How the changes Arthur Andersen made to its organisational architecture in the 1990s and early 2000s led to its ultimate demise
Change is inevitable. Any organization that wishes to succeed in today’s business environment has to keep on changing as the environment changes. Changes could be in the form of organizational structure. The management could change the organizational structure of a business to improve its performance. The culture of the organization could also be changed (Smith, 2006). The other form of change that is to be focused on in this paper is the change in the organizational architecture. Most organizations are increasingly realizing that people are the most important assets in their businesses. Active and effective participation of people in organizational business activities has the ability to bring undisputed success to organizations. Organizational architecture could be explained based on the influence that spatial environment has on the people associated with an organization (Martlew, 2004). This is also referred to as the organizational space. The other basis that can explain the term is the creation of processes within the organization, as well as roles and reporting relationships. This is the organization design.
Arthur Andersen, an auditing firm that was established in the year 1914 came to a dramatic fall in the 20th century following the implementation of organizational architecture changes that were implemented by its management. Even though organizational architecture changes can bring success to an organization, sometimes they can be the source of its demise if not effective. The architecture changes could be influenced by the environment in which the organization is operating. For instance, the changes that were implemented at Arthur Andersen were in response to the changing business environment. However, the changes were ineffective and they led to the fall of the company that was once regarded as among the largest in the world. The three elements of organizational architecture changes that can lead to the failure or success of an organization are assignment of decision rights, methods used to reward employees and methods used to evaluate employees, as well as the business units (Brickley, Smith & Zimmerman, 2009).
Some of the organizational architecture changes that plotted the failure of Arthur Andersen were the separation of its consulting and auditing business. The decision rights of the two firms- Arthur Andresen and Arthur Consulting- were separated upon this separation. This was a time when the auditing business was slowing down due to increased competition. Decision-making is very important for a business organization (Zimmerman, 2006). The other reason for the company’s failure was the change in the methods of rewarding its employees. The company started rewarding employees based on the business they brought. In addition, employees were also evaluated depending on the business they brought before this changed to a 2Ă— performance evaluation system. To get rewarded, employees could do inaccurate work to bring more business. Employees no longer followed the company’s motto of “think straight, talk straight” and its four cornerstones: “good service, quality audits, well-managed staff and profits”. This led to the fall of Arthur Andersen.
What could have been done differently to achieve more successful outcome
As mentioned earlier, the three elements of organizational architecture change are assignment of decision rights, methods used to reward employees and methods used to evaluate employees, as well as the business units (Bernus, Nemes & Schmidt, 2003). The success of an organization partially depends on the nature, quality and effectiveness of the decisions made (Hoque, 2003). Therefore, it is important to ensure that the people who make major decisions for an organization have the knowledge and skills to make the right decisions. Separating the decision rights of Arthur Andersen and Arthur Consulting could have resulted in the failure of the Arthur Andersen Company. The separation came at a time when the auditing business was slowing down and the consulting business was increasing. It was a time when many organizations were adopting new technologies to improve their businesses. The company made some of the decisions that negatively affected the business as AA tried to fight back after realising its counterpart AC was eclipsing it. The company changed its evaluation system and reduced the age at which employees were retiring to 56 in the bid to cut costs. This led to less experienced employees being entrusted with the company’s business. The new breed of partners was in the limelight as the company messed up its business.
I would not have separated the auditing and consulting business if I were the managing partner in the Arthur Andersen Company. Instead, I would have found a way to could incorporate the two businesses to improve the quality of the services offered by the company. As the need for technology increased, I would have introduced computer auditing systems in order to cope with the changing business environment. I would ensure that the company offers consultancy services alongside auditing. The consultancy business would have boosted the company’s profitability at a time when auditing business was decreasing. The decisions to change the evaluation systems and rewarding systems would not have been made. In addition, retiring employees at the age of 56 was not a good decision since experience is vital for any business organization. Therefore, I would not have made the decision to retire employees at the age of 56 if I were the managing partner of Arthur Andersen.
Budget Systems
A budget is very important to any organization. A budget gives a guideline to the actions that will be taken in the organization. Therefore, the management accountant should ensure that he or she prepares a budget that will facilitate actions that will lead to the success of the organization (Langfield-Smith, Thorne & Hilton, 2012). In addition, a budget facilitates communication, as well as coordination within the organization. Therefore, a poor budget will lead to poor communication and coordination (Kaplan & Atkinson, 1998). It is important to note that communication is very effective in ensuring the success of an organization. Other reasons why the budget is important include allocation of resources, controlling of operations, as well as evaluation of individuals and business performance (Jackson & Sawyers, 2006).
The top management should not set a budget that is over ambitious since this might lead to risky behaviour by the employees (Gitman & McDaniel, 2009). I, therefore, agree with the defence argument that has been made on behalf of Arthur Andersen was that the firm had wildly ambitious company-wide revenue budgets that were set by those at the top of the firm. This encouraged risk taking behaviour by audit partners in order to meet their individual budgets. The partners were to be evaluated depending on the business they brought to the company following the decisions made in the bid to compete with Arthur Consultancy. Partners performed inaccurate audits to get more business in order to earn rewards. They would overestimate profits for clients, leading to failure of companies such as Enron and loss of trust from other clients for Arthur Andersen. The result was the demise of the company that was regarded as among the largest in the world.
References
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Brickley, J., Smith, C., & Zimmerman, J. L. (2009). Managerial economics and organizational architecture fifth edition. Irwin: McGraw-Hill (BSZ).
Gitman, L. J., & McDaniel, C. D. (2009). The future of business: The essentials. Mason, OH: South-Western Cengage Learning.
Hoque, Z. (2003). Strategic management accounting: Concepts, processes and issues. Frenchs Forest, N.S.W: Pearson Education Australia.
Jackson, S., & Sawyers, R. (2006). Managerial accounting: A focus on decision making, 3e. San Diego, CA: Harcourt College Publishers.
Kaplan, R., & Atkinson, A. (1998). Advanced management accounting, 3rd edition. Upper Saddle River, NJ: Prentice Hall.
Langfield-Smith, K., Thorne H., & Hilton, R. W. (2012). Management accounting information for creating and managing value 6e. New York, NY: McGraw Hill.
Martlew, C. (2004). Leadership recharged: Business leadership & organizational architecture. Leicester: Troubador.
Smith, M. (2006). Strategic management accounting: Text and cases. Oxford: Butterworth-Heinemann.
Zimmerman, J. L. (2006). Accounting for decision making and control. New York, NY: McGraw-Hill Irwin.