One commentator described the Enron—Arthur Anderson debacle as “the half-full pr

Question

One commentator described the Enron—Arthur Anderson debacle as “the half-full problem”—the tendency for analysts to insist that the glass is half-full rather than half-empty. How can financial managers both stimulate financial success and yet be wary of the dangers of excessive optimism? Is there a place for optimism in accounting? In the sale of derivatives? One commentator described the Enron—Arthur Anderson debacle as “the half-full problem”—the tendency for analysts to insist that the glass is half-full rather than half-empty. How can financial managers both stimulate financial success and yet be wary of the dangers of excessive optimism? Is there a place for optimism in accounting? In the sale of derivatives?

Explanation / Answer

Financial managers can stimulate financial success and yet be cautious of the dangers of excessive optimism by keeping an analytical and strategical approach at all levels of financing. Right from planning and budgeting the finances to allocating them to the right expenditure heads, strategies have to be formed with a goal to get financial success mitigating the risks associated with it. Risk should be evaluated by various methods at every level of financing and steps to avoid them should be determined and implemented. Risk evaluation is the major part of budgeting and financing that cannot be ignored in cash flow analysis.

Excessive optimism in accounting can have a harmful effect. Accounting and future budgets and plans for it are based on facts and figures. To be positive about a successful financial position in future we should be having real figures and proofs for that optimism. Without it, if assumptions are made for the financial analysis with an optimist approach then the company is most likely to face a failure on the financial grounds. Misusing the past records, making false profit reports, ignoring essential cash flow areas are all practices that will be followed in such cases which cannot be a fruitful approach for the company. Hence optimism is not a favourable approach to keep in terms of accounting.

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