Explain how the culture of accounting firms changed from the early 20th century to the point at which Arthur Andersen collapsed. What do you think were the causes of the change?
In the early 20th century, many accounting firms experienced great development by economic boom. In the instance of Arthur Andersen, the firm only consisted 2 partners and 54 employees in 1920, but it had grown to 7 partners and 371 employees in ten years, its annual income also increased by more than 1.6 millions dollar (Niece & Trompeter 2004, p. 185). According to Wyatt (2004), at that time, these firms were headed by a leading accounting professional who had promoted to the top of the firm based on extraordinary technical skills and experience in accounting area. Reputations were gained mainly on accounting firms' stance on the interpretation of accounting standards. Thus being tough on accounting standards was the foremost of character of a accounting firm's success. Especially in 1950s and 1960s, professionalism and accounting code of ethics were still the main focus of accounting education, nearly all large accounting firms' new hires were recent college graduates who majored in accounting and had been taught the importance of professional responsibilities and ethics behavior. In addition, it is necessary for staff personnel to notice top managers of 'any observed behavior that departed from firm's policy'. (Wyatt 2004, p. 46) In general, the culture of accounting firms in early decades of 20 century is rich in academic atmosphere and tough on accounting standards. Moreover, the relatively small size of accounting firms enable staff personnel felt more comfort in expressing their concerns to any superiors within the firm.
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Began in 1960s and accelerated the growth pace in 1980s and 1990s, non-audit services provided by accounting firms became a growing component of revenue streams. For example, 'by 1990, consulting fees valued to 44% of total gross fees for Andersen and ranged from 20 to 25 percent of total gross fees for the other Big Six firms'. On the other hand, the audit market was becoming largely saturated in the early 1970s and auditing became subject to extreme fee pressure. (Zeff 2003, pp. 269-270) The expansion in the range of services provided stimulated accounting firms to attract new personnel. Consequently, firms became to recruit new hirers even they had no any accounting background, even they were experienced people.
This recruitment of people who failed to know the significance of accounting professionalism and the importance of ethical behavior causes the changed of culture of accounting firms. The evolution of the growing profits generated by consulting services, and the progresses of nonaccounting-trained personnel, resulted in a profession-wide significantly impact on the culture of accounting firms. Along with this evolution, consultants of accounting firms demand more compensation and higher level in firm's hierarchy, and this leads to the phenomenon that top leadership of accounting firms gradually moved from professionals with remarkable technical accounting and auditing skills to those who had proved abilities to generate increased revenues. Supported by their high profits generated performances, these successful consultants became to challenge constraints set by 'stodgy accountants'. Thus old professionals were overwhelmed by the new growth profit oriented culture of accounting firms, and firms' leaders gradually focus more on improving profits and overlook resulting potential impact on auditor independence by new services. (Wyatt 2004, pp. 48-51) In summary, in the 1980s and 1990s, the culture of accounting firms gradually changed from a central emphasis on providing professional services in a professional manner to a growth profit oriented values.
In 1990s, concerning consulting services' wide range and increasingly huge profits, the Securities and Exchange Commission challenged several accounting firms by alleging that auditors' independence is impaired by certain services. However, the Commission failed to reveal any linkage between improper auditing opinions and consulting fees. At the same time, a number of professionals from large accounting firms started to obstruct the Commission's endeavours on limiting types of consulting services. Along with professionalism diminished, accounting firms became struggled with their greed for short term interests in the cost of their long year accumulated reputation, and they also failed to acknowledge the impact of this change on their internal culture. The roles of those with technical skills and previously considered as important to firms gradually loss power and influence in firms. Staff personnel easily perceived characteristics of those who with less technical skills but gradually gained promotions, and they tried their best to follow the trend, by expending profitable services rapidly, keeping clients happy and doing what was necessary to retain clients became the new culture in accounting firms. The new changed culture of accounting firms inspired personnel neither be familiar with nor to appreciate the importance of delivering quality services in order to assure the fairness of clients' financial statements for investors and creditors. (Wyatt 2004, p. 49) This changed of culture is evoked by the daily increased commercial driven behavior by consultants, and it potentially encouraged auditors to take more risk for higher revenue and better career. And this change in culture caused the collapse of Arthur Andersen.
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What is the link between the issues raised by Anderson-Gough et al (2000) and your answer to Part (a) above?
As mentioned in part (a), in the 1980s and 1990s, the culture of accounting firms gradually changed from a central emphasis on providing professional services in a professional manner to a growth profit oriented values. Under this new culture, personnel tried their best to expend profitable services rapidly, keep clients happy and do what was necessary to retain clients (Wyatt 2004, p. 49). Because in that environment, the result of displeasing clients may probably lead to personnel (especially new hirers) lose their promotion opportunity and even lose their job.
Wyatt (2004) made a number of recommendations to redressçº æ£ the issues raised in his essay. In your opinion:
Have any of these recommendations been adopted? Explain (support your answer wherever possible).
Has the accounting profession (accounting firms) learned its lesson from past events? Explain (support your answer wherever possible).
(10 marks up to 1000 words)
Part (c) is an opinion-based question, therefore, you may rely on personal experience beliefs/view or judgments to answer this question. Other approaches may include examining websites or interviews with members of the accounting profession. In other words, you have complete discretion to decide your approach to answering this question. Whatever the approach, it is important that you justify your answer, whether it is judgemental or evidenced based.