Thursday, November 6, 2014

The Andersen Years - A Little Context

When I was interviewing for post college jobs in the fall of 1983 accounting majors had three primary career choices:

1) Government
2) Corporate accounting/finance departments
3) One of the "Big Eight" public accounting firms or numerous smaller national and local accounting firms

Everybody in my graduating accounting class sought a position with one of the Big Eight firms. There was a certain cache to landing a position with a big firm because they could select the best candidates and they did the most interesting work for the most important clients.   Though I didn't know for sure that I was all that jazzed to make accounting my career, I had a Big Eight firm or bust mentality for my first job.

The Big Eight firms I had to choose from were:

Arthur Andersen
Arthur Young
Coopers and Lybrand
Deloitte, Haskins & Sells
Ernst & Whinney
Peat Marwick
Price Waterhouse
Touche Ross

It would be more precise to say I was among the thousands of candidates from which the firms had to choose.  The national and local Denver economies were not robust in late 1983.  It was an employer's market. Our tax accounting professor at Regis University had advised us that we shouldn't be too picky if we were fortunate enough to receive a job offer from any of the Big Eight firms.  In his words they were all great places to start a career, to learn, and were "pretty much the same".

My tax professor's broad generalization about the similarity of the Big Eight firms was accurate in many respects.  The firms were all organized in similar divisional and hierarchal structures.  The firms generally slotted professionals into one of three practice divisions: Auditing/Tax/Consulting.  The auditing division provided attest and related services.  The tax division assisted clients with tax planning and tax compliance matters.  In 1983 the consulting divisions were just starting to take form offering IT and general business consulting expertise.

Each firm had a similarly defined hierarchy for a professional's career path that looked something like this:

First 2-3 years as a staff person.  A staff person was the "grunt" of the engagement team performing the least complex assignments.  The staff person graduated to more complex tasks as he or she demonstrated the ability to take on more responsibility and learned the ways of the firm.

Next 2-3 years as a senior staff person, or senior.  The rank of senior is the first promotion one generally received at a Big Eight firm.  The senior level professional had some responsibilities for planning and leading certain aspects of an engagement, including supervising staff personnel. 

Next 4-10 years as a manager.  Within the Big Eight firms the manager had primary responsibility for running the day to day aspects of client engagements including: staffing resources, resolving technical issues, administering billings and receivables, coordinating services from other divisions, performing some marketing of incremental services to clients and prospective clients, and maintaining a public presence in industry and trade groups.

Somewhere between 9 and 15 years after starting a person could reach the hallowed ground of partnership.  Partners had ultimate responsibility for serving clients, maintaining the quality and integrity of the firm's services, and growing the business of the firm. 

Most of the firms adhered to an "up or out" policy.  A person who failed to demonstrate the potential to perform at the next career rung per a particular firm's timeline for advancement would need to seek gainful employment outside of said firm.

When I first joined Arthur Andersen my goal was to reach senior in two years and manager in 4-5 years.  Once I made manager I would reassess the situation and determine a plan to make partner or a strategy to leverage my experience at Arthur Andersen for a role outside the Firm.  I had a sense I wanted to be a partner and was capable of reaching that level.  I was also realistic enough to know that many factors, some of which were not under my control, would come into play on the path to partnership. 

The stats showed that less than 2% of all hires made partner at Arthur Andersen. I suspect the average career life in public accounting was 3-4 years.  I used to keep a list of the people who had left the Denver tax division since the time I started working there in 1984.  The division headcount fluctuated during the next ten years from a low of 40 to a high of 58.  By 1994 there were 168 names on my list.  On average the division was churning 35% of its personnel every year.  The departed generally fell into three categories:
- Asked to leave under the up our out philosophy
- Left on their own due to dissatisfaction with the workload
- Left on their own because of an attractive offer from a client or competing firm

The path to partner at Arthur Andersen took another zigzag in 1989 when the Firm instituted the non-equity partner level into the hierarchal mix.  Personnel now had to cross another bridge before making full partner and the time period for making even non-equity partner was increased by another two years.  The more senior managers used the phrase "I am two years away from being two years away" to describe the murkiness of the partner track.

It was of course obvious to a bunch of accountants that the path to partner was being slowed at a time when the revenues of the Firm were exploding.  However, much of the revenue growth was coming from the Andersen consulting division.  The partners understood that this division would inevitably secede from the Firm.  By slowing down the growth in the number of partners, the incumbent partners could hedge growth in preparation for a world where the revenues generated by the consulting division were no longer part of the pie.  In its fiscal year ended August 31, 2000, Arthur Andersen reported $8.4 billion in revenue.  This was the first year after the consulting division split from the firm.  In Fiscal year 1999 the consulting division had generated $8.9 billion in revenue of which up to 15% was transferred to the non consulting partners under an existing agreement.

I will make but a brief comment of my opinion of the impact the emphasis on profitability growth had on the ultimate demise of Arthur Andersen.  In my humble view a subtle shift by even a few people in power can erase all the objectives of strong stewardship.  When I started at Andersen I had the sense that high profitability was the byproduct of the Firm's unwavering commitment to exemplary service.  When I left the Firm 13 years later I had the sense that profitability had supplanted exemplary service as the primary focus for a small few in the leadership of the Firm.  The consequences of this subtle shift were fast and fatal.

The world moves on.  By the time I left Arthur Andersen in 1997 mergers and consolidations among the former Big Eight firms had reduced the Big Eight to the Big Five:
Arthur Andersen
Ernst & Young

Roughly four and a half years after that Arthur Andersen was gone.

I never expected to outlive Arthur Andersen, the firm.  May the fate of Arthur Andersen continually remind us that no institution can long survive when it compromises its core values.

With that background let's move on to the focus of my ramblings: The people and experiences that colored my days at the Firm.

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