Case study #1: The Rise and Fall of Arthur Andersen

Prepared by: Diane Villanueva

Den Meldrick Almaden

Section: MANPRIN-GTA-T3: 2018-2019

Synthesis:

Arthur Andersen established his accounting firm that built and set the standard of ethics in
the accounting industry. He reinforced “Think straight, talk straight” motto by choosing to maintain
a small firm yet embodied with a strong core of values.

After Andersen’s death, there were series of reformulation of partnership that led to a
decentralized structure. In pursuit of power and profit, the firm strayed from its core founding
identity. Under the leadership of Leonard Spacek, each partner had one vote in all matters and all
partners shared in the profits and losses of the firm. The firm expanded domestically and
internationally which led to the division of Accounting and Auditing, Tax, and Consulting under the
leadership of Harvey Kapnick. The restructuring continued to distance Consulting division from the
original Auditing/Tax foundation of Andersen. The Auditing/Tax division engaged in more
consulting that resulted to overlapping of roles. The competition between the two divisions
continued and led to the separation of the two entities. The Auditing/Tax division proceeded under
the name of Andersen and the Consulting division under a new name of Accenture. In 2000,
Andersen was involved in the greatest corporate bankruptcy and accounting failure tagged as the
Enron scandal. The firm prioritized huge profits and accepted fees paid by large clients including
Enron. The firm participated in the tampering of vital documents and was under the investigation of
the US government. The scandal caused damages and loss of trust from all its stakeholders.

Point of view: Andersen’s successors were capable of leading the firm to which course of action
to take, may it be ethical or unethical.

Statement of the Problem:

How can the Andersen accounting firm grow its business while adopting Andersen’s “Think
straight, talk straight” motto?

Statement of Objectives:

- To review the controlling function of Andersen’s management that will abide by the goals of
the organization

- To assess the profitability of the firm in accordance to Andersen’s core founding identity
and values

- To apply management ethics in alignment with Andersen’s vision for the company

Areas of Consideration (Analyses and Assumptions):

Using the Virtue theory under the Multistream moral point of view, Arthur Andersen’s
managing style stood by with integrity, for he believed that the purpose of management was to
maximize the well-being of the whole organization. He focused on the character of the members
because by doing so, the virtues will be instilled. According to B. Dyck and M. Neubert, Virtue
theory is hinged on the character and ways in which people facilitate the practice of virtues
regardless of the consequences (2017, p.154). To Andersen, it was about doing the right thing
even if it cost him losing clients or earnings, which is clearly suggested by the Virtue theory.
Alternative Courses of Action:

Being the lead partner adhering to Andersen’s motto, Spacek could have set clarity in the
organization by establishing code of ethics. The code of ethics includes expectations for its
stakeholders and certain expectations on positive behaviors to promote and negative behaviors to
a avoid (Dyck & Neubert, 2017, p. 163). In this way, Spacek could involve the organizational
members at all levels to participate in the building of the code so as to allow trust and integrity to
thrive. Once the code of ethics has been established, the management can impose and promote
practices that adhere to the goals of the organization.

On the other hand, Kapnick could have led in a servant leadership style in preparation of
the reorganization. In such way, the overall well-being is equally promoted with the financial well-
being of its stakeholders. Using the Multistream approach, a clear reorganization can be
established thru correct structures and ethical systems. The firm can expand domestically and
internationally without having to decentralize the decision making of the managers.

Recommendations:

The successors and managers should spearhead the development of the code of ethics
relative to their founder’s motto “Think straight, talk straight”. The code of ethics must be clearly
cascaded and implemented across the organization among its members and partners. The code will
serve as the foundation of the firm’s ethical beliefs and culture which can be passed on to the next
generations. Andersen’s management style was based on character and practices grounded in
virtues.

Implementation Plan:

The different managers of each division should call a collaborative meeting to discuss and
formulate the code of ethics. It must be grounded on the original set of core values and must be
aligned with the goals and plans of the firm. The collaborative meeting is similar to an open forum
and should encourage participation from all the stakeholders. Once the code has been established
and agreed upon, the code should be strictly implemented across all its members. This will serve
as an anchor of the firm that is set to endure the test of time.

Learning points:

The case of the Rise and Fall of Arthur Andersen gives us a glimpse of how a management
approach finds and enlivens what was practiced in the past but was not clearly established.
Management ethics serves as a compass in deciding which interests matter more to an
organization and which manner should these interests be served. It is also necessary to set
standards to which an organization should comply, whether in the interest of all the stakeholders or
the other way around.

References:

Dyck, B., & Neubert, M. (2017). Ethics. Management: Current Practices and New
Directions, 136-166.