The performance evaluation concerns on how much new business bring to the firm by partners. These caused auditors do not concern on the quality of their work performed to clients other than focused on the quantity of their work. It motivates auditors to engage in dysfunctional activities to improve their rating in evaluation. In other terms, the problem of “gaming” occurred. In the 1990s, there are lots of significant changes both occurred in environmental and strategic areas in Arthur Andersen.
This part of essay will contain three components based on organisational architecture which include readjusting decision rights, reward system and performance evaluation system. In the early 1990s, Andersen’s Professional Standards Group was moved out of the Chicago headquarters and dispersed to local offices. This was an attempt to speed up decision making and give local offices more power. The result of this attempt gave the local offices rights to assigned significant decision.
However, this leaded the committing accounting frauds much easier for the auditors. Generally, it was essential for the firm to decentralise the decision rights to local offices. However, local managers wanted to maximise their own utility instead of had strong incentives to act maximise value of firm. This meant they will harm the value of the company because they just concern their own interests.
So changes that managing partner could make to solve this problem is not to give all significant decision rights to the local offices. The change points out the authority of decision-making need to be separated. Therefore, the decision rights to local offices are focus on their daily work, but for some higher level decisions should be response by the top management and Andersen’s Professional Standards Group because centralize decision-making have particular advantages when coordination of activities within the firm is important.
By doing this, the new changes of decision rights may increase the cost of information transfer and processing, but it can reduce the conflict interest because the managing partner easier to grant the employee decision management and decision controls which more effective use of local knowledge and help to solve incentive problems.
There are some problems also occurred in Arthur Andersen reward system. The reward system based on profits without penalties for loss incurred. Thus, it will encourage unnecessary risk taking. Employees’ morale will affect when the policy changed partners to retire at age 56.
This means experienced partners might leave and inexperienced ones might stay and to do unfamiliar jobs. Therefore, both the quality of jobs and company’s reputation would be decrease. The problem of the performance evaluation came from “2X” performance evaluation system which adopting by Arthur Andersen (AA) in 1988. Furthermore, the accountants’ realise that their salaries are underpaid when they compare to other professionals. Therefore, the performance evaluation system demonstrates that the auditors’ jobs are no longer secured and may lead to shirking audit jobs and cause fraud as well as the incentive problems.
To solve this problem, AA can establish new performance evaluations which combine objective and subjective. For the objective performance evaluation, it is more focus on the quality of output that provided by employees. For the subjective performance evaluation, AA can provide a table of performance appraisal to employees for marking themselves and also for the others each year. It can provide more fair and true view for the AA to evaluate the work done by employees.
In conclusion, the Arthur Andersen briefly explained the changes occur in organisational architecture which includes the changes in environmental and strategic in 1990s and early 2000s.
In addition, AA could do differently in three aspects of organisational architecture which included separating decision-making rights to different level of employees, developing suitable reward systems to motivate employees and improving performance evaluation both through objective and subjective methods. These changes gave employees strong incentive and increased the value of AA.