May 19, 2020 at 8:33 am #7115
Let’s see if we can generate a discussion by sharing our responses to the Arthur Anderson case in a single thread.
What was the fundamental problem that led to the failure of Arthur Andersen? Who was responsible for this problem?
What governance decisions could have been made differently to change the outcome of this case?
What does the the Arthur Andersen case highlight about broader challenges in corporate governance?
May 21, 2020 at 2:49 pm #7372Janet TaylorParticipant
As I read through the case I noted the cultural change at Arthur Anderson. The expansion into consulting increased their revenues but also changed the intrinsic culture of their organization. Earlier on they were high principled and set the industry standard and over time that shifted to less principled and an industry loser. The board was responsible for the change since they voted down the proposal to separate the auditing and consulting practices. They made the choice to have the Arthur Anderson focus on profit over principles. Management worked within that guidance from the board to the detriment of the organization.
A different decision on dividing auditing and consulting practices could have changed the outcome. The auditing part of the organization could have remained principled while the consulting part focused on profit. The two parts of the organization would have needed to seek separate clients and perhaps the audit portion would have failed due to financial distress however given their track record that seems unlikely.
This case highlights how there needs to be a strong relationship between the board and management. Understanding changes in culture can be hard to see and even harder to predict future success or challenges.1+
May 22, 2020 at 2:39 pm #7400
Great response, Janet, I think you’ve nailed it. And I particularly like this point: “They made the choice to have the Arthur Anderson focus on profit over principles.” There has been increasingly a false idea promoted that investor-owned firms have a legal obligation to make as much profit as possible for its shareholders, but this simply isn’t true. Investor-owned firms, like co-ops, can choose to have multiple bottom lines.0
May 22, 2020 at 5:08 pm #7418Walter PreugschasParticipant
Auditing and Consulting are both legitimate and important functions. The difficulty in the Anderson case is, of course, the conflict of interest where they afforded both functions to the same clients. There would have been various options for the management to avoid this conflict of interest. I suspect management and the board both had become more interested in profit than abiding by its long standing principles. It shows to me that ethics was an attribute that was lacking on the board and with management. Perhaps the board recruitment function needed to focus on a more balanced board membership in order to avoid such imbalance.1+
May 25, 2020 at 9:21 am #7429Tammy Van TighemParticipant
I believe the lesson I learned from Arthur Andersen is discipline is needed to do an independent audit of finances as a check and balance for owners, boards and management .1+
May 25, 2020 at 11:27 am #7431Brett FergusonParticipant
I agree with the above posts. The thing I will add is that they seemed to have a change in focus of the companies vision. Going to a more profit based consulting firm from the auditing. I think if they would have adjusted the vision statement there may have been a clearer focus of the staff if communicated correctly down the channels on the focus of the work provided. Then the board and management could also see the downfalls of areas of the operations more clearly.0
May 25, 2020 at 1:11 pm #7433
Great points, everyone. It is true, I think, that the board’s failure to manage the conflict between its auditing and consulting services is key. As I pointed out in another thread on this subject, the board was negligent in other ways too. Anderson and Enron employees were very close — too close, many people observe — as they frequently participated in voluntary social activities organized by the other party – ski trips, fundraising events, etc. This was considered, later on by examiners, to be ‘inappropriate and atypical’ familiarity. Given that 27% of Anderson’s auditing revenue came from Enron, this should have raised eyebrows. Did the firms have codes of conduct that were ignored, or were their policies inadequate? Were any questions raised by the board regarding such conduct, which could so easily facilitate collusion?0
May 25, 2020 at 3:48 pm #7454Kathy LittleParticipant
I agree with the comments made above. I found it interesting that the board had made a recommendation of dividing the auditing and consulting division into separate entities but under influence by the owners(partners) it was defeated. Although in hindsight this was a poor decision isn’t this how the governance model should work?0
May 26, 2020 at 11:58 am #7474Jim RossParticipant
Lots of moving parts here. just for arguments sake let’s make an assumption that the closely held company (small number of partners and even smaller number of senior partners) still maintained Arthur Andersen’s principles of stringent auditing and the chair presented a different model that separated stringent activities and wanted to create something else in addition.
I am troubled by the number of comments that suggest making money requires one to be not ethical or not principled?
The partners did not agree with the chairs suggested model because they wanted to continue making money through the stringent approach and any infringement on the dearly held reputation would lose them money (which certainly happened in the end)
I asked the question of our auditor, in today’s world have you split your company into two to manage the different functions? The answer was no. But today they follow a rigorous process to manage conflict. Conflicts are rigorously disclosed and they refrain from participating if it’s a problem.
1.so the problem was the break down on keeping the principles sustainable
2 of course the buck stops with the owners and in this case we have all learned some hard lessons at their expense, hence new laws and regulations and best practises
3.competencies of boards now include
b. Director competencies in direction and control with skills in guiding CEO through authority, incentives and identity
C. Boards establishing what information they need for monitoring and in what form (new tools; risk governance vs risk management within a risk framework)
4. Now you can find external stakeholders (consultants, organizations, regulations) that can provide best practises on just about everything example CPA, Canadian Public Accountants – 20 questions directors can ask about series
However there will still be failures because sometimes you can’t protect people from there own stupidity (Canadian agency law, GHL Friedman p.111 but individually you can still act with duty of care. Duty as fiduciary and ethically0
May 27, 2020 at 4:33 pm #7493Jan O’BrienParticipant
Very interesting discussion of the issues that led to Arthur Anderson’s demise. Seduced by the huge fees from consulting, they pushed aside the stringent bookkeeping their reputation was built on. The responsibility was wide spread but at the heart of it was the change in the organization culture. Consequently, the government had to pass heavy-handed legislation. But where were the Securities & Exchange Commission during all this?0
May 27, 2020 at 9:17 pm #7495Lyle OlsonParticipant
Some thoughts: -Greed became a driving Force.
The board had lost direction and decisions were no longer guided by mission, vision and values, this led to the cultural erosion.
Being motivated by greed, the majority of the board was not questioning their actions. there needs to be alot of critical thinking when changing priorities and direction. Decisions need to be in line with guiding principles.
There needed to be some not just social but “professional distancing” with their clients because of the nature of their work.0
May 28, 2020 at 7:42 am #7511Donna SmithParticipant
I totally agree with the greed as motivation, but as someone did say, the drive to financial success is a business goal. Of course i this case it was the downfall. From a board perspective I feel complacency had set in, and too much dependence on the management and not enough independent thinking by the board. As we don’t know the conversations that took place, I wonder how often any board member questioned actions or directions taken, or spoke up at audit meetings, etc.0
June 3, 2020 at 4:51 pm #7966Cheryl WallaceParticipant
If anyone is interested in more about Enron – the smartest guys in the room documentary. The issues permeated throughout the entire system from Enron Board / management even employees to the auditors. There was so much collusion and no one with a loud enough voice to topple the apple cart. The complexity (by design) of the reporting and subsidiaries made it almost impossible for the board to have proper oversight. That should have been a red flag in itself. likely the board members were making money from the stocks so they didn’t feel a need to make waves. Sorry I missed this thread when I posted my responses. I will make sure I watch for this on the next one so it is easier to read each other’s responses!0
June 8, 2020 at 7:54 pm #8076Ward WeisenselParticipant
Greed and the changes in culture this created were ultimately the downfall and I think the discussion covers this well. It is also interesting how the culture change moved Arthur Anderson from being the industry leader developing proper audit practices to a company that completely abdicated this role. It shows the shift from a pride in doing what is right for all the businesses they represent (and others as well based best practices being applied across industries) to a singular focus on profit0
- You must be logged in to reply to this topic.