According to our textbook Figure 11.1, it shows the determinants of strategy, organizational architecture, and firm value. The most common categories are business environment strategy, and organizational architecture.
External Business Environment
Technology, markets and regulations are three aspects of a firm’s external business environment. Andersen started with a stable environment. Technology was used effectively. In 1950 Josef Glickauf demonstrated that computers can be used to automate bookkeeping. Company developed the largest technology practice. Structure of its markets helped Anderson to grow along with its reputation. Arthur Andersen was well respected, reputable auditing company for many customers. Early 1950s Andersen entered in computer consulting business. Regulations also made Anderson became prominent in the market. The federal law in 1930’s which required companies to provide their financial statements to an independent auditor each year helped Andersen’s grow.
Quality audits were valued more than higher short-run firm profits. “Four cornerstones” of good service, quality audits, well managed staff and profits. Auditors were rewarded and
promoted for making sound audit decisions. Mid-level partner was making average $160,000
in today’s currency. In 1990s AA formulated a new strategy that focused on generating new
business and cutting costs. It included how partners should empathize with clients.
AA’s both business (auditing and consulting) had significant decision rights over its business.
New “2X” performance evaluation system was introduced. The job was not secure for partners anymore. Earlier years of companies “tradition” was changed in 1990s. Employees were known to be “one of kind” in the Andersen’s early years, but it is changed. The dress code was very professional; the wooden doors at AA’s office entrance were removed.
AA decided to hire all 40 auditors who worked in Enron, then added 150 of their own staff and put them inside Enron as Enron’s in-house accounting staff. Because all the staff was on site at Enron, went to Enron meetings, and made decisions in the best interest of Enron and not following the principle of doing quality work, it barely fair to say AA’s claim that it was only a few “bad partners”. Moreover, Anderson decided to break up it’s own Professional Standards Group and re-locate group members to local offices. Due to this situation, their power was seized. The company should make decisions not only to generate profit for company, but also protect the firm and all staff from any doubtful situations where unethical issues may happen.
In Andersen’s case, we can find that “soft” elements and “hard” elements of the corporate culture effect each mutually.
As asserted in the text, in a long time of Andersen’s existence, “tradition was everywhere”. “Soft” elements such as physical design of office, they put hard big wooden door at the entrance, and the dress code of partners. “Hard” elements are control of good quality applied over all sectors of its business, a general standard which everyone insisted.
Changes started to take place in “hard” element. Andersen shifted to put more emphasis on driving revenue while neglect produce quality work. Meanwhile, changes were also taking place in “soft” part of the culture. High level partners stop dressing as sharp as before. The big wood doors have been removed, also a new corporate logo was designed.
In my opinion, Andersen was aware of these issues at Andersen are not unique to their company when themselves called into an investigation of one of it’s competitors. It was a matter of scale.
If I was the top partner at one of the other major accounting company by the time of Andersen’s demise, I would either request an internal investigation of my company’s practice or present my company’s practices to the SEC or any other appropriate authority to assess.
After then, I’d be honest with anything found inappropriate and make changes on such as in organizational structure or practices. After Andersen’s demise, people’s doubt to all accounting companies’ credibility would be greatly arouse. The reason to call for an investigation in my company is to prevent another disaster happen in my company. A little leak will sink a great ship.
The legislators were not acting in the public’s best interests, actually they were under pressure from lobbyists in auditing industry. In 1998, Steve Samek became a new managing partner. Some of his operations have been already lead lawsuits, payouts, and fines. It was the right time to pass the proposal. However, it’s possible that legislators didn’t have idea the underlying motive of big accounting firms lobbying against the regulations.
The act of limiting consulting work would have led to the reducing of the non-audit fees charged by the accounting firms. The huge non-audit charges let to conflict interest and to accounting firms enacting another strategy 2X performance evaluation system. For example, $2 million a year in auditing fees and an additional charge from non-audit services. In other words, 2X is bribes paid by the companies to public accountants for signing inaccurate financial statements.
Today, there are more than 418,000 members in 143 countries in business and industry, government. Their mission is to “Power the success of global business, CPAs, CGMAs and specialty credentials by providing the most relevant knowledge, resources and advocacy, and protecting the evolving public interest. AICPA has a place to set ethical operation standards in industry as well has right to levy sanctions and penalties against it’s members, but they are not a regulatory authority and their range reaches so far.
Actually, if a company doesn’t want to respond to AICPA, they can choose not to be a member. It’s unfair to transfer fault from an unethical company to some member organizations.
I think the Sarbanes-Oxley Act of 2002 is a good idea to oversee financial accounting in publicly traded companies due to all the big mistakes been made. Human make mistakes. We can’t solely depend on self-regulate. The purpose of introducing this act was to protect investors who doesn’t have much specific knowledge from possible fraudulent accounting activities by corporations.