The Impact of Management Planning on the Demise of Arthur Andersen free essay sample

The Impact of Management Planning on the Demise of Arthur Andersen The planning function of management is critical to the success of any organization. Innovative ideas, perfect products, and highly skilled employees fail to become assets if no plans are in place for how these assets will be used to achieve the organization’s goals. In the case of the once, highly successful accounting firm, Arthur Andersen, management’s failure to plan effectively for crises led to its demise. Management Planning at Arthur Andersen In today’s business environment, successful planning involves analyzing inside and outside factors that affect the organization. Strategic decisions should be guided by market knowledge with objectives that are open to change (Lamond, 2004). During a crisis, planning becomes even more important to an organization’s sustainability. For Arthur Andersen, strategic planning by management should have been implemented with regard to how the Enron crisis would affect organizational goals, a tactical plan to address the situation publicly and internally, an operational plan for conducting business during the crisis, and contingency planning to analyze every way possible to keep the organization from failing as a result of the crisis. Crisis Management Planning Legal issues, ethics, and corporate social responsibility all had major impacts on the planning by Arthur Andersen management during their times of trouble. According to James and Wooten (2005), organizational crises can be classified into two types: sudden (such as natural disasters, sabotage, hostile takeover, technology disruption) and smoldering (such as rumors/scandals, mismanagement, workplace safety, class action lawsuits). Because sudden crises are often seen as out of the control of people’s hands, the public is often sympathetic and understanding of a company’s reaction to this type of event. Smoldering crises, however, are perceived to be mostly the result of management failings and are often more damaging to an organization’s reputation (James and Wooten, 2005). With the nation still stunned by the tragic events of 9/11, discoveries of fraudulent activities at Enron and WorldCom—two major clients of the Arthur Andersen accounting firm—captured the public’s attention. Within a few months, close to $200 billion of stockholder and employee investments had vanished (Doost and Fishman, 2004). Partners at Arthur Andersen panicked—shredding a good part of the evidence. Such charged decision-making is driven by adrenaline-fueled emotions and all too often leads to costly mistakes (Malhotra, Ku, and Murnighan, 2008). Such was the case for Andersen, since their panicked reaction, more than the frauds themselves, led to the rapid ruination of this prestigious consulting and auditing firm along with their clients. Legal Issues In June, 2002, a federal jury convicted the Arthur Andersen firm of obstruction of justice for destroying accounting documents related to its work for Enron Corporation. During the summer of 2001, Enron was not Andersen’s only crisis—in July, 2001, a dispute with the Securities and Exchange Commission (SEC) was settled regarding Andersen’s work for Waste Management Corporation, and the lead Andersen partners were sued by the SEC on its audit of Sunbeam Corporation. By the middle of August, 2001, Enron warned Andersen of the possibility of an accounting scandal, and, within a month, a crisis-response group was formed by Andersen (Ainslie, 2006). Ethics On October 8, 2001, Andersen attorney, Nancy Temple, let partners know that an SEC investigation was highly probable regarding the Enron case. Two days later, a Houston-based Andersen partner urged personnel to comply with the document retention policy, noting â€Å"if it’s destroyed in the course of normal policy and litigation is filed the next day, that’s great†¦weve followed our own policy and whatever there was that might have been of interest to somebody is gone and irretrievable† (p. 107). Throughout the period until the SEC served its subpoena for records on November 8, 2001, almost two tons of paper were shipped to Andersen’s main office in Houston for shredding (Ainslee, 2006). Arthur Andersen was indicted on March 14, 2002, for obstruction of justice on the grounds that the firm knowingly, intentionally, and corruptly persuaded its employees to destroy Enron-related documents. Corporate Social Responsibility The indictment, conviction, and consequent loss of rights for the firm to appear before the SEC were sufficient to kill the company, which affected not only Andersen’s partners and managers, but also administrative staff and shareholders. In 2001, Arthur Andersen employed over 85,000 people in nearly 390 offices in 85 countries; by the end of 2002, only 3000 people remained (Ainslie, 2006). Even as several of Andersen’s international subsidiaries merged, redundancy of administrative jobs caused many people to lose their jobs. While administrative staff had some difficulty finding new jobs, higher level partners and auditors easily found other jobs or started their own firms. Huron Consulting Group Inc. and Altair Advisers LLC, both created by former Andersen partners, are flourishing. Even the New York-based turnaround firm hired to help Andersen through the crisis, Alvarez and Marsal Holdings LLC, benefited by Andersen’s collapse—expanding its services by hiring several former Andersen auditors and employees (Klein, 2008). One former Andersen tax consultant, Bill Moser, took his experience to the classroom, and his tough but entertaining classes at the University of Missouri are among business students’ top choices (Lease, 2007). Right Approach, Wrong Message Several factors influenced Andersen management’s strategic, tactical, operational, and contingency planning. Wise executives tailor their approach to fit the complexity of the circumstances they face† (Snowden and Boone, 2007, p. 68). The management at Andersen clearly had a complex myriad of circumstances hovering around the Enron crisis. The public eye was transfixed on the news media after the horrifying terror attacks of 9/11, and the media coverage of the Enron scandal was brutal as news networks battled for ratings. 2001 already had brought Andersen twice before the SEC because of other big-name clients, and those cases had ended in fines and sanctions against both Andersen and their clients. The stock market was in the beginning of a downward spiral, and the newly-elected president, George W. Bush, had begun to orchestrate tax cuts and regulation rollbacks ¬Ã¢â‚¬â€a president whose post as chief commanding officer of the United States had been decided by a Supreme Court decision due to voting irregularities and legal maneuvers in Florida, where Mr. Bush’s brother happened to be governor (Doost and Fishman, 2004). When the story broke during the Enron scandal about the shredding of key documents, Arthur Andersen faced intense negative crutiny, not only from the media but with the accounting industry as well. Unlike Enron, Andersen immediately implemented a crisis management process—gathered media contacts, set up a public information Web site, ran advertising campaigns, and consistently delivered the message that the indictment was political and Andersen had done nothing wrong. However, Andersen quickly learned how negatively the public views a company th at takes a â€Å"not my fault† approach. Consequently, Andersen was forced to shut down U. S. operations and thousands of innocent employees were out of a job (Jeffs, 2005). Conclusion Management planning can make or break the success of an organization, as is clearly evidenced by the collapse of Arthur Andersen. Andersen management’s failure to manage effectively and ethically the best interests of the organization during a series of crises allowed the Enron scandal to serve as their defining moment. Although in May, 2005, the U. S. Supreme Court unanimously overturned Arthur Andersen’s conviction—citing that the prosecution failed to prove that the firm knew that shredding the Enron documents was wrong and violation of law, the firm already had crumbled (Mokhiber, 2005). However, the fall of Andersen’s mighty empire is not without benefit. Following Andersen’s 2002 conviction, the Sarbanes-Oxley Act of 2002 was passed—federal legislation designed to improve corporate accountability (a direct result of lessons learned from Andersen’s prosecution), making it easier to prosecute for document destruction—and increased the demand for auditing and consulting services throughout the United States.