Financial Scandals and Management Financial Management Financial Essay

  • Length: 11 pages
  • Sources: 10
  • Subject: Business - Management
  • Type: Essay
  • Paper: #13782423

Excerpt from Essay :

Financial Scandals and Management

Financial Management

Management Financial Actions, Controls, and Decisions

Financial Scandals and Management

Following the rise of financial scandals in the recent past, external and internal audits are carried out to review the management's financial controls and actions, and keep tab of the outside and internal auditors. However, despite the best efforts, accounting scandals like the Cendant Corporation's $300 million bogus revenue indicate that external auditors and managers are not doing their job. It is the perception of management and financial scholars that social and political forces interfere with the ability of auditors and managers to meet their obligation and uncover management misdeeds (Lublin and MacDonald, 1998). This is because an increase in the toughness of external audit committees only increases the chances of bad accounting and shareholder lawsuits. This forms the problem for this review of literature, as the research proposes that for effective financial and audit control, managers must adopt integrated financial and organizational management strategies. To achieve this, this paper will explore the financial scandal of Enron and apply different management strategies as proposed by literature.

Financial scandals are a topic of concern for this research since they greatly affect and reflect negatively on management. Reviewing literature and news stories reveals that any financial scandal has had a bigger effect on the management rather than the employees or other stakeholders. This implies that in the current business world, the roles of management are no longer defined by Henri Fayol's management principles of coordinating, organizing, planning, or controlling (Mintzberg 1989).

Financial and Management Strategies

Enron is an illustration of the fundamental need for ethical standards in management, since ethics are required for trust for without trust the organization falls apart. This is because Enron puts into focus important and cherished business ethics of the last two decades into harsh reality (Millman 2002). The first ethic is that traditional business management theory has required managers to think like shareholders. However, following the events in Enron, it is evident that there is a higher risk of a breach of the code of ethics with the management trying to align their financial interests along with those of the company's investors. The second business notion has been that managers must think like entrepreneurs, as seen in the company, which adopted a slogan of everybody should ask "Why." The challenge of this ethics is that it led the management to ask "Why Not," consequently resulting in the management decisions that led to the scandal (Millman 2002).

Given the dynamic business world firms are facing currently, complicated by the effects of the recession, it is necessary that managers following the basic management principles proposed by Linda Hill (2003). To deal with the changing demands of management and avoid financial scandals like Enron, management should engage in three fundamental types of learning to cope with the changing business environment. Hill (2003) recommends that managers must learn something new, change their minds, and change themselves. This theory requires managers to learn something new, in this sense a manager should learn about effective financial management and accountability. Effective manager seeks learning in financial and conceptual competencies necessary to avoid the financial mistakes made by the management of Enron. This manager must change their attitudes, values, and mind-sets to align them with their managerial roles, duties, and responsibilities above their personal interests (Hill, 2003). According to Hill (2003) managers must lead others instead than work themselves, to win the respect and trust, motivate, and create a balance between control and delegation. According to Hill (2003) managers must learn their duties and responsibilities and create an ethical identity which directs and motivates employees, to avoid the mistakes made in Enron. His is because managers and employees learn through trial, error, interpretation, and observation to be effective managers. Therefore, the decision by Enron managers to invest and put personal interest in investments and finances of the company was unethical. The role of the manager is to perform all functions of the organization through others or through employees. Therefore, the manager is highly dependent on the competencies of others to meet the functions of the organization (Hill, 2003). In this case, managers can make use of the financial and audit competencies of employees and external auditors to realize effective financial statements and practices.

Moreover, the case drives the need to review management practices as proposed by Mintzberg (1989). From the case of Enron, it is clear that management must abandon the folklore that they must be systematic and reflective entrepreneurs and planners. Management in today's organizations must be about activities characterized by brevity, discontinuity, variety, and should be strongly oriented to action and dislike reflective activities (Mintzberg, 1989). For full financial control and audit to prevent financial scandals, management must work. The work management is involved in performs several regular duties, which include ceremony, rituals, processing of information, negotiations, that link the organization to its internal and external environment (Mintzberg, 1989). Moreover, to prevent a case of misinformation of management decisions, it is vital that managers have strong communication lines. Mintzberg (1989) recommends that managers have a strong verbal media, meetings, and telephone calls over the use of documents in communicating. In addition, the current business world requires managers to move beyond the traditional concept that management is a science and a profession. Rather, management is about the locking into individual behavior and cognition the schedule, processes, information, decisions, control, and practices. This implies that to avoid the financial scandals like Enron, management must move beyond traditional management route and rhetoric, to adopt management as a way of life and behavior. This increases commitment to management duties and responsibilities, increases accountability, and commitment to organizational goals.

This leads to the concept of morals in management as proposed by Robert Jackall (2010). Given the participation in investment, and alignment of personal interests by the management of Enron, it is evident that there is a need for moral ethos in management. The moral ethos for corporate management emerges not only from individual principles and convictions, but also from the social networks. In this the management acquires personal moral principles and convictions by adopt Mintzberg's (1989) last fact of personal commitment to managerial role. The second ethos from social networks recognizes that management does not work alone, but is involved in an interactive environment with different employees and stakeholders. Therefore, their moral ethos is the product of the situations and relations they are in contact with (Jackall, 2010). This draws attention to Enron's management failure to meet their ethical duty to stakeholders and investors as they made use of company resources and finances for personal interests. The second ethical issue is the use and management of the company's property and resources. It is a general knowledge that the company's property is supposed to be utilised in a most efficient manner, to increase corporate competitiveness and to provide the best possible service to its customers.

The need for ethics in management is to give everyone guidelines on the procedure to follow on reporting and following up on violation charges. The expectation is that management must set an example to the staff, not to hesitate in reporting misconduct that is in violation of the law or the code of conduct. A failure to report a violation or aiding and encouraging another to break the law or revenging against a report of violation shall be liable for disciplinary action. However, it is apparent that management today find it difficult achieving the level of management set forth by the society and political elite. This is because the ethics standards required for management in handling financial statements is under the influence of the Securities and Exchange Commission and elite business leaders (Lublin and MacDonald, 1998). These influence the external audit committees, as they are forced to go along with the set rules of the SEC. often, while management and the external audit may have the financial experience and independence to oversee the management and accountability, social and political forces interfere. Therefore, this calls for the management to have a firm personal ethics principles and morals ethos. The need for ethics is seen in the case of Enron corrupt dealings with CitiGroup, they agreed to settle at $120 million, this was to cover Dynegy who they had also helped to commit fraud Citigroup. At the same time they were alleged to have tricked borrowers into buying high credit insurance. Furthermore, they had in some instances, included fees in monthly payments and added thousands of dollars to the total cost. When complaints were received from consumers, the employees discouraged the customer form withdrawing the insurance. In the process the FTC made CitiGroup to pay the largest customer settlement of $215 million. This is in terms of ethical principles and theories that give viewpoints and guidance in making ethical decisions. By considering the ethical principles, this research finds that management must follow the first principle is the 'Least Harm' this requires one to do the least harm possible. Management…

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