Strategic management accounting essay
It is difficult to find one of a more amazing business failure than the new collapse of Arthur Andersen. Within a couple of years, Andersen shifted from one with the largest professional service organisations in the world to almost full collapse. The effect of the business’s failure about its staff, customers, investors, and the average person is hard to overstate. Its once pleased reputation was reduced to shambles. Even the President of the United States joked:
We just received a message via Saddam Hussein.
The good news is that your dog is willing to possess his indivisible, biological and chemical weaponry counted. Unhealthy news is definitely he would like Arthur Andersen to do it.
The dramatic demise of Andersen (along with the failures of companies including Enron and Global Crossing) has raised concerns between managers around the world. They want to understand what caused the collapse from the company in order to take activities to avoid comparable fates.
Over the years, Andersen’s organization environment and strategy transformed in materials ways.
Their managing responded by looking into making associated changes in their organisational architecture (decision right, performance evaluation and reward systems). Part a few of this book has contended that sick designed efficiency architectures may result in poor efficiency and even organization failure. An essential question is whether Andersen’s failing can be tracked to unacceptable organisational selections. An even more critical question is whether other managers can learn from Andersen’s blunders. We believe that
the answer to equally questions is definitely yes.
Our case study begins by summarising the history and events that led to the collapse by Arthur Andersen. This discussion is and then a series of questions that question the reader to analyse the demise of Andersen inside the context of the framework presented in this publication. Our purpose is to not present all the relevant examination ourselves. Rather it is to present readers with all the opportunity for an integrated analysis and capstone discussion of an important business problem that relies on materials drawn from through the chapters partly 3 with this book. Additionally, it provides a forum for discussing the root reasons behind the recent business scandals that have connected the worldwide business community.
Arthur Andersen: The Early Years
A 28-year-old Northwestern accounting professor called Arthur Andersen started his own organization in 1914. Andersen’s approach was to provide high-quality accounting services to clients ” promoting ethics and audio audit views over larger short-run earnings. Soon after Andersen formed the firm, the president of any local railroad demanded that he approve a purchase that would include lowered his company’s expenses and improved its reported earnings. Andersen, who was unsure he could meet his firm’s payroll, told the president that there was “not enough profit the city of Chicago for making him undertake it. The president promptly severed his romance with Andersen. However , Andersen soon was vindicated if the railroad registered for personal bankruptcy a few months later.
In the 1930s, the us government adopted new laws to require open public companies to submit their economical statements for an independent auditor every year. These types of regulatory alterations, along with Andersen’s standing, helped the firm to grow. During these formative years, the enterprise continued to advertise its “four cornerstones of good service, top quality audits, well-managed staff and profits for the organization. Quality audits were valued more than larger short-run organization profits. Leonard Spacek, who have succeeded Andersen as handling partner in 1947, created more organization
folklore when he falsely accused powerful Bethlehem Steel of overstating their profits in 1964 by simply more than sixty percent. This individual also led a mission to encourage the Securities and Exchange Commission to crack down on companies that cooked their particular books. The yellowing press clippings of his strong efforts were still on display at the provider’s main schooling center around Chicago in 2002.
Between 1914 as well as the late 1980s, “tradition was everywhere at Arthur Andersen. The company installed weighty wooden doors at the access of all it is offices. Andersen employees were known to be “one of a kind ” clean-cut, straight-laced and dressed in pinstriping. Employees were taught to recite the partnership’s slogan, “Think directly, talk straight. Auditors had been rewarded and promoted to make sound audit decisions. Top management assigned significant decision rights to the central office’s Professional Standards Group. This kind of group, which usually consisted of inner experts, watched audits and issued opinions on how certain types of transactions must be handled. The aim was to encourage consistent and well-reasoned viewpoints throughout the organization.
Andersen’s insistence on quality and high standards enhanced its reputation and advertised consistent development. Auditors inside the firm did not become wealthy in these conformative years. Yet , Andersen associates were very well respected within their local residential areas and gained enough to acquire comfortable houses, nice cars and memberships at regional country golf clubs. In the late 60s, a mid-level partner in Arthur Andersen made regarding $30, 000 ” or $160, 1000 in today’s us dollars.
Andersen Makes its way into the Asking Business
In 1950, an Andersen professional named Frederick Glickauf demonstrated that computers could possibly be used to automate bookkeeping. This led to monumental changes in the partnership. In addition to its standard auditing function, Andersen likewise could help customers automate all their accounting devices. The organization launched their new computer system consulting business in 1954 when it commenced providing services to Basic Electric’s advanced appliance manufacturer near Louisville, Kentucky. Andersen soon created the largest
technology practice of any accounting firm.
During the 1954s and 60s, the asking business grew but remained a relatively minimal activity compared to Andersen’s auditing business. Throughout the 1970s, Andersen’s consulting organization exploded since the demands for facts technology improved. By 1979, 42 percent of Andersen’s $645 , 000, 000 in around the world fees originated in consulting and tax work, as opposed to auditing and accounting. Consulting became the leading contributor to Andersen’s revenues and bottom line in the mid-1980s.
Family members Feud
Because Andersen’s talking to business continuing to develop, tensions within the firm mounted. The consultants, who were adding to more to profits than the auditors, believed that they had been subsidizing the audit partners. Consultants began to realize that these people were underpaid in accordance with their market opportunities. Auditing partners resented the fact the fact that consultants needed a higher reveal of the profits. The auditing partners, who controlled the managing board, made handful of concessions towards the consulting associates. In response, several of the top consultants left Andersen for additional firms as well as to start their own consulting businesses.
Because of installation tension, the firm separated its consulting and auditing businesses in 1989 by simply forming a fresh Geneva-based possessing company, Andersen Worldwide (AW). Under the AW : umbrella had been two subsidiaries, Andersen Talking to (AC) and Arthur Andersen (AA). ALTERNATING CURRENT was to give attention to providing asking services to large corporations (primarily in the areas of computers integration and business strategy). AA, subsequently, would focus primarily upon audit and tax sites to be. However , SOCIAL MEDIA PACKAGE was in order to provide talking to services to smaller companies (annual earnings of lower than $175 million). The more lucrative business was to share a part of its income with the different unit. Settlement no longer had as the same around consulting and auditing partners. Each product had significant decision privileges over a unique business.
Proper and Efficiency Changes for Andersen
The implications to get the auditing partners had been grim. The regular accounting business was developing quite little by little due to improved competition as well as the large number of mergers in the nineties; auditing quickly was learning to be a low perimeter activity. Despite the long hours, accountants’ salaries commenced lagging lurking behind those of other professionals, such as lawyers and investment bankers. AA accountancy firm particularly resented being eclipsed by their consulting counterparts by AC.
The auditors made a decision to “fight back. As top partner (at the time) Richard Measelle said, “It was a matter of pride. AA adopted a brand new strategy that focused on producing new business and cutting costs. AA began considering its partners on how much new business that they brought to the firm. Outstanding auditors “who could not get yourself a lick of business had been secure in their jobs in the 1970s, however, not in the nineties. According to Measelle, partners began to believe that “the number one thing was to choose a numbers and to make money.
To lower costs, SOCIAL MEDIA PACKAGE began necessitating partners to retire at age 56, improving a policy that had long been overlooked. The increased focus on revenue growth and expense reduction led to substantially larger revenues and profits per partner. Because the 20th century drew to a close, the average SOCIAL MEDIA PACKAGE partner manufactured around $600, 000. Nevertheless , these fresh policies as well led to fewer experienced auditors and fewer partners overseeing audits.
A new breed of partner rose towards the top within this new environment. One visible example was Steve Samek, who was in control of the Boston Chicken review. Top partners gave Samek high praise for “turning a $50, 000 taxation fee at Boston Rooster into a $3 million full-service engagement. Samek, however , allowed the string to keep details of losses in its struggling dispenses off its financial statements as it shifted toward a preliminary public supplying. The overstated financial transactions helped associated with IPO a “rousing success. Boston Chicken’s subsequent collapse and personal bankruptcy led to legal actions against AA pertaining to helping to build a “facade of corporate solvency. In 2002, AA decided to settle these kinds of suits by simply paying $10 million.
Samek, nevertheless , had kept the Boston Chicken consideration in 1993 to move on to bigger and even more important tasks.
Robert Allgyer was regarded within SOCIAL MEDIA PACKAGE as the “the Rainmaker due to his success for cross-selling companies to taxation clients. One of his biggest “successes was Waste Managing, which paid out $17. 8 million in nonaudit fees to SOCIAL MEDIA PACKAGE between 1991 and 1997, compared to $7. 5 mil in taxation fees. Simultaneously, Allgyer was signing away on inaccurate financial assertions. Among other things, the corporation wasn’t correctly writing off the value of its resources such as garbage trucks as they aged. As a result, profits had been substantially overstated. In 1998, LUKE WEIL agreed to pay out $75 mil to settle shareholder suits above its auditing of Squander Management.
Boston Chicken and Waste Management were not the only problems to arise by AA over this period. In 2001, SOCIAL MEDIA PACKAGE agreed to pay $110 , 000, 000 to settle shareholder suits arising from its audits of Sunbeam Corporation. These types of suits likewise arose above AA’s attestation of financial statements that were alleged to be overly positive.
Continuing Changes as AA Movements into the Twenty-First Century
AIR CONDITIONING UNIT partners lamented that AA’s consulting with huge companies violated their inner agreement to separate your lives the two businesses ” without a doubt, AC and AA taken part for some of the identical consulting sites to be. In 1997, AC lovers voted unanimously to break up off entirely and registered a formal arbitration claim with the International Step of Commerce. Eventually AIR CONDITIONER was allowed to separate and form a new independent firm, Accenture. AA partners suffered a significant monetary setback if the arbitrator reigned over that AA would not be given a $14 billion payment it had expected coming from AC after separation.
Over 10 years ago, Samek became the managing partner at Arthur Andersen. Among his initial goes was to make a new approach that included advice about how partners should empathize with clients. Samek surprised lots of the auditing partners when he announced his new “2X performance evaluation program. Partners had been expected to generate two times their very own revenues in work outside
their part of practice. In the event that an auditor helped bring the firm $2 , 000, 000 a year in auditing charges, he was likely to bring in one more $4 mil in service fees from nonaudit services, including tax guidance and technology services. Companions who attained this normal were rewarded, while others were penalized and perhaps dismissed from the company.
Moreover to changing Andersen’s organisational architecture, Samek tried to change the softer components of the business’s corporate traditions. For example , the gown code was relaxed, the wooden doors at Andersen’s office entrances were taken off and the company adopted a fresh corporate company logo, the growing sun.
Rapidly Andersen lovers began supplying a new service to clients. Rather than just handling the once-a-year audit from the public ebooks, the organization offered to take over the entire inside bookkeeping function for their clients and provide interior audit companies. Critics, just like Arthur Levitt (chairman with the SEC at the time), voiced concerns that this practice in least could impair the perceived top quality of audits. Accounting businesses engaged in this kind of practice would essentially become checking their own work. In 2000, the SEC suggested new restrictions that would limit the consulting work at accounting firms. In testimony prior to Senate Bank Committee in July 2150, Samek known as the SEC proposal “fatally flawed. He argued which the proposal had been made “just as we need to take an even more effective role in making needed changes in the measurement and reporting program in support of better information intended for decision-making by simply corporations, investors and government. Intense the lobby by the “Big Five accounting firms defeated the SEC proposal.
Arthur Andersen began auditing Enron’s catalogs in 1986. By simply early 2001, Enron experienced grown in what was generally considered the “premier energy company involved in wholesale energy trading and marketing, gas tranny and electric powered utilities. It is market value of its fairness in early 2001 was roughly $75 billion dollars.
In the mid-1990s, Andersen appointed Enron’s entire team of 40 internal auditors. It added its people and opened the workplace in Enron’s Houston hq. With more than 150 people in site, Andersen staff went to Enron conferences and offered input in to new businesses and other strategic issues. While the profits from Enron represented a tiny part of Andersen’s general revenues, these were a large fraction of the Houston office’s revenue and much of the livelihood of the business lead auditor in Houston, David Duncan.
In an attempt to increase decision making and provide local offices more power, Andersen’s once-powerful Professional Standards Group was transferred out of the Chi town headquarters and dispersed to local offices. Carl Striper was the PSG member in the Houston office. In 1999, he told Duncan that Enron should take a $30 , 000, 000 to $50 million accounting charge related to a specific deal. Four a few months later, Andersen’s management taken out Bass from his oversight role in Enron in response to issues by Enron’s chief accounting officer, who wanted him off the audit. As one past staffer noticed, “There had been so many people inside the Houston office with their fingers in the Enron pie. If they happen to have somebody whom said we all can’t signal this taxation, that person would be fired. This suggests that Andersen’s auditors were aware of the accounting problems by Enron yet chose to ignore them.
Because 2001 came to a close, Enron declared that it would take a $544 mil after-tax charge against profits related to their LJM2 Co-investment partnership. Additionally, it indicated that it would restate its financial statements for 1997-2001 as a result of accounting errors related to it partnerships. The company filed for bankruptcy on December a couple of, 200I ” at that time the largest bankruptcy filing in U. S. record. Numerous scams relating to excessive compensation and perquisites to get the best executives, accounting fraud and negligence on the part of Enron’s board quickly used. Enron’s stock price fell from about $90 every share 12 months earlier to near absolutely no by the end of 2001. Popular concern between investors, regulators and the public came about worldwide. Disputes of interest apparently had determined Andersen to sign off on what knew had been questionable
accounting techniques at Enron. The business reputation because an independent auditor was demolished; other Andersen clients quickly changed auditors.
The Demise of a Once Great Firm
Arthur Andersen was eventually charged with obstructing rights due to the shredding of papers and other evidence related to the truth. Many outdoors observers concluded that Andersen staffers had shredded the papers to hide their particular roles in producing fraudulent accounting transactions. On January 24, 2002, Andersen issued the following press release:
While Andersen acknowledges the serious nature of actions and errors of several of its Enron proposal employees, it also asks that most concerned be aware that Andersen is 85, 000 honorable, hardworking specialists worldwide ” including twenty eight, 000 persons and their people in the United States.
Andersen placed most of the blame about David Duncan, who they claimed had violated the firm’s moral standards. Andersen quickly terminated him.
Arthur Andersen ultimately was discovered guilty on the felony fee that it got obstructed the SEC’s investigation of Enron when it shredded important documents and was prohibited by auditing public companies. The firm discontinued its auditing practice that kicks off in august 2002. To a lot of observers, this was a sad end of an business that experienced once been the largest personal services firm in the world.
‘Arthur Andersen’s confidence on obstruction of rights charges relevant to the Enron debacle spelled the abrupt end from the 88-year-old accounting firm. Till [that time] the venerable firm had been regarded as the accounting profession’s conscience. In ‘Final Accounting’ Barbara Ley Toffler, former Andersen partner-in-charge of Andersen’s Ethics & Responsible Business Practices consulting services, discloses that the symptoms of Andersen’s fatal disease were evident a long time before Enron. Drawing on her knowledge as a cultural scientist and her encounter as a great Andersen insider, Toffler chronicles how
a traditions of arrogance and avarice infected her company and led to substantial lapses in judgment among her peers'.
One particular chapter in ‘Final Accounting””Billing Our Minds Out”pertains for the pursuit of charges. Toffler and Reingold supply the firm’s perspective on obtaining and holding onto clients, and charging for audit and consulting job. The experts summarize the firm’s strategy: “The 4 cornerstones of success for Arthur Andersen”People Management, Top quality, Thought Leadership, and Economic Performance”were reported colloquially as ‘three small stones and a boulder. ‘ The boulder was financial performance. The remainder, it looked like, was a joke (p. 105)'.
Read the Arthur Andersen example (above), directing primarily around the events by around 1990 on, and prepare responses to the following questions within a report structure as discussed below:
1 . Explain the way the changes Arthur Andersen built to its efficiency architecture inside the 1990s and early 2000s led to the ultimate demise. Please note that even though you should refer briefly to the determinants of organisational structure (environmental and strategic changes), the focus of the response needs to be on the three elements of efficiency architecture.
installment payments on your Suppose you were the managing partner at Arthur Andersen during this time period (from 1990 onwards). Utilize the organisational architecture framework to briefly go over what you would have done differently for the actual administration, and how come. In addressing question 2, you may find that helpful to pertain back to some of the points you made in query 1, instead of repeating the same points. (The focus of issue 2 ought to be on what you will do differently, and why this would be likely to achieve a easier outcome. )
3. A single defence discussion that has been produced on behalf of Arthur Andersen
was that the firm had wildly focused company-wide revenue budgets that have been being arranged by all those at the top of the firm, and this encouraged risk taking behaviour by examine partners in order to meet their particular individual costs. Discuss whether you agree or don’t agree by using key topics introduced in topics 4&5: Budgeting systems.
You will need to refer to your lecture notes, and to the following product readings in relation to behavioural finances issues, and organisational structure:
¢ Ellie Langfield-Smith, Helen Thorne and Ronald W. Hilton (2006). Management Accounting: An Aussie Perspective 4e. McGraw Hillside (Chapter 9)
¢ L. Brickley, C. Smith and J. Zimmerman (2007). Bureaucratic Economics and Organizational Structures, fifth copy, Irwin, McGraw-Hill (Chapter 11)
You may also refer to the relevant psychic readings on the study course materials database or other folks that you consider relevant.
Deadline: Friday 20 September 2013 ” Week 9
& Collection: Through Assignment Weniger bedeutend
Weighting: thirty percent
Word Duration: Up to one particular, 500 terms including intro, the three inquiries and the summary, but not including any in-text quotes, layouts and your citation. The usual 10% margin does apply. See ‘Report Structure’, under.
Collaboration: This kind of assignment can be achieved as someone or in groups of a couple of (members can be from virtually any AYB321 article group)
The structure of the report is about you, given that it completely addresses certain requirements of the case study. However , to give you some guidance, the following recommended structure can be provided:
|Introduction (a simple statement of what your report covers ” approx forty words) | |Task you: The three elements of organisational architecture in Arthur Andersen | |Decision rights | |Performance evaluation | |Rewards | |Task two: Suggested changes to Arthur Andersen’s organisational buildings | |Balance of the 3 elements | |Compatibility with soft tradition | |Task 3: Discussion of Arthur Andersen’s budgetary approach | |Behavioural aspects of spending budget | |Conclusion (a incredibly brief brief summary of your report’s conclusions ” approx 62 words) | | | |Reference List |
Please be aware that an summary and desk of articles are not necessary.
Application of Theory:
Marks in the three jobs are awarded for your putting on the theory, your analysis plus your insights. No marks happen to be awarded intended for simply duplicating the facts of the watch case.
As with virtually any analytical problem in this product, you are required to apply the relevant theory to the specific facts of the watch case. In doing so , you should evidently identify the theories you are applying, and how that they support the conclusions. Generally, a good approach is to identify the situation first in terms of the idea (eg, ‘AA’s decision making is usually decentralised’), after which present facts from the details of the case to support this realization.
In showing this proof, you can be incredibly succinct while the gun is already incredibly familiar with the case. In fact , you have to be very succinct, as the phrase limit is fairly constrained and (to reiterate) there are no marks to get repeating the important points of the case.
Please see the criteria sheet for more detail. Note that to score highly in the drafted communication criterion, you need to assure the statement is written clearly and succinctly and is free of grammatical and other problems. Therefore , you should ensure you let time for overall editorial work before handing in the project to eliminate errors, and also to assure a consistent style throughout the record (as every team member will probably have an specific writing style).
Make use of the standard margins for Expression, Arial 14 point typeface, 1 . a few line spacing and, wherever appropriate, make use of diagrams (not included in phrase count).
The reference list is expected to include the 3 references as listed above plus any extra references you have used. Please be aware that in-text referencing is usually not required in this assignment, unless you are using immediate quotes. Where you do incorporate direct quotes, please cite your source using the APA style.
According to Assignment Minder requirements.
AYB321 Strategic Supervision Accounting: Requirements Sheet, Mid-Semester Case Study ” Semester 2, 2013
Student Names & Numbers: ¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦¦
|Criteria |Unsatisfactory ” Low Pass |Low Pass ” Very Fair |Very Fair ” Good |Very Good ” Excellent |Marks | | |0 1 |2 2 . 5 |3 4 |4. 5 five | | |Criteria |Unsatisfactory ” Low Pass |Low Pass ” Very Fair |Very Fair ” Good |Very Good ” Excellent |Marks | | |0 several |4 six |7 almost eight |9 | | | | | | |10 | | |Criteria |Unsatisfactory ” Low Pass |Low Pass ” Very Fair |Very Fair ” Good |Very Good ” Excellent |Marks | | |0 several |4
6 |7 8 |9 10 | | |Criteria |Unsatisfactory ” Low Complete |Low Complete ” Very reasonable |Very Fair ” Very good |Very Good ” Excellent |Marks | | |0 1 |2 2 . five |3 4 |4. your five | | | | | | |5 | | | | | | | | | |COMMENTS and TOTAL SIGNIFIES | | | | |/30 |
 This case examine is based on the Capstone Example on Efficiency Architecture, coming from Brickley, Jones and Zimmerman (2009: 553), as well as open public news accounts, company papers and press releases. Among the most crucial sources are Ken Dark brown and Ianthe Jeanne Dugan, “Sad Accounts: Andersen’s Show up from Style Is a Experience of Avarice and Miscures, Wsj, June several, 2002; and a series of content from the Chicago, il Tribune printed in September 2002.
 Joke made by President George W. Bush at a dinner talk in January 2002 while quoted inside the MBA Jungle, December 2002-January 2003, 75.
 Accounting in Problems, Business Week, January 28, 2002.