• Subject Name : General Law

Business Law and Ethics

Introduction to Enron Scandal Report

Enron Corporation having business in the energy field registered office in Houston, Texas is famous for one of the deceitful economic scandals of the 20th century. The company’s role as a commodities and services organization was crucial in American’s Economy. During the 1990’s Enron’s relations with the Accounting Firm, Arthur Anderson came into limelight and had challenged by many enterprises and suspected the fraud due to objectionable accounting techniques. During the blooming period of the Company stock price estimated was above $90 per share. Eventually, the revelation of scandal leads to the downfall of the company. The stock closed on at a low price of 26 cents a share. On December 2, 2001, Enron filed for bankruptcy which was considered to be the most significant bankruptcy filled in American History. Enron’s breakdown influenced the lives of thousands of executives, employees, and workers; it also shook Wall Street to its core. The scandal was an eye-opener which results in revolutionary changes in the corporate governance throughout the world; it also brought the reformative changes in than statues to prevent or at least mitigate the future corporation collapse at this level Connell, M. 2017. The main aim of the enactments is to increase and ensure the accuracy of financial reporting for publicly traded companies. The most significant of those measures, the Sarbanes-Oxley Act (2002), the Act provides stricter penal provisions and hefty penalties for destroying, altering, or fabricating financial statements. The Act also prohibits providing any concurrent business services or any consulting services by the auditing firms to the same corporate clients.

The Germination of Scandal

From the outset sight, Enron resembles a law-abiding corporate citizen, complying with all the provisions of the corporate social responsibility (CSR) and business ethical instruments while conducting business. However, the scandal of Enron has been the most prominent corporate scandal ever and has gotten significantly organized and very much arranged corporate fraud. The Enron case includes both unlawful and dishonest exercises Kizil and Kaşbaşı 2018.

The CFO Jeffrey Skilling and CEO Ken Lay assumed significant parts in the Enron case. Both the executives involved in securities fraud by misrepresentation of the facts and unethical conduct to maximize benefit. Both the executives manipulated the Company's Financial Position; they lied to stakeholders about the disastrous financial structure. Enron's Board administration has abused many Accounting statutes and standards, SPE laws, and manipulate accounting rules and standards to fulfil their profit motives for the time being without considering long term repercussions for stakeholders, market regulators, investors, workers, and the business itself. The unethical motivation to maximize profit by connections that were framed among top driving executives and the top managerial staff developed haughty, thinking they were invulnerable and making them act in an untrustworthy way. Enron permitted Andrew Fastow, the Chief Financial Officer, to control two SPE's (Special purpose entities) that were intentionally associated with Enron. Further, they enable him to abuse his powers predominately.

Enron additionally stopped a portion of its obligation on the asset report of its SPVs and kept it escaped experts and speculators. At the point when the degree of its obligation trouble became known, Enron's Credit rating scores fell, and banks requested prompt instalment of unpaid debts. The Board tries to manipulate the issue of debt as a timing issue instead of an ethical issue. They kept up that the company was monetarily steady and that a large number of their rising issues indeed were not very genuine. However, they knew the reality and were settling on money related choices to secure their benefits.

The issue of the Enron scandal would not be finished without a conversation of the association of Enron's Accounting consultant firm. Arthur Andersen was one of the numerous reasons for the Enron breakdown when they were the irreconcilable circumstance between the services provided to Enron, as auditor of the company and besides as a consultant. Andrew Fastow, the CFO of Enron pushed numerous arrangements across where he had a vested intrigued on the two sides of the structure. By making and purposely taking an interest in these arrangements, he put his money related avarice over the duty to his situation for the company Petra, S. and Spieler, A.C. 2020.

Participation of Directors in The Scandal

As per the special investigative reporting in the matter of the participation of Board of Directors in Enron, it was discovered that a couple of directors vigorously benefitted from the calamity of Enron and were in the bargain of the expert and moral principles expected in corporate America Morris. 2018.

Impact on Stakeholders Interest

Each business has an ethical commitment to serve its stakeholders, regardless of whether they are business associates, clients, investors, or representatives. Enron's bankruptcy leads to financial damages to many parties, including banks, investors, former employees, clients, service providers, networks, and the United States. The Company fails to conduct its business activities without complying proper ethical corporate governance Sorensen and Miller 2017. Lay and, especially Skilling, incited in all the staff of Enron the objective of driving up the share market price to the virtual rejection of all else. The top management is ethically liable to secure the interest of the investors. In Enron's issue, the CFO was permitted to make private partnership manage the company, which is unethical and against the interest of the company.

Impacts on Employees

The primary thing, and most significant thing the Enron scandal had an impact was the activity circumstance. Numerous employees had their whole benefits vested in Enron stock, Kenneth Lay prompted employees kept their Enron stock when the firm was smashing, and he was selling his own. While the employees couldn't sell their stock, lay and other heads were rapidly auctioning off a large number of their interest in the company. The lives and investment funds of thousands of employees were obliterated. They additionally were denied of the opportunity to enhance their retirement portfolios, and they were helpless and powerless while their retirement reserve funds dissipated while top supervisors took advantage of their worthwhile stock choices.

Impacts on Investors and Stockholders

The mal-practices at Enron impacted several stakeholders. Arthur Anderson, for example, lost their credibility, customer base and brand reputation for deliberately hiding facts and misguiding the government and public at large. They were charged with obstruction of justice as they destroyed evidence of the fraud by shredding documents and finally had to surrender their license. Financial institutions such as Citigroup, J.P. Morgan, and Merrill Lynch were charged with misappropriation of funds and fudging the books of Enron. They manipulated financial records to report cash flows in the green, keeping investors and stakeholders ignorant while hiding the financial bankruptcy of the firm. The banks helped Enron executives to perform fraud by carrying out fake transactions and make a broke company look very cash rich. After a thorough analysis of the happenings at Enron, it was found that the fraud of this level would not have been possible without the support and guidance of such auditors and financial institutions.

Conclusion on Enron Scandal Report

Enron’s collapse can be largely attributed to its culture, policies and practices, which due to lack of guiding factors and good governance led to the ultimate fall. Numerous factors have been cited- but the most critical ones are as follows:

  1. Lack of ethics and transparency- Enron’s Board of Directors did not fulfil their fiduciary duties towards the Corporate and evidence reveals that it approved high risk accounting practices, did not take action to mitigate conflicts of interest, and had no justifications executives compensation decisions. Executives put their interest before shareholders, filling their wallets and encouraging decisions which led to monetary gains without considering their responsibilities to shareholders or society at large.

There is proof of the CFO setting up a private equity fund (SPE’s) at the company’s expense.

  1. Poor Culture- a culture of dishonesty prevailed, and even though many were aware, they did not come forward, probably due to lack of management support. The whistle-blower policy was completely ineffective
  2. Ineffective Governance- There was lack of separation of internal as well as external auditors from the Corporate, which caused the auditors to work along with management and fudge reports.

The management clearly had vested interests and all activities were carried out for personal gains ultimately causing one of the biggest scandals in the corporate world.

References for Enron Scandal Report

Morris. 2018.”Former Enron CEO Jeff Skilling Released from Prison," Fortune, Retrieved From: https://fortune.com/2018/08/31/enron-ceo-jeff-skilling-released-prison/

Connell, M. 2017. The Fall of Enron and the Creation of the Sarbanes-Oxley Act of 2002". HON499 projects. 19.


Kizil, C. and Kaşbaşı, B. 2018. Accounting Scandals and Eye-Catching Frauds: USA-Japan Comparison by Considering the Role of Auditing (August 24, 2018). Journal of Asian Research Vol. 2, No. 3, retrieved From SSRN: https://ssrn.com/abstract=3237959

Sorensen, D.P. and Miller, S.E. 2017.Financial accounting scandals and the reform of corporate governance in the United States and in Italy, Corporate Governance, Vol. 17 No. 1, pp. 77-88. https://doi.org/10.1108/CG-05-2016-0125

Petra, S. and Spieler, A.C. 2020. Accounting Scandals: Enron, Worldcom, and Global Crossing, Baker, H.K., Purda-Heeler, L. and Saadi, S. (Ed.) Corporate Fraud Exposed, Emerald Publishing Limited, pp. 343-360. https://doi.org/10.1108/978-1-78973-417-120201022

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