Business Law and Ethics: The Case of Enron Corporation

This report discusses the implications of business laws and ethics in the case of Enron Corporation, including the accounting scandal, unethical practices, and the outcome of the actions taken by the company. It also explores the importance of corporate social responsibility and the Sarbanes-Oxley Act in preventing fraudulent accounting practices.

Business Law and Ethics

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
ESSAY.............................................................................................................................................3
CONCLUSION................................................................................................................................5

INTRODUCTION
Business laws and ethics are two different terms that have become crucial for each and every
enterprise in recent scenario due to increasing fraud and unethical practices that adversely harm
individuals. Business laws are certain rules and regulations that control business operation for
betterment of people that are living in society. On the other hand ethics are moral principle and
values that guide individual whether particular action is right or wrong. This report is based on case
study of Enron corporation that have incorporated unethical practices in order to over-show its
profit margin. Therefore, report includes key information such as discussion of implication of law,
related case and outcome of particular action that are taken by company.
ESSAY
Enron is an American company that operates its business in energy industry that have
founded guilty for conducting accounting scandal in October 2001 that leads to bankruptcy.
Company have incorporated unethical practices in order to make misused of special purpose entities
and show more profit so that large number of investors are attracted to be part of firm. Management
of Enron have taken each steps to cooked the book or losses look much lesser than they actual are
and income higher than actually earned. Therefore, it can be stated that there are key issues in
accounting management that lead to fraud and unethical practices which lead to closure down of
enterprise in future circumstances. Such a unethical practices promoted by Enron have shaken stock
market and corporate governances as it have broken their trust and confidences level adversely
(What is the Enron Scandal, 2020). Enron before 2001, was transforming and diversifying its
business activities successfully that have contributed in increment of revenue from $10 billion to
$139 billion. But serious trouble happened when company diversified its business operations
beyond its core energy operation as it planned to invest in internet that have unlimited future. The
biggest mistake that company has done is heavy investment in marketer and service provider for
which it have taken heavy debt in order to have finance to various investments. Enron face
significant losses in foreign and other operations that resulted in losses or dried up of profit margin
of firms. So, management of Enron to cope up with such uncertain situation have decided to
incorporate unethical practices or misrepresentation of profit. Company by not disclosing true facts
and figure to interested stakeholders such as investors, customers, suppliers and employees have
broke trust of people. As many of the individuals have to loss their jobs, investors have to loss their
capital that resulted in less market confidences because it was felt that there is serious problem in
US system of security regulation.

In short, it can be clearly understood that there are issues related to corporate fraud and
accounting transparency and investors protection that are most important for growth and success of
organisations. Enron by not taking proper steps or ineffective management of accounting have to
cease its business operation, pay huge penality and fines (Miller, 2016). Thus, company by not
undertaking CSR or ethical practices and abiding to legal laws, rules and regulations have to
suffered number of losses.
There are numerous rules and regulations that are made in order to control and monitor
operation of business or corporation (large enterprise) which clearly states the way power and
accountability will flow in organization. It helps in distribution of task, roles and responsibilities
that need to be accomplished by particular individuals or represent chain of power, internal rules.
Thus, in other words, ethical corporate governances can be termed as process, policies that helped
in administrating, managing key issues and day to day operations of business. Corporate social
responsibilities emphasis that company need to socially accountable towards itself, public and
stakeholders that are interested in growth and success of enterprise (Cook, 2019). Enron by not self-
regulating its functions, activities that are beneficial for society such as true accounting information
to investors have to pay huge fines and penalties. So , it can be stated that company have not
undertaken social corporate responsibilities that resulted in distrusted among employees, investors
and customer's of Enron.
Sarbanes-Oxley acts it is law that is passed on 30 July with a main objective to protect
investors from fraudulent accounting practices that are followed by enterprise in order to show their
profit margin higher or less losses for building strong goodwill or market value. This act has came
into existences after financial scandal of few trading companies such as international plc, Enron
corporation and World.com (Sarbanes-Oxley Act, 2020). Such unethical or fraudulent practices of
management have shocked investors or impacted their confidence level in corporate financial
statements, so they demand laws or standard that need to monitor financial accounts so that no harm
can be caused to them. Therefore, Sarbanes Oxley is new strict rules and regulations that are
created for auditors, accountants or corporate officers so that accurate financial records can be
maintained. It also specifies additional penalties or punishment that have to be bear by individuals
for violating securities laws. The act is applied to case study of Enron as company have
incorporated accounting fraud that have caused loss of employment, capital to number of people
that are part of organisation.
World. Com is second largest telecommunication firm in United states that have went to
bankruptcy in 2002 due to incorporating unethical practices or over-showing its financial statement.
World.com accounting scandal is wide spread frauds and most shocking news that happened in

summer 2002 which state that balance sheet over showed $3.8 billion entries and overestimated
assets $11 billion. As a result the court has sentenced jail to CEO for 25 years and CFO to 5 years
for promoting fraudulent practices in the organisations (The Worldcom Scandal Explained, 2020).
There are number of individuals that are interested in growth and success of firm such as
employees, investors, stakeholders and management. It is responsibilities of company and
management to take crucial steps for benefits of all interested parties such as disclose true financial
statements. As it helps them to know exact financial positioning of firm or its overall profit and
losses during financial years. Due to digitalization people have become more aware about CSR
practices that are taken by organization so Enron by ignoring CSR or ethical practices have to cease
its operation. Both Enron and World. com are similar cases as they have incorporated fraudulent
accounting practices in order to show less loss or get benefits to special entities (Mahmood, 2020).
So as per act of Sarbanes Oxley, the management and senior executives are punished for hiding
huge losses that company have suffered due to diversification its business operation in different
areas to earn more return. In similar case of Enron, key individuals that are responsible for fraud are
charged to penalties or jailed for number of years so that same verdict can be applied to Enron. So,
that in future circumstances, no other enterprise can ignored social corporate responsibilities, ethical
values and legal laws while operating its business (Odongo and Wang, 2018). It also has been found
that management or senior executives of organization have not taken necessary steps as per
Sarbanes Oxley law, so they need to be penalized or jailed in order to protect interest of investors.
This law also increased accountability of auditing firms, more penalties or charges need to be bear
by organisation that will found altering its financial statement. Therefore, courts have taken correct
judgement to imposed varieties of charges and sentences to prison to individuals that are involved
in unethical practices. Such as Arthur Andersen have lost its licence to audit public companies as it
have been identified guilty for destroying document or accounting information that represent true
facts or positioning of enterprise in competitive market. The outcome of all punishment was that
shareholders and employees that have invested in capital of firm have received limited returns
(Boda and Zsolnai, 2016).
CONCLUSION
Form the above discussion it can be stated that companies in order to retained customer's
satisfaction and its operation in competitive market needs to abided to all legal laws made by
government. Enron and its management by ignoring CSR activities and ethical practices have to
suffered huge losses and even key person are sentenced to jailed for many years. So, government
after seeing such fraudulent practices adopted by enterprise have imposed new act named as
Sarbanes Oxley to retained or gain trust and confidence of investors. The law has helped in

regulating practices, different business operations so that true and fair picture of accounting can be
showed to interested people. It has been learnt from above discussion that Enron in order to protect
itself form penalties and extra charges has to make efforts to show accurate profit and losses that
have been earned or occurred by organizations in particular financial year. At last, it can be stated
that many companies are learning form case of Enron and World. Com to set prioritizes to
considered ethical values and moral principles to retained their market share and profitability.

REFERENCES
Books and journals
Boda, Z. and Zsolnai, L., 2016. The failure of business ethics. Society and Business Review.
Cook, M. L., 2019. Reflections on the Relationship between Law and Ethics. Adel. L. Rev., 40.
p.485.
Mahmood, K. S., 2020. Need for legal reform to regulate business ethics.
Miller, R. L., 2016. Business Law Today, Comprehensive. Cengage learning.
Odongo, N. H. and Wang, D., 2018. Corporate responsibility, ethics and accountability. Social
Responsibility Journal.
Online
Sarbanes-Oxley Act, 2020, [Online]. Available Through:
<https://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act>.
The Worldcom Scandal Explained, 2020, [Online]. Available Through:
<https://www.thebalance.com/worldcom-s-magic-trick-356121>.
What is the Enron Scandal, 2020, [Online]. Available Through:
<https://corporatefinanceinstitute.com/resources/knowledge/other/enron-scandal/>.