ICMR Center For Management Research: The Fall of Arthur Andersen: Organizational Culture Issues

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The Fall of Arthur Andersen: Organizational Culture Issues
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This case was written by Neela Radhika A, under the direction of Mukund A, ICMR Center for
Management Research (ICMR). It was compiled from published sources, and is intended to be
used as a basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation.
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The Fall of Arthur Andersen:

Organizational Culture Issues
“This is an American tragedy. For decades Andersen was renowned as the company that could say
no to a client, but somewhere along the way, Andersen became a firm that could not say no to a
client, and in fact said, „how can we help you do it.‟”
- An article on http://news.bbc.co.uk, July 2002.
“This growing split was one of the key elements transforming the firm‟s tight-knit, proud culture,
into one filled with paranoia, jealousy and rage.”

- Barbara Ley Toffler (Toffler), former Arthur Andersen partner, commenting on the
animosity between the auditing and consulting groups in her book, ‘Final Accounting.’
A SHAMED COMPANY
In March 2002, one of the world‟s leading auditing firms, Andersen (previously Arthur Andersen),
was indicted by the US Department of Justice (DOJ) on charges of obstructing the course of
justice. The company was blamed for hampering DOJ‟s investigations in the on-going Enron
case.1 Andersen was accused of deliberately destroying evidence (by shredding many Enron-
related documents), while the US Securities and Exchange Commission (SEC) was investigating
the numerous charges.
Ever since DOJ had begun a criminal investigation of Andersen in early January 2002, the firms‟
employees and partners expected the firm to reach an outside settlement with DOJ. The firm had
even roped in Paul Volcker, a former Federal Reserve Chairman, to set things right and restore its
reputation. Thus, the indictment came as an unexpected and severe blow to the firm. DOJ‟s
investigation revealed that Andersen had indeed shredded Enron-related documents during
October 2001 and early November 2001, even as SEC‟s probe at Enron was underway.
Andersen accepted DOJ‟s charges, but passed on the blame to David Duncan, the partner 2 in-
charge for Enron‟s auditing, and fired him. And Enron severed ties with Andersen for destroying
the documents wanted by SEC. The repercussions of the indictment were soon felt by Andersen.
There was an exodus of clients from Andersen to other firms in early 2002: between January 2002
to March 2002, Andersen lost 690 clients (public limited companies) against a client base of 2,311
in December 2001.
Andersen also saw many partners joining rival firms. Since it had also laid-off employees in huge
numbers across the world and traded partners to other leading accounting firms during the period
of the trial, its US employee base had come down from 27,000 to a little over 10,000 during the
1
One of the largest companies in the US, Enron was primarily involved in the trading businesses of energy
and natural gas. The company lied about its profits and concealed debts so as to show a healthy financial
position for many years. As investors and creditors abandoned the company, it had to file for bankruptcy
in December 2001. Andersen had been the internal and external auditor of Enron since the mid-1990s.
2
All Andersen auditors were referred to as partners.
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period. The remaining employees literally took to the streets (in Boston and Philadelphia),
protesting the indictment. They accused DOJ of attempting to punish the whole firm and its
thousands of employees for the misdeeds of a handful of corrupt partners.
The DOJ, which had began proceedings in early June 2002 and concluded them in mid-June 2002,
found Andersen guilty of obstructing SEC‟s proceedings. The SEC revoked Andersen‟s license to
audit public limited companies and ordered the firm to pay a fine of $1,000 for obstructing state
investigation (this was the highest fine that a state board could charge). Andersen accepted the
revocation and the fine, and declared that it would cease auditing corporate clients by the end of
August 2002. After taking the above decision, Andersen laid-off its remaining employees and
closed its offices across the US by the end of August 2002.
Andersen was once known as one of the „Big Five‟ accounting and consulting firms in the US that
had prospered for nearly a century (Refer Table I). Considering the fact that the firm had itself set
the standards for honest and law-abiding accounting ever since its inception, its shameful descent
into becoming one of the „Big Corporate Frauds‟ was even more painful and humiliating.
According to industry observers, Andersen‟s fall can be seen as a perfect example of how even
great institutions founded on integrity, value, stewardship and personal growth, could collapse in
the absence of internal controls, a good work culture and sound values.

Table I
The ‘Big Five’ Audit and Consulting Firms in the US (2001)
Firm US Revenues (in $ Million)
PricewaterhouseCoopers 8,298.6
Deloitte & Touche 5,312.6
KPMG 4,804.0
Ernst & Young 3,781.0
Arthur Andersen 3,545.5
Source: Bowman‟s Accounting Report.
BACKGROUND NOTE
Arthur Andersen (Arthur) and Clarence Delaney founded Andersen in Chicago, in 1913. Andersen was
essentially a partnership firm, with all the chief auditors having a share in the firm. Arthur was one of
the youngest Certified Public Accountants (CPA) in the US. He was invited to be the first salaried
president of the New York Stock Exchange on account of his knowledge and expertise in the field of
finance. However, he declined the offer so that he would be free to concentrate fully on Andersen. The
firm, initially named Andersen, Delaney & Co., was engaged in the business of offering accounting
services to companies. The firm‟s name was changed to Arthur Andersen in 1918.
Arthur gave a lot of importance to ethics and insisted on honest accounting, and the elimination of
conflicts of interest that arose when accounting various companies. According to him, „public
accountants should be answerable to only the investing public and not to the companies they
audit.‟3 Reportedly, Arthur believed so much in his value system that (during the firm‟s initial
years) he refused to endorse an accounting misrepresentation by one of the firm‟s most lucrative
clients. Even the fact that Arthur Andersen had very few clients then and was offered an
astronomical sum in return, did not convince Arthur. He said, “There is not enough money in the
city of Chicago to induce me to change that report.”4
3
„Final Accounting‟ By Barbara Ley Toffler, with Jennifer Reingold.
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Though Arthur Andersen lost a big client, it gained a reputation as a firm with high values. Within
a few months of the above incident, the said client filed for bankruptcy, underscoring Arthur
Andersen‟s reputation as a firm with integrity. During the late 1920s, because of depression in the
US economy, many investors lost faith in companies. Reportedly, Arthur Andersen, under the
leadership and guidance of Arthur, was instrumental in restoring the faith of US investors in
companies, based on its integrity and professional values.
Arthur strictly followed his principle of „Think straight. Talk straight‟ when dealing with clients.
This principle was followed by partners throughout the firm and was taught to every new recruit.
Arthur also developed business standards for his firm. His emphasis on „Arthur Andersen specific‟
business standards evolved into the concept of „One Firm‟ over the years. This concept ensured
that all Arthur Andersen clients across the world received the same quality of work, the same kind
of approach to work and the same caliber people trained in the same way. Such consistency in
offering services and quality was achieved by imparting rigorous training to all new recruits. The
training was sought to make new recruits imbibe the Arthur Andersen culture, popularly known as
the „Andersen Way.‟
Analysts referred to Arthur Andersen partners as „androids‟ who were proud to be working at the
firm and who vowed that integrity mattered more than fees. These androids believed that to stand

up for what they believed in was a virtue and that it was better to do the right thing rather than do
“the easy thing.” Reportedly, Arthur Andersen generally recruited fresh graduates as it would be
easy for the firm to infuse them with the Arthur Andersen culture.
The firm gave a lot of importance to the training of new partners (termed the „making of androids‟ by
analysts). Arthur Andersen also required its existing employees to attend training sessions annually to
ensure that they remained committed to the firm‟s philosophy and values. All employees received an
average of 135 hours training every year. Arthur Andersen invested approximately 6% of its total
revenues on training to ensure that its new hires would take the same approach to a problem in every
office of Arthur Andersen and to implement the concept of „one firm.‟
The firm launched a centralized training program in 1940, which required new recruits and
existing employees from all its offices to be trained at one specific center. Apart from conveying
the Arthur Andersen culture to the trainees, the training also covered aspects of their job such as
their duties, responsibilities, ethics and personal investment restrictions in their client companies.
After Arthur‟s death in 1947, Leonard Spacek (Spacek), a partner in the firm, became the CEO.
During the early 1950s, Spacek realized that Arthur Andersen needed a logo that could create a
unique identity for the firm and symbolize its values. He chose the image of „Mahogany Doors‟
(such doors could be seen at the entrance at all Arthur Andersen offices) as the firm‟s logo. Spacek
said, “To me, those doors represented confidentiality, privacy, security and orderliness. And it
struck me that those thoughts epitomized the common vision I wanted all of our people to share.” 5
According to sources at the firm, the logo was meant to assure the client and the public that Arthur
Andersen could be trusted; that the job assigned to it would be kept confidential and secure. This
logo (two closed mahogany doors), with Arthur Andersen printed on it in gold, was used by Arthur
Andersen on annual reports, stationery, binders, T-shirts and many other items. Reportedly, the
logo became quite popular across the world and even contributed to establishing Arthur
Andersen‟s concept of „one firm.‟ Since these doors were the first thing clients saw at every Arthur
Andersen office, across the world, they felt assured of receiving the same treatment anywhere in
the world, once inside those doors.
During the same period, the firm promoted a computer project under its Industrial Engineering
Group. This project, led by Joe Gilckauf (Gilckauf), changed the firm‟s growth pattern in a major
way over the next few decades. In 1951, Gilckauf designed a small computer named „Glickiac,‟
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which processed business information. Gilckauf convinced the Arthur Andersen board of
„Glickiac‟s ability to perform accounting calculations quickly and process information that could
be of great help to companies and auditors. Following this, Arthur Andersen‟s board decided to
invest in the new technology. In 1953, the firm funded a computer training school for its young
auditors.
By the early 1950s, the culture of ethics and honesty was so deeply ingrained in the firm that the firm
was elected to the Accounting Hall of Fame of Ohio State University in 1953. By the mid-1950s,
Arthur Andersen also became famous for its knowledge of the field of computers, which was at that
time in its initial stage of evolution. Companies like GE, which wanted to install computers, turned to
Arthur Andersen for guidance and help. Thus, Arthur Andersen realized a new business opportunity
in the form of Consultation and Installation services. It set up a new division, „Administrative
Services Division,‟ and began offering these services during the mid-1950s.
Though the business of the new division did not pick up over the next few years, Arthur Andersen
decided to continue investing in it. Commenting on this, Spacek said, “I must say, though, that I
will forever be grateful to the partners. I allotted one-third of all our income to what I called the
extracurricular things. It was a lot of money to the partners.” 6 During this period, the firm also
went in for overseas expansion. The first office outside the US was set up in Mexico in 1955.

By the late 1950s, it seemed to have become a matter of „honor‟ for every accountant in the US to
join Arthur Andersen. This was primarily because more than a job, Arthur Andersen offered its
employees „a way of life‟. The reputation Arthur Andersen gained over the decades made people
regard Arthur Andersen as a wonderful place to work in. The media often referred to it as an
extraordinary organization, a great American Brand.

During the early 1960s, both the auditing and consulting services businesses grew rapidly.
According to sources at the firm, all employees were required to spend their first two years of
service in audit practice, before moving on to the consulting group. This was to ensure that the
employees of the consulting group also followed the „Andersen way‟ in their business as a part of
the „one firm‟ concept. The consulting group‟s activities soon expanded from technology to other
areas of management. During the early 1960s, the consulting group was renamed the „Management
Information Consulting Division‟ (MICD) to reflect the wider scope of its activities.
By 1964, the auditing business was experiencing a boom phase. Since the auditing group now
required more auditors to meet the growing demand, Arthur Andersen began restricting the
number of accountants the consulting group could recruit. By the late 1960s, Arthur Andersen
removed the rule that required all partners to work for two years in the audit group. Reportedly, the
firm felt that this rule mandated audit training for people who were going to leave the practice after
two years to join the consulting group.
The above development changed the very philosophy of the organization that had been carefully
built over the decades. It marked the beginning of a series of internal conflicts within the firm and
contributed to the crisis that Arthur Andersen landed in at the end of the century.
CHANGING THE ORGANIZATIONAL PHILOSOPHY
According to former Arthur Andersen partners, the decision to remove the two-year audit practice
rule was the first step in developing a generation of future leaders at Andersen who did not share a
deep bond with the audit group or its values. According to Victor Miller (Miller), the head of the
consulting group, “The real bitterness emerged when we began pulling people [into the leadership
circle] with no background and no personal relationships with the auditors.”7
6
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„Final Accounting‟ by Barbara Ley Toffler, with Jennifer Reingold.
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During the late 1960s, Arthur Andersen‟s consulting group continued to grow, and began
competing with computer giants like IBM in computer consulting services. Meanwhile, the boom
for auditing services gave way to a recession, leading to a decline in the audit business. At the
same time, the demand for computers in the corporate world increased drastically, which in turn
increased the demand for the services of the consulting group.
Consequently, the business of the auditing services division did not compare well with that of the
consulting division. To make matters worse, the auditing division‟s recruitment spree in the 1950s
(which continued for many years) had led to overstaffing. By the 1970s, the ratio of partners to
staff was very high, putting financial pressure on Arthur Andersen. There was just not enough
money for all partners and, reportedly, the firm was straining under the weight of so many
partners. According to company sources, during that period, the consulting group with a low ratio
of partners to staff naturally looked better in comparison.
In 1970, as Arthur Andersen struggled to deal with the problem of over-staffing, Harvey Kapnick
(Kapnick) took over as the CEO. By the mid-1970s, the consulting group began registering more
profits per partner than the auditing group. In the late 1970s, the consulting group accounted for
21% of the firm‟s $546 million total revenues - and its revenues continued to grow rapidly. In
1977, Arthur Andersen decided to create a new structure to integrate its various international
offices. It established Arthur Andersen Worldwide, under Arthur Andersen & Co. Societe

Cooperation, a Swiss umbrella organization.
During the late 1970s, many audit failures were reported in the US corporate world. As a result,
there was growing concern over the practice of a single firm handling both the audit and the
consultancy requirements of a given client. The SEC and the US Congress expressed concern over
the potential conflicts between the audit business, which had to assure investors of the company‟s
viability, and the consulting business, which advised the company on various organizational and
business issues including financial consulting.
Though interest in this issue died down within a few months, Kapnick realized that it might
generate public concern again at any point in the future. He thus proposed that the two groups be
separated into two different firms (reportedly, he also harbored the dream of heading both these
firms). However, in 1979, when he proposed this at the board meeting, his idea was rejected. The
board (which was dominated by audit group partners) felt that such a move would place the audit
firm at a disadvantage when competing with other firms. Commenting on their investment in the
consulting group in the initial years, an audit partner said, “We still had not realized all of the fruits
of that investment.”8
The board‟s decision was not welcomed by the consulting group, as by then the consulting group
was earning substantially higher revenues than the audit group. Under these circumstances, they
resented that the consulting group employees still had to report to their audit partners.
Eventually, Kapnick lost the trust of both the groups and had to resign at the end of 1979. Duane
Kullberg (Kullberg) took over as the CEO. Kullberg met the demands of the consulting group to a
certain extent, as a result of which the consulting group gained more seats on the board. The
remuneration system was also altered to ensure that consulting partners received increased
remuneration. However, the status of the consulting group partners did not change much. Miller
said, “The consulting partner was always number two.”9
The auditors, who took pride in their accounting abilities and their culture, did not have faith in the
abilities of the consulting group partners. They feared that these partners would upset the delicate
relationship they had built with their clients. Commenting on the intensifying fight for control
between the audit and consulting partners, a former Arthur Andersen partner said, “The
cohesiveness was unsustainable. We were like a teenager, who wants his own set of keys.”10
8
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As the demand for more power to the consulting group increased, Kullberg appointed a task force
in 1986 to determine the firm‟s future focus. As the task force was dominated by auditing partners,
it concluded that the future lied in auditing, and hence, power should remain with auditing
partners. This infuriated the consulting group partners and the rift between the two groups
increased further. While the consulting partners felt they were denied power even though they had
earned high profits for the firm, the audit partners had come to see the consulting partners as „a
bunch of ungrateful upstarts who did not have any appreciation left for the sacrifices made by their
audit colleagues during their initial years.‟11
In 1987, the consulting group changed its name to Andersen Consulting from MICD. Though the
group stated that it had done this to leverage the Arthur Andersen brand, the auditing partners
disagreed. To „tighten‟ its control on Arthur Andersen, the board added a non-compete clause to
the partnership agreement in 1987. This clause stated that no partner could work in the same
industry for one year after leaving the firm. Commenting on this, Brebach, a renowned Andersen
consultant during that period, said, “I knew it was there for a purpose, which was to inhibit the
consulting partners from doing anything on their own. It was never ever talked about before. It was
a threat.”12 When Brebach tried to gather support from other consulting partners against the
inclusion of this clause, he was removed from his job.

THE AUDITING/CONSULTING DIVISIONS FIGHT IT OUT
In 1987, to end the animosity between the two groups, the audit group agreed to separate the
groups and allow the consulting group to function as an independent division. However, this
agreement included a clause, which stated that the group, which earned more, would have to give
15% of its earnings to the other group. The agreement also stated that the consulting partners now
would directly report to other consulting partners and not auditing partners. In 1989, consulting
group revenues accounted for over 40% of the firm‟s total revenues of $2.8 billion.
In early 1990, the audit group entered the consulting business by launching a Technology Consulting
group. This group did not compete with Andersen Consulting and focused on offering technology
related business consulting services to small companies, in which Andersen Consultancy had no
interest. In relation to this, the audit division and the consulting division formally agreed that the audit
group would confine itself to clients with revenues of $175 million or less.
In 1990, with the retirement of Kullberg, Lawrence A Weinbach (Weinbach) took over as the CEO
of Arthur Andersen. As Weinbach was an auditing partner, the consulting group viewed his
election as yet another defeat. In light of the continuing hostility and mistrust between the two
groups, Weinbach ensured that both operated as entirely separate divisions. According to reports,
the two groups had everything separated: brands, recruiting processes, pay scales and even the
floors on which they had their offices.
In 1994, Andersen Consulting‟s revenues equaled the total Arthur Andersen revenues for the first
time, and continued to grow. By 1996, though both the audit and consulting groups were posting
increased revenues, there was a vast difference between their growth rates. The audit business
grew at 11% while the consulting business at 26%.
Following this, the consulting partners began to see their audit partners as a strain on their profits,
as they were contributing 15% of their revenues to the audit group. Meanwhile, the audit business
experienced a decline in its growth rate, causing the audit partners to „envy‟ their prosperous
consulting colleagues. Reportedly, though the audit partners needed money from the consulting
group, they resented the consulting group.
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By the mid-1990s, the technology consulting service division of the audit group was doing very
well and was posting high margins. Inspired by this and seeing more potential in the market for
business consulting services, the audit group began offering other business consulting services and
changed the name of its consulting group to Business Consulting Group (BCG). This was seen as a
desperate move by the audit group to get on par with Andersen Consulting, which was earning
high profits. Moreover, the audit group felt that with the Fortune 500 companies going in for IT
initiatives and business overhauls, there was a lot of money to be made by the BCG.
As a result, during the mid-1990s, the partners and employees of both Andersen Consulting and
Business Consulting began vying for the same business. This naturally resulted in increased
hostility and rage among partners from both the groups. In the mid-1996, to diffuse tensions,
Weinbach recommended that Arthur Andersen‟s BCG merged with Andersen Consulting. This
suggestion was declined by both the groups for different reasons. While the audit partners found
the consulting business very profitable, Andersen Consulting felt that the BCG might distract them
from their larger client projects.
During the same period, transfer payments from Andersen Consulting to Arthur Andersen as a part
of their agreement increased to about $170 million in 1997. In light of direct competition from the
BCG and the increase in transfer payments, Andersen Consulting demanded more power in the

firm. Distressed by the growing conflict between the two groups, Weinbach resigned and left the
firm in mid-1997. As candidates for the CEO post nominated by both the audit group and the
consulting group failed to attain a majority vote, W.Robert Grafton (Grafton) was made the
Interim CEO of Arthur Andersen Worldwide. Jim Wadia (Wadia) was made the head of the audit
and tax division and George Shaheen (Shaheen) was made the head of Andersen Consulting.
With the rift increasing, in late-1997, Shaheen called a meeting of the Andersen Consulting group
to discuss whether it should file for separation from Arthur Andersen as a whole. Following this,
Wadia and Grafton met Shaheen to resolve the differences and offered an independent board
within the firm. They also offered to stop the transfer payments and made it clear that they did not
want a breakup. This infuriated Andersen Consulting partners and supported their belief that the
audit partners would never allow them to get what they thought they deserved. Following this,
Andersen Consulting (with the unanimous approval of its partners), filed for arbitration 13 in
December 1997 to separate from Arthur Andersen Worldwide. Andersen Consulting sought a
breakup on the grounds that the audit group violated the partnership agreement which restricted the
consulting services of the audit group to only companies that earned upto $175 million.
The arbitration proceedings continued till mid-2000. In August 2000, the independent arbitrator,
Guillermo Gamba,14 ruled that Andersen Consulting be made independent of Arthur Andersen
Worldwide. He stated that the audit group had violated the partnership agreement. As per the
arbitration ruling, Andersen Consulting had to pay $1 billion to Arthur Andersen Worldwide as
compensation for its freedom and had to remove „Andersen‟ from its name. Following this,
Andersen Consulting was renamed Accenture.
By 2000, Arthur Andersen had more than 100 partner firms across 83 countries and 77,000
employees. The services offered by the firm included Assurance and Business Advisory Services,
Global Corporate Finance and Tax services, Business Consulting and Business Advisory services.
In early 2001, Joseph Berardino (Berardino) took over as the CEO of Andersen Worldwide. In
March 2001, the firm changed its name to Andersen from Arthur Andersen as per the court order
to change its brand name after separation of the consulting group from the firm.
13
Arbitration is a process through which a dispute between two or more parties is resolved by an impartial
individual or a group of individuals, called arbitrators, conjointly selected by the parties involved in the
dispute. Arbitration is generally sought by companies to avoid costly and lengthy litigation.
14
Guillermo Gamba is a Harvard-trained lawyer practicing in Columbia. Arthur Andersen Worldwide and
Andersen Consulting chose him as their arbitrator in March 1998.
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A CHANGE IN VALUES – WHY ANDERSEN BEGAN COMPROMISING
Arthur Andersen Worldwide had not only experienced internal conflict, it had also experienced an
erosion of its culture. Various factors were responsible for this cultural decay. During the 1990s
(especially in the mid and late-1990s), the auditing services business was at a low. Arthur
Andersen had the slowest rate of growth (12.6%) among the Big Five auditing firms. Also, though
its consulting group was making profits, it was still in the initial stages. The consulting groups of
competitors such as KPMG and Ernst and Young were, however, making high margins on their
consulting services.
Reportedly, the pressure to increase revenues and profits was unbearable on the auditing group given
the increasing competition and the expanding partner base. The fact that the Andersen Consulting
partners looked down on their audit partners (because of the high revenues generated by the
consulting group) added to this pressure. Reportedly at that period, the audit partners could not afford
to reject their clients even though the clients were involved in numerous illegal activities.
Another major factor that contributed to the erosion of Arthur Andersen‟s values was the changing
dynamics of the US corporate world during the 1990s. As the markets became more competitive,

companies cut costs to increase productivity and profitability. In times like these, auditors had to
become client-driven to be successful. As a result, meeting customer requirements became more
important than the reputation and integrity of the audit firms. This realization came as a big shock
to Arthur Andersen auditors, who for decades had prided themselves on their principles.
Commenting on these changed business conditions, a former Arthur Andersen partner said, “In the
old days the client did not tell us what to do, we told the clients what was right. And if they did not
listen to us, we dropped them. In those days being dropped by the auditor was scary business. It
usually meant that your stock price would drop as well. Not anymore. Now if the auditors tell the
client something it does not like, the client drops the auditor and that means a few million dollars a
year right down the drain.”15
The 1990s also saw an astronomical rise in the remuneration of those executives of leading US
companies who were instrumental in drastically increasing the profitability of their companies.
Arthur Andersen partners interacted closely with many such executives as their companies were its
clients. Reportedly, this created a lust for money in the audit partners of Arthur Andersen: “The
Androids wanted to bask in that glow (money) as well.”16
All the above factors contributed to a major transformation of Arthur Andersen‟s culture. The
principles it had prided itself on were replaced by a focus on revenues. Toffler stated that the firm
became a place where revenues mattered more than reputation or business ethics. She claimed that
auditing partners forced her to increase her billings even when the increase was unjustified.
According to analysts, by the mid-1990s, Arthur Andersen was using its brand name to „over bill‟
and „under deliver.‟ Analysts remarked that the attitude of the partners during the 1990s could be
summed up in one word – arrogant. Reportedly, words like “Relax, we are Arthur Andersen. They
[clients] need us, they shall pay,”17 were commonly heard at Arthur Andersen offices. Toffler felt
that it was very hard for clients to get their money‟s worth from Arthur Andersen.
By this time, the firm was also offering risk consultancy services. As it was difficult to overcharge
only on the basis of audit services, the firm offered consulting services as part of the audit service
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and increased the total bill. According to a report, the firm provided „good‟ services only to those
clients who paid the quoted price. Clients who bargained over the fee received poor service as
Arthur Andersen assigned their work to inexperienced, junior auditors.
According to Rich Lowe, a retired Arthur Andersen partner, “During the 1990s something
changed. In my years of working at Andersen, I came to believe that the white-shoed accounting
firm known for its legions of loyal and honest professionals – a place that once had the respect,
envy and admiration of everyone in corporate America – had forgotten everything about its laid
down ethics and culture.”18 According to analysts, the firm was rudderless in the 1990s, with the
leaders changing frequently. The firm reportedly forgot its basic values of integrity, responsibility
and honest business practices and focused instead on increasing revenues.
During the late 1990s, as the consulting business of Arthur Andersen grew, the audit partners tried
to turn consulting jobs into annuity jobs thus ensuring increased and continuous revenues.
Reportedly, the audit partners pushed their colleagues and staff to convince their clients to opt for
other services of the firm by carefully expanding the scope of their project to create a growing
dependency. According to reports, Arthur Andersen also offered both internal and external audit
services to the same client.

Reportedly, during the late 1990s, the revenue targets for the partners were set so high that they were
forced to use whatever means possible to achieve them. The increased pressure on the partners to
generate revenues for the firm (and thus increase their remuneration) led to cutthroat competition
between them. According to analysts, the changed culture at Arthur Andersen forced the partners to
cut one another out of business as they tried to acquire the same client. Toffler said, “Andersen was a
brutally cutthroat place, where I learned to try to screw someone else [other partners] before they
screwed me up.”19 Reportedly, the members of the firm hated each other‟s guts.
Analysts also blamed Arthur Andersen‟s remuneration system for the deterioration in the firm‟s
values. At Andersen, the audit fees given to audit partners, was divided into „generated fees‟ and
„supervised fees.‟ The fee generated by the individual overseeing the audit job went to the
individual‟s office as that individual‟s generated fees. But if a partner used or supervised anyone
from another office on a specific project, the home office of the supervised individual received the
fees, called supervised fees.
This system discouraged the partners from using personnel from other offices as doing so had little
impact on their remuneration though they were generating revenues for the firm. Under Arthur
Andersen‟s remuneration system, supervised fees, which reflected the fees of every person
involved on a partner‟s project, did not contribute much to the partner‟s units (the basis on which
the partner‟s remuneration was calculated), if he used personnel from another office. So if a
partner brought business to the firm but did not work on it personally, nor supervised the job at his
office, he did not get any formal credit and still had to meet his personal target for that period.
In the late 1990s, some partners tried to convince the firm to change the billing system. Under the
system they proposed, the partner received the total fees for a project, sometimes depriving staff
(from other offices within the firm, whom they used) of any remuneration. This attracted even
more opposition. Commenting on this, analysts said that the concept of „one firm‟ did not seem to
apply, when it came to sharing fees. This further increased internal competition, mistrust and a
drive for success even at the cost of other Androids. According to Toffler, “Instead of seeing
collaborators or colleagues, they saw rivals and fee suckers.”
18
19
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403-049-1
ANDERSEN – READY TO FALL
In this vitiated environment, Arthur Andersen employees were not allowed to question the
superiors and were forced to comply with improper orders. There was no transparency in the
system. According to Toffler, most of the people did not want to be involved in unethical
activities, and such activities took place only because „decent people were put under unbearable
pressure to do their jobs and to meet the firm‟s ambitious goals with very limited resources to get
the job done.‟20 Thus, Arthur Andersen‟s changed organizational culture made its partners easy
accomplices in many crimes committed by some of its clients.
Many of these clients had come into the firm‟s fold as a result of its implementation of a strategy
called „Emerging 10,‟ including fast growing companies that were emerging as market leaders.
Launched in 1999, this new strategy was aimed at focusing on fast-growing entrepreneurial
companies. Under this strategy, the firm dropped its unprofitable clients and concentrated on
attracting big, profitable clients. In early 2001, under Berardino‟s leadership, Arthur Andersen began
taking on „new economy‟ clients, which promised both high risk and high returns. Companies such
as WorldCom and Global Crossings came into the firm‟s fold as a result of this initiative.

This move could be termed as the catalyst that triggered the firm‟s eventual demise. Not only were
many of these clients working on unstable business models, they were also working in industries
where the pressure to show good financial performance was tremendous. As a result, such
companies like Enron, WorldCom, Sunbeam and Waste Management Inc. often resorted to
accounting malpractices to hide losses and show profits. And the changed Arthur Andersen was
prepared to play along.
QUESTIONS FOR DISCUSSION:
1. Analyze the evolution of the „Andersen Way.‟ Discuss the key components of Arthur
Andersen‟s culture and evaluate its contribution to the company‟s success.
2. Examine the reasons for the growing rift between the audit group and the consulting group at
Arthur Andersen. How did these differences influence the culture of the firm? Discuss.
3. Comment on Arthur Andersen‟s during the 1990s. What factors contributed to the major
cultural change during that period? How far do you think external factors were responsible for
the change in culture at Arthur Andersen? Justify your answer.
4. What problems did the company have to face as a result of its change in culture? Whom do
you hold responsible for the changed fate of the company in the early 2000s? Justify your
answer.
20
11
403-049-1
Additional Readings & References:
1. Andersen Blame Game Heats Up, www.money.cnn.com, January 21, 2002.

2. Boston‟s Andersen Employees Rally, www.bizjournals.com, March 21, 2002.
3. Arthur Andersen Cuts 7,000 Jobs, www.newsmax.com, April 9, 2002.
4. Arnold James, Tough Times for the ‘Androids,‟ www. news.bbc.co.uk, June 15, 2002.
5. Babington Deepa, Rigby Bill, In Glory Days, Andersen Led from the Front,
www.chron.com, June 16, 2002.
6. A Final Accounting, Chicago Tribune, September 1, 2002.
7. Akar Katie, May Bonnie, Price Kim Wrunk Jay, An Ethical Analysis of Corporate
Conduct at Arthur Andersen LLP, www.moceyunas.com, September 28, 2002.
8. Andersen's Ethics Consultant Say Company Rotted from Within, www.smartpros.com,
April 11, 2003.
9. www.andersenbc.com.

Books:
1. Final Accounting: Ambition, Greed and the Fall of Arthur Andersen, by Barbara Ley
Toffler, with Jennifer Reingold
Related Case Studies:
1. HP at Cultural Cross Roads, Reference No. 402-025-1.

1. Netscape‟s Work Culture, Reference No. 402-023-1
12

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403-049-1

ICMR Center for Management Research

2003, ICMR Center for Management Research

ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India

Distributed by The Case Centre North America Rest of the world

The Fall of Arthur Andersen:

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extraordinary organization, a great American Brand.

CHANGING THE ORGANIZATIONAL PHILOSOPHY

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A CHANGE IN VALUES – WHY ANDERSEN BEGAN COMPROMISING

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ANDERSEN – READY TO FALL

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prepared to play along.

QUESTIONS FOR DISCUSSION:

Additional Readings & References:

1. Andersen Blame Game Heats Up, www.money.cnn.com, January 21, 2002.

Purchased for use by Florian Stöger on 04-Oct-2021. Order ref F425106.

Related Case Studies:

1. HP at Cultural Cross Roads, Reference No. 402-025-1.

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