Managerial Economics and Organizational Architecture-ARTHUR ANDERSEN LLP - Case Study Example

?Running head: Managerial Economics and Organizational Architecture ARTHUR ANDERSEN LLP Insert Insert Insert 24 June 2011 Case study: ARTHUR ANDERSEN LLP Discuss the environmental, strategic, and organizational changes that occurred over the life of Andersen in the context of Figure 11.1 In 1930s, due to the change in regulatory measures that required companies submission of their financial statements annually, Andersen’ firm was effective in “promoting its good service, quality audits, well managed staff, and profit for the firm” (capstone case study, pp 554). Thereafter, around the 1980s, Arthur’s firm changed its outlook by installing wooden doors in all its offices, while the firm trained its employees on thinking straight, as well as talking straight. The management also gave the right of decision making to the central office’s professional standard group, with an aim to quality and firm opinions in the organization. Technologically, an engineer in Andersen’s firm came up with the idea of computers use in bookkeeping, hence proving to be efficient while automating their client’s accounting systems. This led to the rise of a computer consulting business, which provided services to other firms and yielded much more revenue compared to the auditing. Due to the conflicting factors of the consultants feeling underpaid and leaving the firm, Andersen separated the consulting and auditing business and decided to form Andersen worldwide (AW). This consisted of Andersen consulting that focused on consulting services via use of computer systems and Arthur Anderson (AA), which focused on audit and tax business (Capstone case study pp 555) Due to stiff competition, the firm made some organizational changes; first, it decided to cut on it costs by ensuring that its employees retired at the age of 56 year, thus yielding more revenue that benefited the partners. New partners emerged such as Steve Samek who headed the Boston chicken audit, and Robert Allgyer who excelled in waste management that generated $17. 8 million. With Samek becoming the managing partner at AA, he introduced the 2X performance evaluation that required partners to yield twice as much from auditing and non-auditing services, and those who met this target would be rewarded. The dress code changed and the wooden doors that had been installed were removed, and a new logo “the rising sun” was adopted. New services were offered such as concentrating on the bookkeeping and offering internal audits (capstone, 557). Evaluate Andersen's claim that their problems on the Enron audit were due to a few "bad partners" in the organization. If you disagree with this claim, discuss what you think were the root causes of the problem. As one staff suggested, “there were too many people in the Houston office, with their fingers on Enron’s pie” (capstone, 55), which is true as the auditor present chose to ignore the problems that faced Enron. Andersen firm was competent and it should not have blamed anybody for the decisions it made such as shredding documents so as to hide fraud practices at Enron. Anderson should have taken the blame himself, as he was responsible for his employees’ ethics other than firing David Duncan. In addition, the problem could have arisen from incompetent staff, questionable accounting practices, bad management, and poor internal controls. 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)? First, I would have only hired a substantial number of auditors to work with and ensure that they were competent enough. Secondly, my management would not have advised Enron to declare itself bankrupt at that crucial time, as many investors would be affected. The questionable accounting practices at Enron that Andersen signed off should have been brought to light, so as to determine the root cause of the problem. Moreover, effective management, quality accounting practices are efficient in a CPA firm. Discuss the relation between what happened at Andersen and multi task principle agent theory The Multitask principle agent theory is related to different tasks that a firm is expected to execute. According to Bond (176), “the agent may have limited liability and the marginal product of the agent’s effort is constant and independent across tasks.” This theory entails the possibility of the tasks being managed by a firm being either a success or failure in the end. Primarily, success depends on the contracted firm’s effort and competence on the assigned task. For instant, in the case of auditors checking balance sheets of several departments of a firm, the failure of checking one component in an audit may lead to a firm concealing some money from its investors. Therefore, just one failure may interfere with the assigned task results. When Enron entrusted Andersen firm with the task of auditing its books, Enron expected efficiency and success in the task, however, due to Andersen’s staff ignoring the problems that the firm faced and as a result of poor accounting practices, the decision of Enron to declare itself bankrupt affected the country and its investors. When the principle firm offers a task to an agent, the hired agent’s actions determine the probability of success of that particular task. Discuss the relation between the "hard" and "soft" elements of a firm's corporate culture in the context of this case. When a firm adopts a hard model, employees in that organization are seen as a resource and as human capital, whereby the firm invest in them with an aim to make profits and achieve a competitive advantage (Koster, pp 6). The firm utilizes the employees and at the same time, minimizes its cost; this is evident when Andersen firm decided to reduce its costs by not increasing on the consultants wages, thus resulting to some exiting the firm. At the same time, the firm decided to reduce the retirement age to 56years in order to reduce on costs and maximize on it profits. The soft model entails valuing employees and is always trusted by management. The employees are viewed as part of an organization and their involvement is highly valued, hence they are motivated and are not seen as mere assets but as human beings. Do you think that the problems at Andersen were unique to them or did they exist at the other big accounting firms? Suppose you were the top partner at one of the other major accounting firms at that time of Andersen's demise. What actions, if any, would you take in response? Explain. The issues of fraud and incompetence could have also existed in other major accounting firms, from the pressure of the competitive markets with the then higher flyers like the Andersen firms. Due to lack of strict regulation at that time, it would be possible that other firms conducted low quality and ineffective accounting practices. As a top manager in one of the firms, the best way to avoid any trouble would have been to ensure that my firm was not associated with any fraud by ensuring consistency and quality work while working for any other firm. In 2000, the SEC proposed new regulations that would limit consulting work by accounting firms. This proposal was not passed by Congress. Do you think that the legislators were trying to act in the public interest when they failed to pass this proposal? Explain. It is evident that public interest seemed to come first when congress decided not to pass the proposal. The main objective that stands out is the need for accurate financial records quality financial systems; hence, there was no need for a rule to limit consulting for other firms. If this proposal were passed, it would have limited the independence of certified professional accountant firms from providing non-audit services to audit firms. In addition, this proposal would have induced constrains on banks’ ability to utilize their auditors in handling internal audits in the firms. In case this proposal was implemented, some CPA firms would have no other choice other than decline to offer any audit services, and if they do, they would have to increase on the fee due to the issues arising from the regulations. Therefore, when congress declined in passing the rule, it acted on the public interest. The American Institute of Certified Public Accountants is the primary professional association for certified public accountants. It has developed a Code of Professional Conduct that sets the standards of conduct for CPAs. People can file complaints about the ethical conduct of a CPA with the AICPA, which can levy sanctions and other penalties against its members. Do you think that the Unethical conduct at Andersen (and possibly other accounting firms) was the fault of the AICPA for not setting and enforcing higher ethical standards among its members? Explain. All firms have adopted a certain culture and a code of conduct, therefore, a firm chooses whether to be ethical or unethical during it operations. The role of the AICPA is to ensure that the imposed rules are followed; however, firms can decide to bend the law even when they are aware of the repercussions. Therefore, it was not the fault of AICPA’s failure to set high standard rules that led to the unethical conduct of Andersen; since even today when rules are up to standard, some accounting firms result to fraud, despite the high ethical standards. The Sarbanes-Oxley Act of 2002 established a new five-person board to oversee financial accounting in publicly traded corporations. The board is appointed by the Securities and Exchange Commission. Prior to the creation of this board the industry relied primarily on self-regulation through the American Institute of Certified Public Accountants. Do you think the establishment of the new oversight board was a good idea or should the profession have continued to be self-regulated? Due to the failure of large corporations like Enron, many investors suffered the consequences, and the implementation of Sarbanes-oxyley act would at least give hope to the future investors. According to Atkins, SEC commissioner, “Sarbanes-Oxley strengthens the role of directors as representatives of stockholders and reinforces the role of management as stewards of stockholder’s interest.” The act require that audit committees be responsible, and requires a firm to obtain financial experts in auditing, hence the implementation of the board was a good idea, since it was formed with an aim of avoiding further failures of CPA corporations. With the implementation of the board, it was capable of reducing conflicts of interests and the act provided incentives for banks, such that the banks could not exploit the conflict of interest and criminal charges were increased for obstruction of charges. With the board in charge, monitoring is much easier as compared to being self-regulated, which is not an effective method. Works Cited Atkins, Paul. SEC Commissioner: The Sarbanes-Oxley Act of 2002: Goals, Content, and Status of Implementation. 2003. 24 June 2011. http://www.sec.gov/news/speech/spch020503psa.htm Bond, Philip. Gomes, Armando. Multitask principal–agent problems: Optimal contracts, fragility, and effort misallocation. Elsevier Inc publishers. 2008. 24 June 2011. http://finance.wharton.upenn.edu/~pbond/research/jet2009.pdf. Case study material. On organizational architecture. ARTHUR ANDERSEN LLP Koster, Marco. Human Resource Management versus Personnel Management. Berlin: GRIN Verlag publishers. 2007. 24 June 2011. http://books.google.com/books?id=-S_N1wGOy1wC&pg=PA6&dq=hard+and+soft+hrm+models&hl=en&ei=LakBTu_uKIPdsga-q_WUDQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDAQ6AEwAA#v=onepage&q=hard%20and%20soft%20hrm%20models&f=false. Read More