Corporate Finance Assignment ( Questions ) Essay

Corporate Finance Assignment ( Questions ) - Essay Example The Enron scandal and Arthur Anderson case has been the witness of this testimony. If the interest of organisation and individuals are not aligned then there are classical cases like Arthur Anderson and Enron comes up in the public world. This case tries to highlight how a corporation like Arthur Anderson came to such demise. 80 years of legendary innovative history in Corporate America that was created by Arthur Anderson was washed up in a matter of 8 years. Internal divisions came up in the company and the world started to look at Corporate America with shame. To align the principal agent theory in practice, Sarbanes Oxley came into operation in 2002. The act tried to align the best interest of the shareholders and the agent i.e. Management in the same mould. The objective of the act was to reduce the ever growing gap between the two of the main functions of the organisation. There are two main functions of any organisation which decide the fate of the organisation as a whole. The first one of them is the shareholders (Principals) who elect the Management (agent) to represent them as the owner of the company. The objective of the principal is to maximise shareholders wealth while that of Management can be the same or it can be different also. If the objectives are aligned by using good compensation strategy and urging responsibilities over the management then agency cost of the company will be reduced. If that is not the case agency cost will always increase. With this background let us have a look at the classic case of Arthur Anderson. Management of the company which was looking after the AA division of the company was less compensated compared to their counterparts in AC. This is itself a contradiction to the principal agent theory. Arthur Anderson has grown from the roots as a major auditor and the consulting division came into picture very late when they started automating the book keeping systems. AC was very successful and the compensation was not in a lignment with the kind of success they achieved. Hence the companies were separated and consulting division was now separate from auditing division. After the separation AC kept growing fast with their own set of compensation strategy while AA started facing challenges. This challenges are advent from the number of lawsuits AA faced during 1990s and 2000. Employees at AA were resenting and finding other ways to get paid and rope in extra money for the organisation and themselves. This is when they started realigning shareholders interest with theirs. This was visible in the biggest corporate scandal of America- Enron. Enron was the worst corporate scandal which shook American Corporation. Auditors at Arthur Anderson signed the financial statements of Enron without cross checking the stated facts. This was done just to rope in extra money from this big ticket client. Somewhere this is an also a case where organizational structure should be questioned. The reason for this is because f or a big ticket client like Enron, Arthur Anderson compromised its corporate hierarchy. They allowed their premier groups to go and reside at the client’s headquarter. There was no proper check on what was happening within employees and the client. 2- (Goal of financial Management )Why is the goal of financial management to maximize the current share price of the company‘s stock? In other words, why isn’