I recently encountered this error when attempting to run Add-AzureAccount using Azure PowerShell on a Windows 8.1 machine. The error occurred regardless of whether I was running PowerShell as a regular user or as Administrator.
The browser based authentication dialog failed to complete. Reason: The server or proxy was not found.
The error message gives little meaningful information but on investigation, it appears to have been caused by the default browser being set to something other than Internet Explorer (in this case, Chrome).
An alternative is to use a PowerShell function, such as the one available on PoshCode, to switch the default browser to IE before running Add-AzureAccount & then back to the preferred browser after the account has been added.
I attempted to replicate this error on a Windows 7 machine where Chrome was set as the default browser however an error did not result in that case.