Table of Contents
I.0 Introduction
The theatrical termination of Arthur Andersen came as a great shock when it was once of the most famous accounting firm in the world. For changing its strategy, Andersen moved from being one of the largest professional service organisations in the world to almost complete collapse within a few years. There were significant impact of the firm’s failure on its employees, customers, investors and the general public is hard to overstate on its organisational architecture. This report will discuss the environmental and strategic changes that occurred over the life of Andersen in 1990s and early 2000s. It will also discuss and explain the managing partner would do differently to the actual management by using organisation architecture framework to in early 1990s.
2.0 Environmental and Strategic changes
2.1 Business Environment change
2.1.1 Regulation change
In order to limit the consulting work at accounting firms the SEC proposed new regulations in 2000s. The SEC proposal was named "fatally flawed" before the Senate Banking Committee in July 2000. The argument about the proposal was being made to provide more active role in making needed changes in the measurement and reporting system to give better information for decision-making by corporations, investors and government. However, the SEC proposal was defeated by the "Big Five" accounting firms.
2.1.2 Market changes
The market changes for Arthur Anderson (AA) both occurred ...
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2.0 Environmental and Strategic changes
2.1 Business Environment change
2.1.1 Regulation change
In order to limit the consulting work at accounting firms the SEC proposed new regulations in 2000s. The SEC proposal was named "fatally flawed" before the Senate Banking Committee in July 2000. The argument about the proposal was being made to provide more active role in making needed changes in the measurement and reporting system to give better information for decision-making by corporations, investors and government. However, the SEC proposal was defeated by the "Big Five" accounting firms.
2.1.2 Market changes
The market changes for Arthur Anderson (AA) both occurred in internal and external environment. In 1990, the change in the internal environment increased the competitive market for the firm which raised the problem about the company undergoes. The company undergoes was came from auditors who realise they are being underpaid and also related to accountants whose salaries are lagging behind of other professionals. These leads many of top consultants moved to other consultant firms or start their own business because the company did not compromise. On the other hand, the change in the external environment has led the auditing business into a down turn. Therefore, increasing in completers and larger numbers of mergers made the auditing service become a low profit margin activity in 1990s.
2.2 Strategy changes
The new strategy changes played an important role at Anderson in 1998s. The changes were mainly about retirement and the culture environment of the company. Firstly, in order to achieve the goal in cutting cost, the company enforced employee to retire at the age of 56 which caused skilful auditors leave and some inexperienced auditors rise. Secondly, the company also put a major focus on increasing the company’s revenue through the “2X” performance evaluation system. On this way, partners will award by bringing two times in their revenue in work outside of job scope through this system, otherwise they will get penalized or dismissed. In addition, the changes for the culture included changing from solid to soft like the casual dress code, removing the big wooden door at entrance and changing the company logo to a “rising sun”. The strategies used in the earlier period such as clean-cut, professional, “think straight, talk straight” had all gone after this new changes occurred and changed the culture environment.
2.3 Organisational architecture changes
2.3.1 Decision-right assignment
In 1990, the Professional Standards Group (PSG) was moved out of the Chicago headquarters and dispersed to local offices in order to give local offices more power in decision making. Thus, the local offices were assigned significant decision rights which made the committing accounting frauds much easier for the auditors and also would most likely result in local officers act to maximise their own interest.
2.3.2 Reward system
The reward system determined an auditor’s revenues by how much new business they bring to the firm. For example, partner will be rewarded if they could bring in two times their revenue in work outside their job scope. However, these rewards system has lead to shirk audit jobs and fraud problems. For example, they allowed clients to keep details on losses, approve inaccurate financial statements and overstate clients’ profit. Consequently the incentive from reward system was totally misused and problems existed with the different objectives between owners and employees.
2.3.3 Performance-evaluation system
The performance evaluation concerns on how much new business bring to the firm by partners. These caused auditors do not concern on the quality of their work performed to clients other than focused on the quantity of their work. It motivates auditors to engage in dysfunctional activities to improve their rating in evaluation. In other terms, the problem of “gaming” occurred.
3.0 Doing differently to the actual management
3.1 Brief introduction
In the 1990s, there are lots of significant changes both occurred in environmental and strategic areas in Arthur Andersen. This part of essay will contain three components based on organisational architecture which include readjusting decision rights, reward system and performance evaluation system.
3.2 Decision Rights
3.2.1 Problems of decision rights
In the early 1990s, Andersen’s Professional Standards Group was moved out of the Chicago headquarters and dispersed to local offices. This was an attempt to speed up decision making and give local offices more power. The result of this attempt gave the local offices rights to assigned significant decision. However, this leaded the committing accounting frauds much easier for the auditors.
3.2.2 Solutions of decision rights
Generally, it was essential for the firm to decentralise the decision rights to local offices. However, local managers wanted to maximise their own utility instead of had strong incentives to act maximise value of firm. This meant they will harm the value of the company because they just concern their own interests. So changes that managing partner could make to solve this problem is not to give all significant decision rights to the local offices. The change points out the authority of decision-making need to be separated. Therefore, the decision rights to local offices are focus on their daily work, but for some higher level decisions should be response by the top management and Andersen’s Professional Standards Group because centralize decision-making have particular advantages when coordination of activities within the firm is important. By doing this, the new changes of decision rights may increase the cost of information transfer and processing, but it can reduce the conflict interest because the managing partner easier to grant the employee decision management and decision controls which more effective use of local knowledge and help to solve incentive problems.
3.3 Reward System
3.3.1 Problems of reward system
There are some problems also occurred in Arthur Andersen reward system. The reward system based on profits without penalties for loss incurred. Thus, it will encourage unnecessary risk taking. Employees’ morale will affect when the policy changed partners to retire at age 56. This means experienced partners might leave and inexperienced ones might stay and to do unfamiliar jobs. Therefore, both the quality of jobs and company’s reputation would be decrease.
3.3.2 Solutions of reward system
The change that Arthur Andersen (AA) can make is to build long-term employment relationships with its employees which can better provide strong incentives to motivate employees become more productive. In addition, AA also can improve its compensation regulation which based on the quality work done by employees. This compensation give to employees is not simply like promotions, bonuses and prizes. It even can be the way that is provided by AA to give some shares to excellent employees and compensate the retire employees above the market rate.
3.4 Performance evaluation system
3.4.1 Problems of performance evaluation system
The problem of the performance evaluation came from “2X” performance evaluation system which adopting by Arthur Andersen (AA) in 1988. Furthermore, the accountants’ realise that their salaries are underpaid when they compare to other professionals. Therefore, the performance evaluation system demonstrates that the auditors’ jobs are no longer secured and may lead to shirking audit jobs and cause fraud as well as the incentive problems.
3.4.2 Solutions of performance evaluation system
To solve this problem, AA can establish new performance evaluations which combine objective and subjective. For the objective performance evaluation, it is more focus on the quality of output that provided by employees. For the subjective performance evaluation, AA can provide a table of performance appraisal to employees for marking themselves and also for the others each year. It can provide more fair and true view for the AA to evaluate the work done by employees.
4.0 Conclusion
In conclusion, the Arthur Andersen briefly explained the changes occur in organisational architecture which includes the changes in environmental and strategic in 1990s and early 2000s. In addition, AA could do differently in three aspects of organisational architecture which included separating decision-making rights to different level of employees, developing suitable reward systems to motivate employees and improving performance evaluation both through objective and subjective methods. These changes gave employees strong incentive and increased the value of AA.
Bibliography
Brickley, J., Smith, C. & Zimmerman, J. (2009). Managerial Economics and Organisational Architecture, Fifth edition, New York: McGraw-Hill Irwin
