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Growth Before the Storm

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Arthur Andersen experience incredible growth in the years before its fall. Look at what led to that growth and how it eventually also led to the demise of the company.
This chapter is from the book

At Arthur E. Andersen’s death, the partnership was thrown into a crisis. Arthur E. Andersen had hopes that his son, Arthur A. Andersen, would take over the firm after his retirement or death. But his son walked away from his father’s firm in 1943, leaving him without provisions for succession. The remaining 25 partners were restricted to two choices: Disband the firm or continue it as a partnership.

Their choices were limited by federal regulation. In reaction to the crisis following the 1929 stock market crash, which touched off a long period of global economic depression, the SEC was created. In one of its first actions, the SEC moved to limit potential for conflict of interest in public accounting firms by prohibiting them from being corporations with investors. Accounting firms had traditionally been partnerships, but this made it mandatory.

The partners fought bitterly over their options. “The arguments became . . . vociferous,” Leonard Spacek remembered.[1] George Catlett, who joined Andersen in 1940, added, “It was really an argument about who was going to run the firm.”[2] Things became even more complicated when Andersen’s son, Arthur Arnold, tried to step back in and take over. Because his father had controlling interest and the firm bore the Andersen name, he assumed that “he just inherited,” Leonard Spacek said. But, of course, he had left the firm years before and wasn’t a partner. He really had no place with the firm.[3] Arthur Arnold Andersen was furious and threatened to deny the use of the family name but had no grounds to pursue his attempt to step in and run the firm.

A long-standing rift between the Chicago and New York offices and the control that Arthur E. Andersen had exerted over his firm had left a deep scar on some partners. They would rather dissolve the firm than repair the rift or come under such control again. And that is exactly what they decided. They voted to break up the firm and go their independent ways. But there remained a few determined disciples who could not let the firm die with its founder. The night after the vote, Leonard Spacek and a few other partners met behind closed doors to hammer out a plan to pull the feuding partners together and lift the firm back from the brink of collapse. The next day, they called all the partners back together to offer an arrangement that could set the firm back on the road to growth and success. The solution contained some significant changes in the firm’s organization and financial structures.

No longer would the firm be dominated by one man. Partners would have more real authority to run their local offices as they saw fit, and the new organization would be governed by the principle of “one partner, one vote.” In the spirit of all for one and one for all, the firm unity would be maintained through partner cooperation. The firm would continue to speak with one voice but now that voice would be based on the majority wishes of its partners. The partners would all share more equally in the profits and in the debt, too. It cost $1,726,400 to purchase the founder’s share of the firm, a debt that wasn’t fully paid off until 1964.

To coordinate the local offices and overall operation of the firm, the partners created a seven-man advisory committee. All on the committee were Arthur E. Andersen’s protégés. P.K. Knight of the New York office chaired the committee. Charles W. Jones, managing partner of the Chicago office, was elected vice chairman, and Leonard Spacek was designated administrative partner.[4]

This alternative partnership arrangement was accepted, and the partners rescinded their earlier decision to disband the firm announcing, “Mr. Andersen has left us a heritage for which we shall be eternally grateful. We will show our gratitude by carrying forward with a united spirit.”[5] Once the succession crisis caused by the death of its founder had passed, the firm began to grow. The partners continued Arthur E. Andersen’s founding values of honesty and straightforward communications, and the firm’s motto continued to be “Think Straight, Talk Straight.” Over time, it became recognized among partnerships for its size and longevity.

In hindsight, a number of people within and outside Andersen concluded that it wasn’t so much corruption or greed that lead to the firm’s problems with Enron. It was better understood as an unfortunate consequence of the increased independence granted to local offices during this time. Arthur Andersen had been an advocate of more centralized control with uniform standards and common procedures, rejecting the traditional concept of treating local offices as individual fiefdoms. Even so, Andersen “gave local offices extensive autonomy, especially with respect to making engagement-related decisions, but neither he nor any of his successors ever relinquished complete control to the offices.”[6]

Andersen’s view was that each of the firm’s offices should be self-sufficient and staffed to handle the audit, accounting, tax, and systems needs of its clients. Operating under general policies and guidelines established by the partners, Andersen felt individual offices should be free to manage their own operations and responsible for their success, yet act as one firm, speaking with a unified voice. As majority owner, his voice was dominant. Even though subsequent leaders did not entirely relinquish centralized control, none after Arthur was majority owner. Some reasoned that, in reaction to the solitary rule of one strong individual, the era after its founder’s death marked an evolution of slow, seemingly consistent change, not unlike that of many companies. But within that gradual change would come a drift from some of the principles that Andersen felt had to be maintained to remain credible and in control. That, some reasoned, was the ultimate cause of the firm’s destruction. Certainly by granting the local offices more independence, the potential for a rogue office was increased.

Growth

Arthur Andersen & Co.’s partnership was now ready to take advantage of the post-World War II economic boom of the 1950s, and the firm expanded in the U.S. and internationally. Because the partners could operate independently on the basis of guidelines, rather than rules, Arthur Andersen & Co. was able to expand without major changes in its organization for some time. The independence of local offices also provided the flexibility to respond quickly and effectively to local business conditions. Partners could confidently send out teams of trained specialists at a moment’s notice. High-quality, bright staff all working to the same set of methods was the cornerstone of Arthur Andersen & Co.’s early success and a formula for growth and profitability. It could be replicated anywhere in the world. They could hit the ground running on every continent. Using this unique formula, the firm found it had a winning combination to compete successfully against other accounting firms in the rapidly changing marketplace during the second half of the 20th century.

Leonard Spacek had a seminal experience in the 1950s that galvanized his determination to grow the firm. He was summoned to New York to meet with the heads of several firms because, as Spacek tells it, “they were annoyed with all the speeches I had been making about the need to improve accounting principles to assure realistic financial reporting.”[7] The head of Price Waterhouse, George O. May, told Spacek in no uncertain terms that “the major firms decide what the principles should be,” gratuitously adding, “yours is not a major firm.”[8] Spacek resolved to grow the firm to the point that its voice could be heard.

The mutual support of the partnership members and the firm’s strong culture helped Andersen remain stable as it grew from 1950 to 1970 to a total of 87 offices that employed nearly 10,000 people in 26 countries.[9] Half of the new offices were outside the U.S. The partnership grew first within North America before expanding into Mexico in 1955, then to Europe, South America, Asia, the Middle East, and Africa. During the same period, from 1950 to 1970, its revenues increased from $8 million to $190 million,[10] an increase that made it the second largest auditing firm, behind Peat Marwick.[11] During this period, Leonard Spacek played a pivotal role.

Only two years after the partners created the seven-man governing committee to oversee the firm, Leonard Spacek took control. Unlike Arthur E. Andersen, he did not own a majority interest in the firm and so could not use this tactic as a platform for command. Instead, he gained dominance using “equal parts of drive, obstinacy, and intimidation.”[12] In 1949, the partnership voted to increase his responsibilities and gave him the title Managing Partner. Leonard Spacek continued to lead the firm until 1970.

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