Arthur Anderson

1. Environment, strategic, organizational changes * High quality accounting, promoting integrity and sound audit opinions over short run profits * 1930’s- government adopted laws that require public companies to submit financial statements to independent auditor each year * mantra- good service, quality audits, well managed staff, profits for firm * auditors rewarded for making sound auditing decisions * decision rights to Professional Standards Group * firm did not become wealthy in the early years, partners were well respected in communities * 1950’s- Joseph Glickauf- computers to automate bookkeeping * 1979-42% of $645m fees came from consulting * 1989- split to AC and AA * accounting business grew slowly in 1990 due to increased competition and mergers * AA adopted new strategy of generating profits, “it was a matter of pride” * New rules- partners retired at 56, less experienced auditors and fewer partners overseeing audits * New breeds of partners- Samek, Allgyer, signing off on inaccurate financial statements * 1997- AC split completely and became Accenture, AA underwent setback when they didn't receive the $14b expected payment from AC * AA- 2X performance evaluation, relaxed dress code, wooden doors removed * New service- take over entire internal bookkeeping for clients- impaired quality of audits * Enron-1986, wholesale energy trading * Anderson hired Enron in 1990 * Speed up decision making- gave local offices more power, Professional Standards Group dispersed to local offices * Anderson aware of accounting problems but chose to ignore it * Conflict of interest motivated them to sign off on questionable accounting practices * Shredded documents to hide roles in producing fraudulent statements * Found guilty on felony charge, discontinued auditing in 2002, 28,000 employees lost jobs

2. Few “bad partners”? * Disagree- the root cause was the change in organization structure, which changed the motivation. Salary originally was not related to integrity. Once the structure changed, 2x evaluation, tradeoff occurred between salary and integrity

3. Management- what would you do differently? * Firms must design organizational architecture to address agency problems in business * There needs to be a balance between performance evaluation, rewards and incentives, and decision rights * AA & Enron- AA was essentially checking their own work, no centralized organization to oversee the group

4. Multitask principle agent theory * Incentive incompatibility- the objectives of the principal and the agent are different * Slide 4- incentive conflicts * Owners aim to maximize value of profits with a reasonable degree of risk * Conflict of interest- overly conservative or risky behaviors for short term benefits, dishonesty and/or fraud

5. Are these problems unique to Anderson? Top partner at competitor- what would you do? * We don’t think these problems are unique to Anderson * Environmental factors could have motivated many companies to follow the same unethical decisions as Anderson * In order to avoid these conflicts of interest, if you were a top partner you should enforce balance of elements within organization structures, should separate the auditing vs. operations