Answers for question # 1
For several years, Andersen’s strategy and environment changed especially with regards to the materials. The management of Anderson’s businesses reacted to the changing environment by making the related changes to the organizational architectures such as performance evaluation, decision right and reward systems. In the book, it is revealed that poorly designed organizations architecture in response to the changing environment in term of material can result into company’s underperformance and even failure. The initial Andersen’s business plan was to provide high-quality bookkeeping services to its clients. Later, with the invention of computers, Andersen’s engineer named Joseph Glickauf illustrated that computers could be utilized to automate bookkeeping. Through bookkeeping automation, Andersen’s firm became the most outstanding accounting firm in America. Their business exploded due to the increased demand for information technology in the 1970s. During that period, business consultation became the chief revenue earner in the Andersen’s firm.
The growing consultation business created high tension within Andersen’s firm employees. The firm’s consultants began noticing that their wages were less in relation to the market opportunities. They felt their contributions towards profit realization were more than the auditors’ contributions who even had better salaries than them. The auditing partners who were in the managing board of the organization resented that their consulting partners wanted higher profits and shares which they were not ready to address. As a result the consulting partners pulled out of the organization and formed their own consulting firms. This led to the creation of more consulting firms in America and it is the reason as why Andersen’s firm began declining due to increased competitions.
Answers for question # 2
The problem started with Andersen hiring a staff of 40 internal auditors from Enron leading to the management of a staff of more than 150 individuals. The localization of “Andersen’s Professionals Standards’ Group” was further weakened by moving them from Chicago to local offices. Another problem encountered was the removal of Carl Bass by Andersen’s management from his oversight role. This was due to Carl’s idea of Enron taking a specific transaction of $30 million to $50 million accounting charge, which he expressed to David Duncan (lead auditor in Houston).
According to a former staff his observation was that so many people in the Houston office had their fingers in Enron’s pie and anyone saying an audit can’t be signed was fired. This was confirmed when complaints were made by Enron’s chief accounting officer wanting Bass to be removed form the auditing team which was done. Due to accounting errors in Enron’s partnership it indicated restating of financial statement for 1997-2001. Many scandals emerged which related to negligence of the Enron’s board, accounting fraud, excess compensation and perquisites for the firm’s top executives.
Answers for question # 3
As the managing partner of Andersen’s firm, I would have called for government’s intervention to probe the performance of all other companies in the United States. The reason is to protect the company’s identity and its future success. An evident is when Leonard Specks, Andersen managing partner, a part from his management roles, changed the firm’s reputation when he called upon the government to audit the accounting books of a powerful Bethlehem industry, which he accused of exaggerating its profit by 60 percent in 1947. In addition, he called upon the Stock Exchange commission and the Securities to launch a crack down on those companies that were overstating their profits. Taking such regulatory measures is geared to improve the company’s growth and reputation.
Answers for question # 4
Multi task agent theory requires that job design is a vital instrument in ensuring a firm’s future prosperity. The Andersen’s firm after being subjected to stiff competition from other consulting firms, decided to restructure its management. In 1989, it separated its auditing and consulting businesses by forming Andersen Worldwide (AW) based in Geneva. AW had two subsidiaries, namely Author Andersen (AA) and Andersen Consulting (AC). AA was to primarily deal with tax and audit engagements. AC on the other hand aimed at providing consulting services to large organizations. AA other than its tax and audit engagements was also to provide consulting services to smaller corporations with annual revenue of less than $ 175 million. The sector that was making more successful was to share its profit with the other sector. Through multi-tasking Andersen’s firm continued making more profit and creating a good reputation.
Answers for question # 5
After the invention of the computers, Andersen’s Engineer discovered that computers could be used to automate bookkeeping accounts. The auditing and the consulting partners were united and they worked together, which made Andersen become the leading firm that practiced accounting technologically. This made the firm’s consulting to generate more revenue as opposed to accounting and auditing. The consultants soon realized that they were paid less salary as compared to their counterpart auditors who were the managing directors. The auditor’s failure to address their issues angered them and they pulled out of the company to form their own consulting firms. Establishment of more consulting firms subjected Andersen consulting services to a stiff competition from these other firms. As a result, it began underperforming and even its reputation was greatly reduced leading to decrease in profit realization.
Answers for question # 6
The problems that are facing Andersen’s firm are common problems that are facing all other accounting firms. The major problem that Andersen faced was to offer the auditors and accountants more pay than the consultants do. To avoid such problems, as a managing partner of another accounting firm, I would reward my staff in accordance to their contributions to the firm’s revenue. Highly productive employees would be paid more salaries and wages than underperforming employees.
Answers for question # 7
The congress by failing to pass the SEC proposal was indeed acting in accordance to the public’s interest. Contrary to the SEC proposal to implement new policies that would limit accounting firms’ consulting work, Andersen’s organizational architecture, Samek, argued that the SEC proposal was “fatally flawed”. He said that, “ just as we need to take an even more active role in making needed changes in the measurements and reporting system in support of better information for decision making by investors, corporations and the government” (Andersen,)
Answer for question # 8
Yes, it was AICPA’s fault of not setting and enforcing higher ethical standards that led to unethical conduct at Andersen and other companies. This was because in Andersen the staff was left to act on their own interest. The staff practices unethical conduct if they know the AICPA is not checking on their audits here the staff will not take responsibility for their actions.
Answer for question # 9
The establishment of a new oversight board was a good idea since earlier the self-regulation in the industry had many discrepancies. An example is a company named Bethlehem Steel, which was accused by Leonard Spacek of overstating its profits, by more than 60 percent this was due to the industry’s self-regulation. Also before the establishment of oversight board, some companies cooked up their books.