An inside look at Arthur Andersen: “Serving two Masters”

Master’s Concentration: Business Development Studies

20 April, 2011

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Incentives in Arthur Andersen that guided and influenced the behavior of the firm’s
consultants

Flemmin poulfeldt considers important to recognize that consultants frequently have to

operate in situations full of ambiguity, uncertainty, sensitivity and bounded rationality.
Furthermore, the power imbalance of some consultant-client relationship can have a huge impact
on the ethical behavior of the consultant and this becomes a key issue to analyze.

In the words of Barbara Toffler at Arthur Andersen “the pursuit of fee income had
become an end in itself, in which leadership was absent when it matter the most”. The unethical
activities the firm was involved in, were simply a side effect of its corporate culture. In general,
employees at Arthur Andersen adopted a behavior of worshipping money, and nothing else
matter for them than the bottom line. Additionally, an attitude embracing the old saying “the
means justifies the end” was implicitly adopted along the organization.
After analyzing some of Arthur Andersen employees’ recounts, there are particular
incentives that guided and influenced the behavior of the firm’s consultants:
-Lack of proper leadership to counterbalance a huge egocentric culture. Strong corporate culture
can be self-destructive if it is negative.
-An unhealthy, confusing and unfair fee income structure. The incentives at Arthur Andersen
seemed to be exclusively design to trigger the basic instincts of the human nature of survival
of the fittest. This in turn created an unbearable atmosphere of competence, individualism and
territorialism affecting negatively everybody’s behavior in the firm and consequently the
foundation of the firm.
-The size of the partnership had gone far beyond the ability of its members to maintain personal
relationships and personal trust.
-Everything inside Arthur Andersen revolved around “who gets the fees”, placing ethics aside.
Additionally, employees did not want to face reality, so even if they knew or suspected that
something was unethical, their environment implicitly made them afraid to ask and to know
the truth. It is interesting to see how human beings perception of ethics is altered by its
surroundings and immediate community. Making the customer happy became more important
than the organization integrity.

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-The high level of autonomy of the local offices brought the firm speed to react fast to the local
clients’ demands. However, empowered to make their own decisions, some local office
partners drifted into situations where that conflict of interest compromised Andersen’s core
values and clouded partner judgment.
-A strong hierarchical structure that will not left room for questioning from the bottom up. This
generates a high level of conformity among the employees that survived in this environment.
-Most of the employees who made a career with the firm, had not worked anywhere else, so
whether they realized it or not Arthur Andersen was their second family. These employees
developed strong loyalties to the firm and its culture. Their assimilation of the corporate
values was done with no comment or questions. Besides, these employees were under great
pressure to meet sales targets or face possible dismissal. Pressures like these can easily alter
someone’s judgment.
-An aggressive business model that put stress on client service and sales over stewardship.
-A sales culture increased the level of risk the company and its employees were willing to take
with its clients, thus raising the possibility of conflicts of interest. A conflict between client
sales and protecting the public. Consequently, employees became risk takers, so did the firm.
The pro-risk culture inside Anderson took its highest toll with the Enron scandal.
-No importance was given to the ethics of the client, perhaps this was somehow based on Arthur
Andersen’s consultant urge to get their fee.

Positive and negative implication of these incentives

Heavy “brainwashed” of newly graduates limits the possibility of enriching the company
with other positive lines of doing business and refreshing its corporate culture with each
individual’s personality and experiences. Nonetheless, the capacity of Arthur Andersen of
establishing a strong corporate culture, although with negative consequences, could be seen with
positive lens. Another positive side of the Arthur Andersen experience is its goal oriented
system. Well managed competition is always healthy, and this system if well managed could
propel a company forward.

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 Compensation was set to motivate selling creating a direct conflict of interest with
auditing. Traditionally, client service for auditors was about ensuring compliance with regulatory
requirements. For consultants, client services were about meeting client needs and satisfying the
client (Squires et al, 2003). The company placed a huge amount of importance into client service.
This carried problems when there was an imbalance of power between the client and the
consultant. Additionally, accounting and consulting follow different paths in the business world,
when their paths are crossed a firm providing both should be careful, since a firm will be directly
exposed to a conflict of interests. Arthur Andersen learned it too late with Enron, that pleasing
the client is not compatible with a public accounting firm’s central responsibility to protect the
public interest.
While Andersen Consulting and Arthur Andersen shared the value of client service, the
meaning of this value had been interpreted differently. Traditionally, client service for auditors
was about ensuring compliance with regulatory requirements. For consultants, client services
were about meeting client needs and satisfying the client (Squires et al, 2003).

A firm can not go blind into the market. The firm needs to be cautious when taking on
sensitive issues; it needs to make sure that its consulting services are required to solve a problem
and not to cover up one. Therefore, it is imperative for a firm to establish a code of conduct
regarding ethics that it is clearly detached from the bottom line.

Alternative incentives Arthur Andersen could have applied to prevent its demise

Keeping both lines of services separate could have avoided the company problems of
conflict of interest. Professional rules only serve as the overall ethical guidelines. Professionals
when facing day to day situations encounter an array of very specific ethical issues, and most of
the times there is not a written solution. The need for interpretation and the operationalization of
the ethical rules is necessary (Poufeldt, 1997).

However, in some instances is hard to determine what is right and what is wrong, and
here the role of the corporate culture to back up a judgment can be either beneficial or
detrimental, being the latter the case of Arthur Andersen. Measures to safeguard the values and
core ethics of the company are needed. An alternative is the establishment of forums where

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employees could freely express their opinions and grievances, together with proper training
about business ethics and their applications with real case scenarios.

Competition, among employees, at all levels is healthy. However, a check and a balance
system is needed so the company’s friendship and camaraderie feeling is not lost. If competition
is not maintained at healthy levels then competition in itself could hinder progress. An
alternative is the creation of a system where all the different teams get rewarded accordingly to
their participation. This could have made a difference inside Arthur Andersen. Additionally, a
bonus or reward system for results and innovative ideas will push competition at different and
healthier levels. In addition, the company needs a leader that without interfering with the
different partner’s offices autonomy could unite all its scattered offices as one firm.

In the end, Arthur Andersen’s story is about the conflicted environment in which public
accounting operates in the United States; a conflict of interest between serving the public and at
the same time maintaining profitability. Although Andersen’s partners must carry some of the
blame for the firm’s fall, They were also caught in a system where manipulating accounting
guidelines and rules to please the client was often not only legal but rewarded by clients (Squires
et al, 2003).

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 References

Greiner, L., & Poulfelt, F. The Contemporary consultant: handbook of management consulting:
insights from world experts. Mason, Ohio: Thomson South-Western, 2004.

Squires, S., Smith, C., McDougall, L. & Yeack, W. Inside Arthur Andersen: shifting values,
unexpected consequences. Upper Saddle River, N.J: FT Prentice Hall, 2003.

Poulfelt, F. (1997), Ethics for Management Consultants. Business Ethics: A European Review,
6: 65–70. doi: 10.1111/1467-8608.00050

Who killed Arthur Andersen? (2003, March 11). Financial Times

The Right Thing; Forewarned Is Forearmed? Not Always. (2003, Feb 16). New York Times

Toffler, B., & Reingold, J. Final Accounting: ambition, greed, and the fall of Arthur Andersen.
New York: Currency/Doubleday, 2004.