Andersen Partners’ Accounts
Exercise
Explain the advantages and disadvantages of these arrangements: (1) partners are required to keep significant sums invested in the firm until they retire; (2) after retirement, they typically withdraw these sums over 10 years; and (3) rules that prevent all the retired partners from grabbing all their capital at once. “Arthur Andersen’s partners also have significant sums socked away in accounts that they are required to keep invested in the firm until they retire. Partners must keep a portion of their salaries, which can top $1 million a year for the highest executives, in these accounts. After retirement, they typically withdraw it over 10 years …. Partners can change their annual withdrawal schedules once a year, around the end of the company’s fiscal year in August and there are rules to prevent all the retired partners from trying to grab all their capital at once”.[1]
[1] KRANHOLD, K., J. R. WILKE, and J. WEIL, “Andersen Seeks a Deal to Avoid Indictment: Criminal Charges Could Be a Fatal Blow to Firm,” The Wall Street Journal Europe, March 11, 2002, p. A6.
Analysis
Mainly, motivating mutual control. To avoid paying higher personal income taxes and depriving the firm of capital the firm. Avoiding panic runs. Trying to alleviate the last period problem and providing incentives for long term value maximization. (Note: Obviously that was not enough to prevent large scale fraud that brought to the indictment and the disappearance of the firm).
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