Question

1. What was the reputation of the Arthur Andersen CPA firm in the 1960s and 1970s?

Answer 1

Arthur Andersen's common culture and shared values were coming unglued. They were geographically divided by growth in the 1960s and 1970s, and divided by division in the early 1980s, then divided into separate business units in 1988. In the 1990s, the firm found its culture and values divided as Andersen Consulting and Arthur Andersen began to move in different directions and to lead separate lives. It was clear to many partners that the firm's restructuring in 1988 was just the first step in the eventual dissolution of the economic connections between Arthur Andersen and Andersen Consulting. As the relationships among the partners steadily deteriorated through the 1990s, Arthur Andersen pursued strategies intended to put its part of the firm in a position to offset the potential loss of Andersen Consulting's economic contribu- tion. At the same time, Andersen Consulting jettisoned the burden of public accounting firm requirements.

Although consulting and accounting were separated into two busi- ness units, this separation did not stop the infighting. In the 1990s, Andersen Consulting began to generate far more revenue than Arthur Andersen. In accordance with the agreement between the two business units, consulting now began to transfer 15% of its annual revenue over and above that of Arthur Andersen to Arthur Andersen's partners. By 1999, the transfer from Andersen Consulting partners to Arthur Andersen partners had amounted to nearly $1 billion over the years. Andersen Consulting partners resented sharing their profits with Arthur Andersen and said so. Even with the revenue-sharing contribution of Andersen Consulting, Arthur Andersen was placed in a difficult financial situation. The audit environment had not changed much from the time that the firm had first decided to grow its consulting division back in the 1970s. The threat of litigation had continued to increase during the 1980s, whereas audit rey- enue growth had remained disappointing compared to consulting. Before the separation, the whole partnership had shared earnings across all

offices. Now the accounting partners would have a limited portion of the profits, and this had a serious effect on each accounting partner's earn- ings. Arthur Andersen would have to go the extra mile to bring in new business to replace the revenue they had grown accustomed to. By 1989, Arthur Andersen contemplated building a new consulting division that would position it to recapture lost revenue and reestablish growth. But consulting in combination with audit was still perceived as a conflict of interest by the SEC, and Arthur Levitt, head of the SEC under the Clinton administration, was determined to eliminate this con- flict from the public accounting profession while he was in office. Would Arthur Andersen become a consulting firm again or return to its accounting foundations? Could it be both?

Although the firm had confronted a multitude of internal problems by hosting consulting services within its organization, the partners had not encountered any inherent external conflict of interests associated with Andersen's consulting division. Increased revenues were worth the risk, and the partners thought they could manage consulting ser- vices better the next time. This time, the Arthur Andersen partners would take a different approach, keeping consulting under the watchful eye of accounting Arthur Andersen decided to try consulting again. What Arthur Andersen did not recognize, as the firm moved to reestablish consult- ing, were the changes that had occurred within Andersen's own accounting culture as a result of its long association with the consulting division. When Arthur Andersen had enabled the consulting division to develop an aggressive entrepreneurial culture built on distinct recruit- ment, professional development, and career paths, it had made com- promises in its own recruitment, professional development, and career path. In the process, Arthur Andersen had shifted its values in subtle and not-so-subtle ways.