Arthur Andersen Essay Essay

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In order “to offer high-quality accounting services” . Arthur Andersen ( AA ) . a Northwestern accounting professor started a concern to offer services to clients advancing “integrity and sound audit sentiments over higher short-term profits” . The company’s “four cornerstones” was good service. quality audits. well-managed staff. and net incomes for the house. Their scheme was to concentrate on quality and high criterions of audits instead than net incomes. a really successful scheme that led to consistent growing over the old ages.

Environmental. strategic. and organisational alterations

In planing the optimum architecture for a given house. market conditions. engineering. and authorities ordinance should be taken into consideration as these are of import factors and determiners of scheme. At the top is firm’s external concern environment which comprises of engineering. markets. and ordinances all of which feeds down scheme. organisational architecture. inducements and actions. and steadfast value.

In order to concentrate on bring forthing new concern and cut costs AA adopted a new scheme which involved measuring its spouses on how much new concern they brought to the house. This freshly adopted scheme made it more about the Numberss and doing money. In order to cut down the costs they required spouses to retire at the age of 56 old ages. With this scheme it led to the increased accent on gross growing every bit good as disbursal decrease.

There were new spouses that rose to the top. Steve Samek. a outstanding illustration of a spouse that was able to turn a $ 50. 000 audit fee into a $ 3 million audit battle. Although some rose to the top. such a policy it led to fewer experient hearers and fewer spouses supervising audits and subscribing off on inaccurate fiscal statements for companies that overstated grosss due to improper compose off of assets.

Another outstanding alteration within the house was when an Andersen applied scientist. Joseph Glickauf. demonstrated that computing machines were able to automatize clerking records. This was noted to be a “monumental alteration in the partnership” and allowed the company to come in the consulting concern in 1954. They were able to assist their clients automatize their accounting records and they were able to develop the largest engineering pattern of any accounting house.

The firm’s external environment was besides altering in 1930s as the federal authorities adopted new Torahs that required public companies to subject their fiscal statements to an independent hearer every twelvemonth. Added ordinances led increased grosss during this period and helped with the firm’s repute and growing.

In 1998 when Samek became the managing spouse he formulated a new scheme the “2X” public presentation rating system which included advice on how spouses should “empathize” with clients. Along with doing organisational architecture alterations he besides changed the civilization by doing the frock codification a relaxed and adopted a new logo that incorporated a lifting Sun.

Enron’s Audit due to a few “bad partners”

Arthur Andersen began scrutinizing Enron’s books in 1986. Early 2001 Enron was considered the “premier energy company” with a market value of equity of about $ 75 billion and such a high market value meant that it was of import to pay close attending to the books of Enron since there is heavy trust on the auditor’s sentiment. Enron’s battle fees accounted for merely a little part of AA’s grosss but most of the grosss came from a Huston office that was set up in Enron’s Huston central office with the spouse David Duncan.

In measuring Andersen’s claim that their jobs on the Enron audit were due to a few “bad partners” I would differ because of the stopping point relationship that the two companies shared along with a ill developed organisational architecture. The Huston central office had over 150 Andersen professionals on site that apparently knew or were cognizant of the accounting dirt but chose to disregard it. Professional judgement and independency besides was non practiced as noted “there were so many people in the Huston office with their fingers in the Enron pie if there was an hearer who did non desire mark off on an audit they would be fired.

This was non the lone crisis that AA was involved in which made foreigners questioned their patterns and overlook their claim. There were cases against Arthur Andersen. Prior to the Enron dirt AA had settled a difference with the Securities and Exchange Commission paying more than $ 7 million for accounting and scrutinizing work of Waste Management Corporation. Additionally. the SEC sued an Andersen lead spouse on the Sunbeam Corporation audit.

These crises along with their claim that their job with the Enron audit was due to a few “bad partners” was simply the consequence of an unsound organisational construction along with policies and patterns that the house implemented. The unsound organisational construction of Arthur Andersen changed the motive of employees within the house and alterations within the house over the old ages one of which was the compensation of spouses did non let for unity when work was being done for these public companies.

What could hold been done otherwise?

The organisational architecture of Arthur Andersen seemed to hold gone a different path from what it was intended for and much of the success that Arthur Andersen was short term and spouse based. Policies that were implemented led spouses to prosecute in arch Acts of the Apostless to derive more concern. Slowly their policies and patterns became more about money instead than quality audits utilizing the right protocols.

Other than direction who were involved in arch Acts of the Apostless I would animate or smooth bing constabularies to realine it to their initial scheme which was to supply “quality accounting services to clients and promote unity and sound audit sentiments over higher short-term profits” . It is noted that an ailment designed organisational architecture can ensue in hapless public presentation and company failure and AA made stuff alterations that changes their concern environment and scheme which led to their prostration. Their blemished organisational architecture made it difficult for new endowment ( other than spouses who were all about Numberss ) to be discovered. It became more about doing your Numberss so I would besides plan a system that allowed for inefficient direction to be replaced by new endowment who are non merely about making value for the house but besides to make full in spreads that may be in architecture.

Andersen and multitask rule agent theory

Incentive struggles existed at Arthur Andersen. At AA there was direction and spouses that acted in their ain ego involvement through maximising their ain public-service corporation at the disbursal of the other spouses that was vested in the company. This besides seemed to be a repeating job that affected the company because on multiple occasions a spouse was accused moving in their ain ego involvement. Conflict of involvement with alters the chief agent relationship besides played a large portion at the rise of the Enron dirt because a widespread concern among investors. regulators. and the populace rose which may hold motivated many AA professional on the Enron battle to subscribe off on questionable accounting patterns. Hazardous patterns to harvest short term benefits paved besides paved the manner for dishonesty and fraud.

Relation between “hard” and “soft” elements of the firm’s corporate civilization

Hard and soft elements better known as the 7S Model is a theoretical account of organisational effectivity was developed at McKinsey & A ; Co. Consulting house in the 1980’s. It proposes that there are seven factors within a house that needs to be aligned and reinforced in order to be successful. Difficult elements include construction. scheme and systems and the soft elements include shared values. accomplishments. manner and staff.

Difficult elements are influenced and identified by direction. It is the formal architecture and primary determiner of a firm’s value. Soft elements on the other manus are those intangible elements that are influenced by corporate civilization. AA for illustration organisational architecture. Samek tried to alter the softer elements of AA’s corporate civilization. For illustration. the frock codification was relaxed. the wooden doors at AA’s office entrywaies were removed. and the house adopted a new corporate logo. the lifting Sun. This gives the company a sense of way and motive and serves as a agency for pass oning and reenforcing steadfast ends.

Harmonizing to this theoretical account it is required that there is a balance between the difficult and soft elements. As it relates to AA there was no good balance between both elements. At the pinnacle of this theoretical account are shared values a soft component which was a broken component that made the theoretical account difficult to accomplish at AA. There was no proper defined corporate civilization at AA so there was nil to associate how people will act in the house or to keep the architecture of the house up. The construct of shared values should get down at highest degree ( i. e. spouses of AA ) and they should transfuse these values to their senior direction who must so go on the procedure till it reaches first twelvemonth hires. However. if unethical behaviour starts at the highest degree the companies civilization will be damaged before it reaches first twelvemonth hires and the will follow the unethical behaviour

In add-on to altering Andersen’s organisational architecture. Samek tried to alter the softer elements of AA’s corporate civilization. For illustration. the frock codification was relaxed. the wooden doors at AA’s office entrywaies were removed. and the house adopted a new corporate logo. the lifting Sun.

Were actions at Arthur Andersen unique?

There may hold been certain environmental factors ( i. e. intense competition ) . chances. or deficiency of ordinances and supervising that may actuate other companies to partake in the same unethical determinations as AA. There may besides be no stating whether or non other accounting companies practiced unethical determinations because they may be able to break hide these unethical patterns so it goes unnoticed. This state of affairs was non alone to Arthur Andersen. The badness of the dirt made it difficult for AA to resile back whilst other companies may hold been able to decide issues covering with unethical behaviour to decrease the badness and do it look miniscule to the populace.

There is beyond no uncertainty that after the autumn of AA and Enron that top accounting companies started to guarantee that their patterns and organisational construction was sound to forestall the same crises such as that of AA from go oning to their company. As a top spouse of another accounting house during Andersen’s death I would closely reexamine patterns of the house. and closely follow articles and ordinances released by the SEC. GAAP. and other regulative bureaus sing auditing processs. Last. I would besides guarantee that the proper protocols are followed sing bing. new. or anterior battles ( i. e. practising independency. professional judgement or incredulity ) .

SEC proposed ordinances in 2000 to restrict confer withing work by accounting houses

Legislators were moving in the public’s involvement as they may hold noticed that the proposed ordinance was flawed and may hold stirred up contention in the securities market. The proposal was under examination as it was noted to be “fatally flawed” and bing ordinances passed were challenged as it was noted that a more active function needed to be taken in doing alterations in the measuring and coverage system in support of better information to further better determinations doing by corporations. investors and the authorities.

With the added force per unit area and intense lobbying by the “Big Five” accounting houses they may hold non seen a job in the company supplying both services or felt the ordinance needed to be refined.

Enforcing ethical criterions because of Andersen dirt

Whilst it may non hold been the chief ground for the AICPA to let go of a set of criterions for the behavior of CPAs. the Arthur Andersen dirt surely gave rise to the development of the Code of Professional Conduct. When dirts refering to audit of fiscal statements occur the first individual to fault is the house of the CPA on the audit battle. The AA dirt has decidedly heightened the public’s consciousness of the demand for increased attending to all ethical concern patterns by professionals particularly CPA who investors to a great extent rely on for their sentiment.

The AICPA is merely to be blamed for non puting higher ethical criterions for their members and doing it a precedence. They do non hold control over unethical behavior of members but they can implement and clearly province the branchings. It is of import to observe that the house that hires the CPA to execute services should besides transfuse their ain codification of behavior.

Appointment of a new inadvertence board

Rather than go oning to be self regulated after the dirt. the assignment of an inadvertence board was necessary as they provide independent inadvertence of public accounting houses supplying audit services. They register hearers. define. inspect. and enforce specific procedures and processs for conformity of audits every bit good as for quality control.

Hearers of public accounting companies are inspected by the PCAOB non less than one time every 3 old ages and except any lacks. the review study becomes public information after completion of an appeal period. The PCAOB further has authorization to look into and train misdemeanors of the Sarbanes Oxley Act. board regulations. securities Torahs and professional criterions.

This oversight board will provides insight on all public accounting houses so investors are confident in trusting on their sentiments about a peculiar firm’s fiscal statement. The Sarbanes Oxley Act allowed more eyes from the exterior to look in on the patterns of these accounting houses.

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