Case: The Fall of Arthur Andersen

This paper aims to examine if and how the organizational structure and corporate culture in a

consulting firm can affect employee behavior. The focus will be on the case of Arthur

Andersen (AA), a former auditing and consultancy firm, and its staff. Special attention will

be paid to the positive and negative implications of incentives in relation to employee

behavior and its impact on AA as a whole. In the concluding part, ideas and suggestions on

how AA´s organizational structure could have been improved will be proposed. In order to

work with the term "organizational culture" (OC) a definition is needed. Prof. Edgar Schein

defines it as "a pattern of basic assumptions that develops as any group strives to deal with

internal divisions and external threats" (Harris, 2006). The following three research question

will be an orientation in analyzing the case:

1. Identify the incentives in AA that guide and influence the behavior of the firm's

consultants (incentives may here include a wide range of e.g. cultural, financial, and career

incentives).

2. Discuss the positive and negative implications of these incentives.

3. What alternative incentives could the firm have applied to prevent its demise?

1. The unique feature of AA that distinguished the firm from its competitors was the "one-

Firm" concept (Niece & Trompeter, 2004) with its so called "Andersen Way" (Financial

Times, 2003) that stood for a unified, independent organization. No matter where in the

world, clients were met with consistent service and a comforting familiarity. That was the

initial idea of Arthur Andersen who built up an auditing and accounting firm that represented

"confidentiality, privacy, security and orderliness" for decades (Toffler & Reingold, 2003).

This traditional company culture initially led to employees being proud of working for Arthur

Andersen, which contributed immensely to a wholesome working climate. Eventually that

positive culture had "gone rotten" and "organizational suicide" was committed (Financial

Times, 2003). Especially the fee driven financial incentives caused negative developments.

Since the financial performance received so much attention, employees were pressured to

resort to so called "fee-fucks", which meant that AA´s agents individually were striving to

bring in as many fees as possible (Toffler & Reingold, 2003).

Competition was another essential incentive at AA. The organizational structure consisted of

business units that were directed by partners. Subsequently these partners had an incentive to

compete internally over contracts and resources. Moreover, partners in AA were pushed to

collect as many fees as possible until the age of 56, after which they received a fixed pension

that was based on their earlier fee-collecting performance (Toffler & Reingold, 2003).

The business units in the organizational structure were set up in a matrix management

structure which enabled AA to excel communications, productivity, and profitability. It

unfortunately also increased complexity and the stress levels amongst employees (Toffler &

Reingold, 2003). Another incentive was the career development at AA. Becoming a partner

meant having a higher rank and more influence as well as better chances of accumulating

more fees (financial success).

2. The Matrix management system that was implemented in the 1970s actually worked well

for