Business Ethics and Management
The fall of Arthur Andersen
Environmental, strategic, and organizational changes in Andersen
The business setting of Andersen comprises technology that was utilized efficiently. The organization initiated the use computer bookkeeping and established the most significant technology practice. Andersen’s fundamental objectives were strategic. Andersen technically chose the right business, and in his business goals, quality work had a prevalence of higher short-term profits. Further, he rewarded his workers for doing their exemplary job well. Andersen underwent a series of organizational changes since its inception and particularly when it entered into the consulting business that later led to internal feuds between the consultants and auditors. This wrangles led to its split into Andersen consultants, which was to handle consultancy bit of the business and Arthur Andersen that was to control the auditing bit of the company.
The genesis of Enron misfortunes started when Andersen decided to expand its operation from strictly doing the independent external auditing business to engaging both in the internal and external auditing for some of their clients. In my opinion, that was the root of the problem with Enron. When it augmented its staff with that of Enron, it jeopardized the independence of the company, and therefore there was every possibility that all the team would act and make decisions according to their best interests. Further, the decision to decentralize its powers by breaking its professional group in Chicago was a huge mistake. It is always more efficient when final results are being monitored from a single unit than from multiple units. Therefore, the claim by Andersen that Enron’s mistake was due to few “bad Partners” is clueless and baseless.
If I were Andersen’s managing partner in the 1990s
The two big mistakes Andersen made in the period above is to allow the suggestion of the company going into internal and external audits of its clients as well as closing down its professional group office in Chicago and decentralize the management. If I were a managing partner, I would not have allowed the two processes to take place. It is not humanly possible to honestly and independently audit yourself. That is what Andresen was trying to do running both internal audits and external audits of one corporate.
Relation between Andersen’s Misfortunes and multitask principle-agent theory.
According to Fehr, & Schmidt, (2004 p.1), Bonus contracts highly outshine piece-rate contracts. Most principals remunerate significant endeavors on all the jobs alongside huge bonuses. Agents expect the reward and therefore give substantial effort on all the works. Conversely, a considerable number of agents with a piece-rate agreement concentrate on the first job and neglect the second. That is exactly what happened with Andersen when it started doing both consulting and auditing for some of their clients. The partners concentrated much on the Consulting business since the rewards were higher and forgot or neglected the auditing business.
Relationship between the “hard” and “soft” elements Andersen’s corporate culture
In the context of Andersen, it is clear that that the management used “hard” organizational culture approaches to climb up the ladder. This fact is evidenced by the strict code of dressing for all the auditors and workers that were employed in the firm.
Lack of concentration on a single line of business
The problems at Andersen were not Unique to them. It is the nature of most if not all business to desire to make more and more profits through taking up any business opportunity that comes their way. If I were at the top partnership of a major accounting company, I would disengage from all internal operations of any of our clients that we were handling their external independent audit.
SEC’s proposed new regulations in 2000 that would limit consulting work by accounting firms.
No, they were not acting in public interest since if they had passed that proposal, Andersen would not have been allowed to take part in the internal operation of Enron, and as such, it would still be existing and providing employment to the 28,000 employees that lost their jobs.
American Institute of Certified Public Accountants code of conduct
Moral issues ought to remain with individuals at the personal levels. If the workers at Andersen chose to conduct themselves unethically, they would have still done the same even if the code of conduct was in existence. Therefore, in my opinion, it cannot be claimed that Andersen’s staff conducted themselves the way they dis due to lack of a code of conduct.
The Sarbanes-Oxley Act of 2002 and the establishment a new five-person oversight board
The establishment of the oversight board was a perfect idea since it is always wise to regulate any professional to set paradigms. Any professional body that is regulated increases efficieny and accountability is one of its key attributes. An organization operating knowing that there is an oversight body that conduct regular analysis of organizations in their field of expertise will always strife to work smart and with a lot of cautiousness.
Fehr, E. and Schmidt, K. M. (2004), Fairness and Incentives in a Multi-task Principal-Agent Model. Scandinavian Journal of Economics, 106: 453–474. doi:10.1111/j.0347- 0520.2004.00372.x