The Fall of Andersen

1.  For nearly 90 years, Andersen had a culture of doing the right thing.  Moral courage defined the organization.  However, there was a gradual erosion of the culture. Name three cultural changes that contributed to Andersen’s problems and defend your position.

The first cultural change was that Andersen embarked on a path that valued consulting service which charged hefty fees ahead of auditing in 1990s. Compared to its original major service, auditing that required accountants to insist independence of judgment, consulting should cater to clients’ requirements and fix problems from client’s perspectives. The situation that two roles mixed in Andersen made top managers decide to sell more consulting service which earned higher profits. Then Andersen rewarded accountants who could be involved with profitable consulting project no matter how troubled the clients were. Through the 1990s, Andersen aggressively sold lucrative consulting services to those who relied on them for audits and Andersen's top partners tripled their earnings in the '90s. Due to this change, the status of auditors was relegated to the position lower than that of consultants. Even though many of its accountants continued to uphold high standard auditing service, others compromised in the interests of generating fees. Gradually, some partners who faced accounting dilemmas with clients had more at stake when deciding whether to reject problematic practices uncovered in audits. These changes planted the seeds of firm’s erosion.  

The second change was that the influence of Professional Standards Group, a small group of Andersen’s most experienced partners who defined Andersen’s positions on accounting issues, had diminished. In 1992, top management had rejected a key ruling from the group for the first time. After that, no one at Andersen listened to the group’s pronouncements. By 1994, two-third revenue of Andersen came from consulting side. Because of its dominant consulting service,...