Former Australia batsman Darren Lehmann, the Queensland coach who is in England with the Australia A team, will take over from Arthur.
"The timing is far from ideal but we didn't feel we could sit back and hope matters would change without addressing issues critical to a high-performing team culture," Sutherland said in a statement.
"It obviously isn't the type of change we want to make three weeks out from the Ashes commencing but we believe a change is needed."
Australia captain Michael Clarke has asked to step down from his role as a team selector.
The team have endured a series of poor results and there have been a number of disciplinary issues in the squad.
Arthur was informed over the weekend that he was being let go despite his contract running until March, 2015.
The South African - the first non-Australian to coach the national side - took over in 2011 following a review into the humiliating 3-1 Ashes defeat, the first home series loss to England in nearly a quarter of a century.
The 45-year-old had previously coached South Africa to their first test series victory in Australia before resigning after falling out with Cricket South Africa officials.
Early results were encouraging but they lost a test series in India this year 4-0 and failed to reach the knockout stages of the Champions Trophy, a competition they had the last two times it was held.
It may be, however, that Arthur has paid the price as much for the off-field problems as the on-field calamities.
In what became known as "homework-gate", Shane Watson, James Pattinson, Mitchell Johnson and Usman Khawaja were dropped from the third test in India for failing to provide their thoughts on how Australia could improve in an e-mail.
David Warner's Twitter attack on journalists did nothing to counter the impression that discipline was an issue in the squad and it was compounded when the opener hit England batsman Joe Root in a bar after a Champions Trophy defeat.
Sutherland was furious about the latter incident, which resulted in Warner being stood down for the remainder of the Champions Trophy.
The highly-regarded Lehmann, better known in cricket circles as "Boof", was a left-handed batsman who played 27 tests and 117 one-day internationals before moving into coaching.
Australia play a four-day tour match against Somerset on Wednesday and the first Ashes test starts at Trent Bridge on July 10.
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