The Fall of Arthur Andersen - Organizational Culture Issues

            
 
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Case Details:

Case Code : HROB024
Case Length : 12 Pages
Period : 1990 - 2002
Pub Date : 2002
Teaching Note :Not Available
Organization : Arthur Anderson
Industry : Consulting
Countries : USA

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"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.

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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 partner2 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 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.

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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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