Financial Management Report: Analysis of Enron's Financial Practices

This financial management report provides a comprehensive analysis of the Enron case, exploring the major ethical violations that contributed to the company's collapse. The report highlights the unethical funding schemes, strategic management failures, lack of transparency, and accounting irregularities that plagued Enron. It delves into the role of corporate governance and the importance of ethical practices in financial reporting. The report examines the responsibilities of financial managers in notifying stakeholders of material changes and proposes actions that Enron's management could have taken to avoid bankruptcy. Furthermore, the report outlines the actions the CEO should have taken, emphasizing the implementation of fair accounting policies, ethical corporate governance, and the avoidance of aggressive accounting practices to maintain transparency and accountability. The report references key academic sources to support its findings and conclusions.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
Answer to Question 3......................................................................................................................3
Answer to Question 4......................................................................................................................4
Answer to Question 5......................................................................................................................4
References........................................................................................................................................6

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Answer to Question 1
From the provide case study of Enron, it can be seen that there were some major ethical
issues in the organization that contributed largely towards the collapse of the company as all
these ethical issues are major issues. The major ethical violations for Enron are discussed below:
 The funding scheme introduced by the Chief’s Financial Officer of the Enron was one of
the major ethical issues for the company. The main aim of this scheme was to increase
the share prices of the company. However, the actual motive behind the introduction of
this scheme was to increase the management’s personal wealth at the expenses of the
employees. This was a major ethical violation in Enron (Schwartz 2013).
 Another major ethical violation for Enron can be seen in the field of strategic
management. It can be seen that Jeff Skilling introduced the business of broadband in
which he did not have any kind of personal knowledge in that particular field. As a result
of this, he could not raise the required capital for the implementation of the project.
 Lack of transparency and accountability was another major ethical violation for Enron.
At the beginning, the management of Enron was determined to provide the true financial
information of the company to their stakeholders in order to maintain transparency and
accountability. However, in the later stage of the business, it can be seen that the
management of the company started to maintain an off-balance sheet in order to hide the
debt and liability position of the company. This process was highly unethical as the
stakeholders were deprived form this action of Enron (Markham 2015).

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 From the provided case study, it can be seen that the accounting firm, Arthur Anderson
violated all the ethical principles of accounting in order to help Enron in the scandal. This
can be considered as another major ethical violation for Enron.
Answer to Question 2
Corporate governance refers to a formal pattern in the organizations of specific guidelines
and principles so that the business operations of the companies can be run in the most ethical
way. The role of ethics in corporate governance refers to the process of the application of ethics
in various administration related business operations of the companies (Crane and Matten 2016).
With the help of ethics in corporate governance, the management of the companies is able to
manage both the internal and external ethical issues of the companies. For example, the role of
ethics in corporate governance can be seen in the process of managing the various issues with
the employees. In this regard, the process of selecting the employees needs to be based on the
possession of required human capital in the most ethical way (Trong Tuan 2012). Apart from
this, the application of ethics in corporate governance can be seen in the process of the
management of external stakeholders of the companies by the management. In addition, with the
help of ethics in corporate governance, business organizations are able to address the issues of
responsible corporate behaviors. One of the major roles of ethics in corporate governance can be
seen in making the companies operate in eco-friendly manner. On the other hand, with the help
of ethics in corporate governance, the companies become able to bring accountability and
transparency in the process of financial reporting (Jo and Harjoto 2012). Thus, based on the
above discussion it can be seen that the introduction of ethics in corporate governance makes the
companies act in the ethical manner in every aspect.

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Answer to Question 3
It is the responsibility of the financial managers of the companies to notify all the
investors and shareholder about any kind of major material changes in the financial statements.
This needs to be done as the predicted profit of the companies can be reduced due to the material
changes. This same concept can be applied in the case of Enron. In this situation, it needs to be
mentioned that the Security Exchange Commission (SEC) uses to notify the organizations about
any kind of material change in the financial statements of the companies. In case this happens,
then the manager of Enron would be seen as more ethical if he arranged specific procedures to
let the investors know about this material change. This can be done in various ways. First, the
financial manage can arrange a meeting with the investors and shareholders of the companies to
let them notify that the profit level will not be the same due to major material change. Second, he
can arrange a press release to notify the investors and shareholders the same (Brigham and
Houston 2012).
Answer to Question 4
The Enron manages could take certain actions to avoid bankruptcy. First, it was a major
faulty step for Enron to take their business in California. It can be seen that the experiment of
Enron about the deregulation in California did not work and the company went towards
bankruptcy. Thus, the managers were required to shut down the business in California to avoid
bankruptcy. Second, the managers of Enron needed to take action to stop the funding scheme
introduced by the Chief Finance Officer of the company, as it was one of the major reasons of
the bankruptcy of the company. Third, the managers of Enron needed to take action against the
maintenance of off balance sheet. The managers of Enron required to take these actions.

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Answer to Question 5
If I was the CEO of Enron, I would make it sure that the company adopted the fair
accounting policy so that the stakeholders of the company do not have to be deprived. The
establishment of fair accounting policies would bring transparency and accountability in the
company and would be helpful to avoid bankruptcy. In addition, I would not maintain any kind
of off balance sheet to manipulate the financial position of the company. I would try to include
ethics in corporate governance so that all the business operations of the company can be run in
the ethical manner. Lastly, I would not adopt any kind of aggressive accounting policies for the
company.

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References
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage
Learning.
Crane, A. and Matten, D., 2016. Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. Oxford University Press.
Jo, H. and Harjoto, M.A., 2012. The causal effect of corporate governance on corporate social
responsibility. Journal of business ethics, 106(1), pp.53-72.
Markham, J.W., 2015. A financial history of modern US corporate scandals: From Enron to
reform. Routledge.
Schwartz, M.S., 2013. Developing and sustaining an ethical corporate culture: The core
elements. Business Horizons, 56(1), pp.39-50.
Trong Tuan, L., 2012. Corporate social responsibility, ethics, and corporate governance. Social
Responsibility Journal, 8(4), pp.547-560.