Arthur Anderson Culture and Its Downfall

1.1 Aspects of Andersen's culture that would be signals of a dysfunctional culture.

* Inability to question superior's practices and incapability to suggest new ways of doing things in all areas of the firm.

* Andersen's organization, culture and practices were derived from the old structure, which were still seen as the best practices even if outdated. At the organization, new trends of the market and new competitors were not going to change any of the company. \"Don\'t question it. That\'s the way it\'s always been done\". They had no desire to change their archaic practices.

* When Anderson realized that they could not survive with the current, traditional business approach and their competitive edge was dwindling, they switched from a \"pillar of integrity\" company to one that focused solely on keeping clients at any cost.

* Andersen was too fee-driven. For example, hard selling of services (particularly consultants tagging along on audits) that the clients did not need and giving results of both auditing and consulting, supported by the client's goals.

* Resistance to change from seemingly unethical to ethical practices. The root of the problem was top management figures who exemplified poor ethical practices.

* Internal conflicts of interests between consulting and auditing businesses.

* Internal competition over who gets credit for fees created backfires inside the organization.

1.2 Andersen culture impacted the responsibilities to its stakeholders over time because:

* Andersen's main focus shifted away from serving public to serving themselves

* Culture shifted to just getting as much revenue from clients as possible. Not only assisted with the necessary consulting and auditing of each case, but enforced unnecessary ones.

* Began to underestimate vulnerabilities in their practices which jeopardizing the organization's future. \"Cross fingers and pray\" when auditing and consulting proved to be an ineffective method.

* The organizational incentives program got out of control. To promote Andersen's original image, an excessive number of employees made the position of partners. This gave a whole new direction to the revenues of the company, forcing them to hire more inexperienced, low-paid employees to perform services.

* In order to save money and enhance profits, Andersen took advantage of its corporation's prestigious image using inexperienced workers to accomplish tasks which only experienced specialists should do (specifically on the consulting side). This brought on many mistakes as well as judgment errors and helped contribute to the company's downfall.

2. Enron and Andersen interacted in the following ways contributing to the downfall of both firms.

Two major factors shaped Arthur Andersen's culture to mesh perfectly with that of Enron, leading to disastrous consequences. First, extremely slow growth in the auditing side of business led to intense competition among the major accounting firms. Second, the large number of highly paid partners in the firm caused a need for accelerate revenue growth. These factors shaped Arthur Andersen's culture into two components:

o Willingness to do anything to please the client

o Extreme focus on generating more revenue

In the case of Enron, high market expectations led to intense pressure for the company to continue its phenomenal growth. This, in turn, led directly to its culture of maintaining its growth by any means necessary (whether ethical or not), including excessive risk-taking and hiding debt. The culture of growth at any cost enabled two factors to play perfectly into Arthur Andersen's culture:

o Enron's need for aggressive accounting in order to show growth combined with Andersen's willingness to do anything to please the client.

o Enron's willingness to pay excessive amounts to get it's auditor to comply with its aggressive accounting tactics combined with Andersen's drive to generate revenue.

These two combinations seemed to allow the two companies to leverage each other's weaknesses and enabled unethical behavior on both parts. Andersen's duty was to ensure that the public received an accurate financial representation of Enron, and Enron executives should have demanded that Andersen do its job to the best of its abilities. The companies should have kept each other in check, but instead their cultures allowed the companies to abuse their positions. Their actions simply accelerated the downfall of the two firms.

3. Discuss how a firm's reward system influences its culture and, more broadly, the behavior of individuals in the firm.

* Stock rewards are good, but the method of pursuing high stock price will trickle down through the company. Corporate executives should have incentive-based compensation plans supported by other external measures in addition to stock price growth

* A reward system for executives based solely on stock price gives great incentive for those executives to grow the company quickly, without regard for long-term consequences. Focusing on the short-term is not a sustainable method of growth. At the point when growth becomes unsustainable, the incentive for the executives is to "cheat" in