Kapnick took over during a time of flux. Andersen was struggling to create a management structure that would accommodate its global growth and keep its independent local offices in line. But the partnership was conflicted. Local offices had always been the primary work unit of the firm and the reason for Andersen’s success. No one wanted to disrupt success by reducing local office flexibility. Each office had to be allowed to retain authority for most of the day-to-day decision making. Kapnick promised to find a way to regain control of the firm, and the partners elected him to replace Oliphant based on his promise. Although he was “perhaps less visionary than Arthur Andersen, less charismatic than Leonard Spacek, less patient than Wally Oliphant, Kapnick was, nonetheless, a dynamic, aggressive, and highly successful leader” and, they hoped, “the right man at the right time.”^[2]

Kapnick took over leadership of the firm at a time when management science was advocating new ideas about organizations. Kapnick, jokingly called Andersen’s organization man,^[3] was influenced by these ideas. Kapnick’s solution to the firm’s growth problem was to break up the firm into manageable service divisions—consulting, tax, and audit. He also proposed transferring significant leadership functions to local-level partners by division and geographic location. The plan was a bold change for the partnership and was opposed by many who were concerned with partner unity. The partners had traditionally depended on a high level of face-to-face contact to manage the firm and to monitor local offices. Mutual knowledge of the partnership members and the firm’s strong culture were the two key factors that helped Andersen remain stable as it grew: Most Andersen partners grew up in the firm’s culture. They believed in the firm’s values and understood the reasons for expected behavior. Most thrived in the Andersen environment, and few ever left, except to retire. The firm was like a second family. These partners worried that, under Kapnick’s plan, “we cannot retain a one-firm concept with such [a divided] organization.”^[4]

Kapnick disagreed with the opposition. He proposed that, under his management, the new organization could even strengthen the one-firm philosophy. After all, by 1970, most partners knew only a small number of the partnership’s nearly 700 members. It was so large that one partner admitted he didn’t know many of his fellow partners and might not recognize one if he tripped over him in the hall. Maintaining personal relationships throughout the partnership based on face-to-face contact was not realistic, and keeping track of what partners were up to at the local office was nearly impossible. With sheer size, maintaining the unity of the partnership was becoming more and more difficult, anyway. At least under Kapnick’s plan, the partners could be encouraged to work together within their division or geographic area.

Spacek, now a senior partner, supported Kapnick. At the 1970 partners’ meeting, Spacek said, “Positions of leadership should be filled by nationals of a country, and the sooner we achieve that goal, the sooner we will have strong national practices and a truly integrated international organization, because roots must run deep if you are to grow a strong, healthy tree.”^[5]

With Spacek’s support, Kapnick got his way. By 1973, Administrative Services; Accounting and Audit Services; and Tax Services each had its own division, with new partner categories and titles to reflect the shift in leadership roles and responsibilities to the three divisions. Office Managing Partner was the new title given the partner with overall responsibility for each local office. Two new partner classes were created. Country Managing Partners were given regional or geographic responsibilities, and Practice Directors developed industry or practice specialization. Along with these changes came a more complex internal hierarchy.

Kapnick’s reorganization had two consequences. As Kapnick predicted, it created more manageable units within the firm. At the same time, as some of the opposition partners predicted, it shifted partner allegiances from the partnership to the division level, effectively dividing the one firm into three.

The partners embraced the new, more workable division structures as they discovered opportunities to build and grow their office’s business by becoming important within their division or by providing more than one service line at the local office level.

Because partner cooperation had always been an important component of success at Andersen, it was not difficult to transfer cooperative arrangements to the division level. What was different was the new focus for cooperation. By reducing partner unity to pursue a common good for the firm, the divisions turned inward. Division and local office loyalties replaced common good. This was a particularly important development for the consulting division, Administrative Services. Now that consulting had its own division, they were freer to groom their own staff and grow their business as they wanted.

The accounting and technology practices at Andersen had never been compatible, and from the start, the cultures of accounting and computing were quite distinct. Traditionally, Andersen professionals were selected and developed to the firm’s values and specifications. But consultants did not have the same professional standards as the accounting profession even though the firm required them to get a CPA.

The consulting division began to introduce a more aggressive model for increasing revenue by stressing client services and client satisfaction, a model other divisions first resisted but would later adopt. To build a saleable staff base, consulting partners took advantage of Andersen’s professional development program to gain, train, and retain an appropriate workforce that would be attractive to clients. Some partners became very good at acquiring and developing staff who were highly skilled technically. Some developed their selling skills and had the clients. Between these two types of partners, there developed a system of favors and obligations in selling work and doing the work. Andersen became a leader in IT consulting and the largest consulting firm of this kind in the world.

A complex informal partner hierarchy developed based on rankings in this elaborate internal trading system. Some of the most powerful partners were not the most profitable but the ones with the most outstanding favors. The trading of staff and sales opportunities served as a way to redistribute different forms of wealth within the firm: work on the one hand and labor on the other. If a partner had the right staff, at the right place, at the right time, he or she could make money on intrafirm staff loans. Helping each other by staffing critical projects created reciprocal debt obligations among partners. In addition, by accepting the staff on loan, the receiving partner entered into a debt relationship with the lending partner. Partners “owed” each other large and small favors. Partners could “get points” by both loaning and borrowing staff. Lending partners could build impressive power structures without actually selling by amassing favors from partners who did sell.

Generating revenue through sales or, indirectly, through lending of saleable staff increasingly became the measure of success in the consulting division, and a consulting partner with a growing revenue stream could climb the division hierarchy. Under the trading system, two success measures began to matter—performance ranking and building networks. But consulting was a small division and did not affect the overall culture of Andersen during the early 1970s. As long as it remained a small part of Andersen’s overall business, consulting’s tendency to divert from the traditions of public accounting could be managed, as it had always been in the past, by folding its members into the Andersen culture.

Two requirements protected the firm’s values and culture: a CPA license and participation in the firm’s professional development program. Obtaining a CPA license was expected of all professional staff, regardless of specialty or division, and was a regulatory requirement for joining the Andersen partnership. To strengthen the professional development program and provide unity across the divisions, in 1970, Kapnick authorized the purchase of a central training facility as part of his plans to reorganize the firm, and Andersen purchased the campus of the old St. Dominick’s College in St. Charles, Illinois. Officially named the Center for Professional Education, it was commonly called St. Charles. St. Charles was described as the jewel in the crown of the firm and the cradle of Andersen’s culture. St. Charles was not just a training center, it was the symbol of Andersen unity around the world. It showcased artwork from offices in every city and country in which the firm was based. Like the flags from each country near the Culture Center, artwork displayed the scope of Andersen Worldwide. It told anyone who looked that the firm had a unified global reach. Everyone, including partners, managers, and staff, were required to attend Andersen’s training facility at one time or another to learn or reestablish links with Andersen’s common culture. The facility was known as “Sing-Sing on the Fox” because no one got out of going there.

Management and technical consultants introduced an element of uncertainty, even risk, into the firm’s strictly controlled workforce because they did not fall under standards of the professional accounting umbrella. Despite requirements meant to establish unity across the divisions, accounting, tax, and consulting continued to become quite different and more independent of each other. Andersen’s division specialization became more pronounced, and multiple identities developed within the firm. The consulting staff heightened concern about being a “good fit” with the firm, and they were extensively monitored to make sure that they matched the personnel profile and loyalty levels of other staff.

Kapnick found that the training center alone was not enough to provide unity in the firm. He reorganized once again in an attempt to rein in the activities of the divisions, particularly consulting. In 1977, a new worldwide umbrella structure, Arthur Andersen & Co., Société Coopérative, was created to coordinate the activities of the various member offices, set policy, establish and monitor worldwide quality standards, and coordinate training for all personnel. The new entity was registered in Geneva, Switzerland, and Kapnick wanted to move Andersen’s central operations there but in the end, Chicago remained the firm’s world headquarters. Under this arrangement, each partner became both a national partner in a specific geographic area and a partner in the Société Coopérative. Andersen immediately began crafting a common operations framework and establishing all sorts of other groups, committees, and operational mechanisms to regain central control over the firm. But the new structures that Andersen dropped on top of its local offices and divisions introduced a level of complexity that was sometimes awkward and confusing, and never really took hold at the local and division levels. The divisions were working just fine and no one wanted to make his or her business more complicated. Besides, by this time, the three divisions had already started to become very different, with diverging practices, market conditions, business needs, and potential for revenues and profitability. Local office and division-level partners reacted negatively to the restructuring and, in some cases, ignored the world headquarters altogether. Andersen was becoming a conglomeration of services, public accounting being only one of many.

By 1978, Kapnick’s new divisional structures seemed to be settling into place while everyone was happily ignoring the world headquarters. Splitting the firm by division had divided the partners but had not seemed to detract it from becoming one of the top eight accounting firms in the world. To stay successful, the partners could not spend time worrying about internal matters; they had to deal with a series of growing external threats to Andersen’s primary service—audit.

It was a founding assumption at Andersen that if accountants maintained their integrity, followed the firm’s methods, and abided by generally accepted accounting principles and standards, they would avoid liability. But, beginning in the 1960s and continuing through the 1970s these assumptions were challenged by an explosion of mergers and acquisitions in the U.S. Auditors on both sides of these transactions watched with mounting concern as the Wall Street investment bankers devised new and more creative methods to finance these deals, and corporate executives speculated on the earnings potential that might result. In many cases, these mergers and acquisitions were successful and profitable. However, if the expected earnings from a merger or acquisition were not realized, investors often asked their lawyers to seek damages. With the corporate assets of the unsuccessful companies depleted, the audit firm was often the only party left with money and became the target of lawsuits.

In 1968, the Continental Vending case, tried in U.S. District Court in New York City, set precedence for such suits brought against accounting firms. In this case, the judge issued a stunning ruling that adherence to GAAP did not exempt auditors from liability if the court found that there was a need for further disclosures. This ruling opened the door to further litigation against public accounting firms, and suits rose from 71 cases in 1970 to 140 in 1971 and 200 by 1972. Audit firms found themselves on the losing side of a lawsuit if the auditors were found to have:

To protect the firm from litigation, Andersen created an independent oversight group, the Public Review Board (PRB), in 1974. The PRB was given the authority to visit offices, review records, and “review the professional operations of (the) firm, including how (it was) managed and financed, the scope of (its) practice, and the quality of control over (its) work.”^[6] Under the watchful eye of the PRB, Andersen’s auditors became very conservative about who became a client and how audits were conducted.

By the end of the 1970s, at a time when Andersen was being cautious about new clients, audit revenues began to flatten. With so many mergers and acquisitions, there were fewer big companies to audit and the struggle between the giant accounting firms for clients became very competitive. By the end of the 1970s, companies were beginning to take the audit function for granted. It was part of the American business system. Andersen had been founded, and for decades was dominated, by auditors. Arthur E. Andersen had built up the audit role during the 1930s, a time when the government thought that big corporations posed a threat to freedom and needed to be reined in. External audits had become a legal requirement for publicly held corporations in 1933 and 1934 to protect the public from another stock market crash like that of 1929. In the late 1970s, people were not interested in remembering that audit was essential to protecting public investing. Audit itself was devalued in the marketplace. It was a hassle, but one of those things businesses had to do. For public accounting firms, audit was not a money-maker.

Then, in 1978, competition among accounting firms was raised another notch with the introduction of advertising. In 1978, the American Institute of Certified Public Accountants (AICPA) rescinded a ban on advertising and other forms of audit client solicitation. Fifty years earlier, the ban had been placed on the profession because the Institute had feared that aggressive competition in the accounting industry might compromise the integrity of audits. When the ban was lifted, competition became fierce. Some audit clients used competitive bidding, or the threat that they might go “shopping” to drive their audit costs down. Although large multinational companies had to have auditors capable of conducting complex audits for global organizations, there were a limited number of such large corporate clients on which Andersen could rely for the major portion of its audit business. As the revenues from audit services flattened, competition increased, and litigations loomed, Andersen’s audit services—the core service of the firm—was under attack. Andersen needed to find a way to keep the firm financially stable.

Expanding consulting services was a logical solution. Andersen was not the only public accounting firm to consider expanding nonaudit services during this period. Many local and regional firms in the U.S., as well as international firms, were already deriving revenue from tax, accounting, consulting, and other work that fell outside auditing. Now all accounting firms, regardless of size, were watching their audit fees shrink and were seeking to broaden their nonaudit services to compensate.

At Andersen, the aggressive sales strategies that the consulting division was using made it a viable, growing division within the firm. Andersen could offset the flattening revenue growth of audit by expanding consulting. But Kapnick hesitated. He had become keenly aware that consulting and audit services were growing apart, and he blamed the impact of rapid technical advances and the development of a large and expanding base of nonaudit clients as the cause. Consulting services’ head, William J. Mueller, agreed on the rift between the two divisions but not the cause. He blamed audit staff’s lack of technical understanding and confidence, and said, “By and large, relations of the [consulting] division with the audit division are getting worse, and it has to stop—right now!”^[7] Whatever the reasons, it was quite clear by 1979 that the differences between the two divisions were real. To let consulting get bigger would only increase the rift. But Kapnick opposed the growth of consulting services within the firm because of another more important consideration—growing scrutiny of conflict of interest by the SEC and the U.S. Congress.

Through the 1970s, the SEC and Congressional committees had been concerned about a single firm auditing a client company’s financial statements while helping that company plan its taxes or develop management information systems. Both the SEC and Congress shared a concern that consulting would compromise audit’s independence and paid special attention to firms that tried it.

Although Kapnick disagreed with the view of the SEC that consulting impaired audit independence or put audit in a conflict of interest, he was concerned about how the SEC would react to further expansion of consulting services at Andersen.^[8] There were rumors circulating that the SEC was about to propose a review of each accounting firm’s audit and nonaudit fees to decide whether it was independent. If any audit client failed the test, the accounting firm would be asked to divest itself of consulting. Because Arthur Andersen derived more income from nonaudit than any other firm in the world, Kapnick was pretty sure the firm would be asked to get rid of consulting if it came to the test.

Kapnick was spurred into action. He went into the 1979 annual meeting of 1,100 partners with a restructuring plan that would split consulting from the firm, or as he put it, “turn one great firm into two great firms.” This was exactly the opposite of the plan that the partnership wanted or had expected, and they greeted the plan with skepticism. How could Kapnick even suggest spinning off the highly successful, fast-growing consulting practice at a time when audit revenue growth was flattening? One shocked member voiced the objections that the others were thinking, asking how Kapnick could possibly make the suggestion to carve off one-third of the firm and suggested that, in his opinion, Kapnick was making an expedient choice, rather than pursuing the best possible solution. Others questioned how accurately he had read the responses of the SEC to the firm’s constant argument that limiting the services a firm could offer its clients was not necessary and of benefit to no one. For the first time in memory, shouting disrupted the meeting as partners jumped to their feet to shake their fists at Kapnick. Wondering what they had gotten themselves into, newly elected partners asked, “Are all the annual meetings like this?”^[9] Cooler heads took Kapnick aside during a break in the arguing to urge him to withdraw his proposal, suggesting that he might want to conduct further meetings with regulators or other government officials to make sure he really understood their position and that the next time he went to meetings with SEC officials or members of Congress, maybe he should bring other partners with him. Kapnick was annoyed and not about to change his mind. He refused to withdraw his proposal but he stopped short of pushing for a vote by the partnership. In the days that followed, the firm was immobilized amid the continuing controversy. Kapnick had misjudged the partnership badly. He had failed to understand fully how anxious the partners were about the continued success of the firm or how disruptive his proposal to divide the firm would be. On October 14, 1979, Kapnick resigned as chairman-chief executive, ending his duties as head of the firm as he had begun them—in controversy. A few days after he stepped down as head of the firm, he retired, saying “Since I now more clearly recognize the direction the partners wish to take in resolving the problems created by the [SEC regulations on the performance of nonaudit services by public accounting firms], I find it impossible for me to properly discharge the responsibilities of chairman and chief executive because I disagree with such course of action,” adding “I have concluded that 10 years is about the maximum that a person can give to the heavy and demanding responsibilities of leading a worldwide professional organization.”^[10]

Andersen had been founded, and for decades was dominated, by auditors. But profits could be made in consulting and could stabilize the firm during a rocky time of litigation, competition, and decreasing audit revenue growth. Besides, Andersen had always had a technology-consulting niche and had experience managing consulting services without conflict of interest. The partners believed they could handle the risk now. With Kapnick gone, the decision to grow consulting, not get rid of it, was made. In 1980, the firm reorganized once again. This time, there would be only two practice divisions—Management Information Consulting Division (MICD) and Accounting, Audit, and Tax Division (AATD), the firm’s traditional services. A third division provided internal support and management services. Consulting was on its way to becoming co-equal and would in the decade to follow eclipse the traditional accounting services that the firm had always provided. But Kapnick’s solution to divide the firm by service divided the partnership and the firm’s single culture. Divided, the firm would never again have complete control over its divisions and local offices. With a partnership divided, the consulting division was free to go in its own direction, elevating the value of client service—a shift that would eventually have important implications for client relationships and the sales role of partners as this new stress on service and, by extension, sales spread to the rest of the firm.

In June 2002, just two months after Andersen was convicted of wrongdoing in a federal court, Harvey Kapnick died unexpectedly at age 77. His son commented about his father, “He had long believed that the dilution of standards at his beloved firm could be traced to the rise of auditor-salesmen and the poisoning effect its drive for profits had on Andersen’s famous independence.”^[11] Kapnick’s attempt to maintain control at Andersen failed and cost him his job. He never fully realized that his plan for restructuring the firm would undermine the standards he held so dear. In a little less than 10 years, consulting would take matters into their own hands, rising up and sending Andersen into its final spiral.