on quality and high standards of audits rather than profits, a very successful strategy that led to consistent growth over the years.
Environmental, strategic, and organizational changes
In designing the optimal architecture for a given firm, market conditions, technology, and government regulation should be taken into consideration as these are important factors and determinants of strategy. At the top is firm’s external business environment which comprises of technology, markets, and regulations all of which feeds down strategy, organizational architecture, incentives and actions, and firm value.
In order to focus on generating new business and cut costs AA adopted a new strategy which involved evaluating its partners on how much new business they brought to the firm. This newly adopted strategy made it more about the numbers and making money. In order to reduce the costs they required partners to retire at the age of 56 years. With this strategy it led to the increased emphasis on revenue growth as well as expense reduction.
There were new partners that rose to the top, Steve Samek, a prominent example of a partner that was able to turn a $50,000 audit fee into a $3 million audit engagement. Although some rose to the top, such a policy it led to fewer experienced auditors and fewer partners overseeing audits and signing off on inaccurate financial statements for companies that overstated revenues due to improper write off of assets.
Another prominent change within the firm was when an Andersen engineer, Joseph Glickauf, demonstrated that computers were able to automate bookkeeping records. This was noted to be a “monumental change in the partnership” and allowed the company to enter the consulting business in 1954. They were able to help their clients automate their accounting records and they were able to develop the largest technology practice of any accounting firm.
The firm’s external environment was also changing in 1930s as the federal government adopted new laws that required public companies to submit their financial statements to an independent auditor every year. Added regulations led increased revenues during this period and helped with the firm’s reputation and growth.
In 1998 when Samek became the managing partner he formulated a new strategy the “2X” performance evaluation system which included advice on how partners should “empathize” with clients. Along with making organizational architecture changes he also changed the culture by making the dress code a relaxed and adopted a new logo that incorporated a rising sun.
Enron’s Audit due to a few “bad partners”
Arthur Andersen began auditing Enron’s books in 1986. Early 2001 Enron was considered the “premier energy company” with a market value of equity of approximately $75 billion and such a high market value meant that it was important to pay close attention to the books of Enron since there is heavy reliance on the auditor’s opinion. Enron’s engagement fees accounted for just a small portion of AA’s revenues but most of the revenues came from a Huston office that was set up in Enron’s Huston headquarters with the partner David Duncan.
In evaluating Andersen’s claim that their problems on the Enron audit were due to a few “bad partners” I would disagree because of the close relationship that the two companies shared along with a poorly developed organizational architecture. The Huston headquarters had over 150 Andersen professionals on site that seemingly knew or were aware of the accounting scandal but chose to ignore it. Professional...
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