Inside Arthur Andersen: Shifting Values, Unexpected Consequences

By Nusspickel, Francis T. | The CPA Journal, August 2003 | Go to article overview
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Inside Arthur Andersen: Shifting Values, Unexpected Consequences


Nusspickel, Francis T., The CPA Journal


INSIDE ARTHUR ANDERSEN: SHIFTING VALUES, UNEXPECTED CONSEQUENCES

By Susan E. Squires, Cynthia J. Smith, Lorna McDougall, and William R. Yeack Financial Times Prentice Hall; 208 pages; $24.95; ISBN: 0131408968

Reviewed by Francis T. Nusspickel

This book provides insight into the changes that took place within Arthur Andersen and which the authors conclude led to the firm's demise in 2002. The authors, four ex-Andersen employees, attempt to apply the lessons learned from the fate that befell Andersen to the future of the accounting "industry" and a commentary on the Sarbanes-OxleyAct of 2002.

The first half of the book, after briefly recapping the Andersen trial and the Enron story, summarizes the history of Arthur Andersen & Co, mostly taken from the firm's own publications. It highlights the legacy left to the firm by its founder, Arthur E. Andersen: one of integrity, high quality of work, and an unwavering commitment to "Think straight and talk straight," the principle on which he built his accounting practice.

The authors present the theory that a cultural change within the firm resulted in a conflict of interest that compromised its obligation to protect the public interest. Citing internal and external pressures, they claim that Andersen adopted a "sales culture "that demanded and rewarded the generation of fees. This change, combined with rapid growth that increased the independence of local offices, resulted in higher levels of risk. The authors also put forth the popular belief that this quest for fees focused on the fast-growing consulting markets, creating a conflict of interest with audit clients that generated substantial consulting fees.

Considering the authors' backgrounds, for the book to focus on Andersen's sales culture is understandable. But the problem is probably not that simple. The demise of Arthur Andersen is far more complex, with many factors contributing to its downfall, only some of which the firm could control, although conflicts of interest plus poor risk management was clearly a formula for disaster. This confluence of factors resembles the perfect storm: Individually, these factors could possibly have been handled effectively; collectively, they proved insoluble problems.

The book overlooks the entire area of the quality of the practice. During the 1990s, Arthur Andersen and other large firms constantly reviewed their audit methodologies in light of the changing world of business. The "new economy," with its rapidly expanding technologies and global operations, caused companies to become more complex and difficult to audit. Audits had to focus more on processes and controls, areas of perceived risk, and unusual transactions, because the volume of transactions made traditional audit techniques inadequate. Implementing these revised audit methodologies required audit staffs to have more extensive training and a higher level of experience. The authors do not address the adequacy of the audit practice.

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