Capstone case study on organizational architecture
Arthur Andersen LLP
Introduction and Overview
It is difficult to find an example of a more spectacular business failure than the recent collapse of Arthur Andersen. Within a few years, Andersen moved from one of the largest professional service organizations in the world to almost complete collapse. The impact of the firm’s failure on its employees, customers, investors, and the general public is hard to overstate. The once proud reputation had been reduced to shambles. Even the President of the United States joked:
“We just received a message from Saddam Hussein. The good news is that he’s willing to have his ...view middle of the document...
Our purpose is to not to present all the relevant analysis ourselves. Rather it is to provide readers with the opportunity for an integrated analysis and capstone discussion of an important business problem that relies on material drawn from across the chapters in Part 3 of this book. It also provides a forum for discussing the root causes of the recent business scandals that have rocked the international business community.
Arthur Andersen: The Early Years
A 28-year-old Northwestern accounting professor, named Arthur Andersen started his own business in 1914. Andersen’s strategy was to offer high-quality accounting services to clients — promoting integrity and sound audit opinions over higher short-run profits. Soon after Andersen formed the firm, the president of a local railroad demanded that he approve a transaction that would have lowered his company’s expenses and increased its reported earnings. Andersen, who was not sure he could even meet his firm’s payroll, told the president that there was “not enough money in the city of Chicago” to make him do it. The president promptly severed his relationship with Andersen. However, Andersen was soon vindicated when the railroad filed for bankruptcy a few months later.
In the 1930s, the federal government adopted new laws to require public companies to submit their financial statements to an independent auditor every year. These regulatory changes, along with Andersen’s reputation, helped the firm to grow. During these formative years, the organization continued to promote its “four cornerstones” of good service, quality audits, well-managed staff, and profits for the firm. Quality audits were valued more than higher short-run firm profits. Leonard Spacek, who succeeded Andersen as managing partner in 1947, produced more company folklore when he accused powerful Bethlehem Steel of overstating its profits in 1964 by more than 60 percent. He also led a crusade to motivate the Securities and Exchange Commission to crack down on companies that cooked their books. The yellowing press clippings of his bold efforts were still on display at the company’s main training center near Chicago in 2002.
Between 1914 and the late 1980s, “tradition was everywhere” at Arthur Andersen. The company installed heavy wooden doors at the entrance of all its offices. Andersen employees were known to be “one of a kind” — clean-cut, straight-laced, and dressed in pinstripes. Employees were taught to recite the partnership’s motto, “Think straight, talk straight.” Auditors were rewarded and promoted for making sound audit decisions. Top management assigned significant decision rights to the central office’s Professional Standards Group.” This group, which consisted of internal experts, monitored audits and issued opinions on how specific types of transactions should be handled. The objective was to promote consistent and well-reasoned opinions throughout the firm.