Financial Management and Ethics: Analyzing the Enron Case Study

This report provides an analysis of the Enron case study, focusing on the ethical violations committed by Enron managers and the factors that led to the company's bankruptcy. The pursuit of personal wealth through aggressive growth strategies and incentive schemes, manipulation of earnings, and the use of questionable accounting practices such as the "mark to market" method are highlighted as key issues. The report discusses the role of ethics in corporate governance, the actions of the SEC, and options Enron managers could have taken to avoid bankruptcy, such as maintaining transparency and avoiding conflicts of interest. It emphasizes the importance of ethical conduct, independent oversight, and sound financial management practices to prevent similar failures in the future. The case also examines the role of Arthur Anderson and the importance of detecting operational flaws and maintaining ethical standards.

Financial Management
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Authors’ Note

Main ethical violations that had been done by Enron managers
Analysis of the business case on Enron helps in understanding the main ethical violations that
had been carried out by the Enron managers. The chase for personal wealth by the managers
through attainment of rapid growth can be observed as the primary cause behind the collapse.
The pursuit by the managers for individual wealth subsequently led to the in introduction of
extreme incentive scheme for luring as well as motivating very bright as well as driven
individuals. This in turn led to inadequate concentration on the earnings of the firm in the
short term. The current case also reflects the fact that earnings could have been manipulated
for attainment of aggressive revenue as well as targets for earning (Brigham & Daves, 2014).
As the worked out figure for earnings growth left a deficit in cash, the managers of Enron
utilized the borrowing capabilities. Again, management’s decision to issue greater number of
equity would have hurt the price of share on which majority of the incentives were founded.
Therefore, schemes were generated to generate financing secretly and this financing had the
need to be concealed. Thus, these actions undertaken by the managers created a
dishonourable along with unethical culture in Enron that in turn exploited and deceived
different stakeholders of the firm for the sake of achieving targets. Furthermore, managers in
the upper echelon of the organization also rewarded themselves using the same incentive plan
and tried to show off that market driven approach led to greatness. Again, the revered Arthur
Anderson was also permitted greed for payments to over-rule of the tradition of strong
business ethics of the company that in turn met with fatal outcomes (Lasher, 2013).
Main roles of ethics in corporate governance
The main role of ethics in corporate governance is to maintain an ethical tactic, set balanced
objectives, establishment of decision making procedures and equal concern for different
stakeholders (Brooks, 2015).

SEC is trying to get corporations to notify the investment community more quickly
when a material change will affect the forthcoming financial results
The SEC is trying to get corporation to notify the investment community more quickly
regarding material alteration that can affect the overall financial outcomes of the firm.
Essentially, it was primarily reported that the SEC (Security and Exchange Commission) of
US permitted the company to utilize the “mark to market” method of accounting. In itself, the
unawareness of the shortcomings of this particular method also led to financial scam. The
main task is to make certain that the commodity futures as well as options markets function in
both an open and economical way, while the Federal Energy Regulatory Commission
(FERC) necessarily controls the interstate broadcast as well as market for diverse energy
products. Evidently, the main basis of federal oversight for specific publicly traded
corporations is the Securities and Exchange Commission (SEC) (Bekaert & Hodrick, 2017).
Thus, SEC in order to ensure optimum profits of firms can act for detecting different wrong
doings such as accounting fraud that in turn can violate the interests of shareholders.
Options that was available for ENRON managers to avoid bankruptcy
The inadequacy of transparency and truthfulness by Enron’s management regarding the
actual health condition of the corporation is one of the causes of the bankruptcy of the
corporation. Essentially, the senior management of Enron could have maintained a good
ethical culture that could have protected the reputations and compensation as the most
successful executive in the United States for averting bankruptcy.
The management of the company could have avoided the conflict of interest and maintained
adequate independent oversight of management for averting collapse of the corporation.
Additionally, the compensation policies provoked greater concentration on the growth of
earnings of the firm and price of stock. However, regulatory alterations concentrated on

enhancement and strengthening internal accounting as well as control systems (Petty et al.,
2015). Essentially, the conflicts of interests between two different roles played by Arthur
Anderson as an assessor and a consultant could also have been averted for avoiding
bankruptcy of the firm.
In addition to this, magnitude of assumed accounting errors, together with Anderson’s role as
the firm Enron’s assessor along with the extensive attention of the media delivered a setting
regarding influence of reputation of the auditor on market prices of the client on failure of
audit. In itself, analysis of the case reveals that Enron was not generating enough flow of
cash, whilst spending expensively on business expansion that ultimately led to collapse of the
corporation (Arnold, 2013). Nonetheless, this could have been avoided by emphasizing more
on generation of greater flow of cash. Furthermore, the use of mark to market system of
valuation on agreements generated artificially large amount of earnings that essentially
concealed the poor financial health of the firm in terms of profitability. Therefore, a different
system of valuation could have been used for better presentation of financial results and
avoiding bankruptcy. As such, the financial incentives led to necessary inadequacy of
transparency. Again, deception and trick for delivering reliable above average rate of growth
in market could also have been avoided for averting liquidation.
Actions that would be undertaken
The flaws in operations have the need to be detected quickly and indeed periodically need to
be commented by different observers. Again, ethical surveys as well as corporate governance
surveys can be undertaken by different independent parties for emphasizing the growing
issues. The advantage of hindsight that began as an imaginative as well as ground breaking
notion, that necessarily transformed the entire natural gas supply sector, swiftly evolved into
a dictatorial vision of generating a world leading corporation. In this case intellectual self-

confidence mainly transformed into contempt for traditional business models and generated
an environment in which top management got disconnected from reality (Petty et al., 2015).
Therefore, maintenance of clear insight regarding the reality before framing innovative
business designs is essential for enhancement of business. Thus, analysis reveals that it is
important to maintain basic dimensions of control and yardsticks and avoid progressive
dishonesty for generation of revenue and earnings that can in turn deceive the entire stock
market and management.

References
Arnold, G. (2013). Corporate financial management. Pearson Higher Ed.
Bekaert, G., & Hodrick, R. (2017). International financial management. Cambridge
University Press.
Brigham, E. F., & Daves, P. R. (2014). Intermediate Financial Management. Cengage
Learning.
Brooks, R. (2015). Financial management: core concepts. Pearson.
Lasher, W. R. (2013). Practical financial management. Nelson Education.
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M.
(2015). Financial management: Principles and applications. Pearson Higher Education AU.