Financial Risk Manager Part 1

Explanation

Enron's collapse was primarily driven by governance risk, which refers to failures in corporate governance structures, oversight mechanisms, and ethical standards. Key governance failures at Enron included:

• Board oversight failures: The board failed to properly monitor management's activities and approved questionable transactions
• Lack of independent oversight: The audit committee and internal controls were ineffective
• Conflicts of interest: Executives engaged in self-dealing and off-balance-sheet transactions
• Ethical breakdown: Widespread fraudulent accounting practices and misrepresentation of financial health
• Inadequate risk management framework: No proper systems to identify, measure, and manage enterprise risks

While Enron also faced other risks like market risk and operational risk, the fundamental cause of its collapse was the systematic breakdown in corporate governance that allowed these other risks to go unchecked and ultimately led to the company's demise.

Governance risk is particularly dangerous because it creates an environment where other risks can flourish without proper oversight or control mechanisms.