Failure of Ethical Corporate Governance: Enron Scandal and Sarbane-Oxley Act 2002

This article discusses the failure of ethical corporate governance in the Enron scandal and the enactment of the Sarbane-Oxley Act 2002 to prevent such scandals in the future. It explores the relationship between ethical corporate governance and the act, and the principles that should be considered for a strong corporate governance. Recommended actions for directors to enhance brand value are also provided.

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BUSINESS LAW AND
ETHICS

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Table of Contents
INTRODUCTION...........................................................................................................................3
PROJECT 2......................................................................................................................................3
Introduction to the Case..............................................................................................................3
Facts of Enron Scandal................................................................................................................3
Ethical Corporate Governance and Overview of Sarbane-Oxley Act 2002...............................4
Relationship Between Ethical Corporate Governance and Sabrane-Oxley Act 2002................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

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INTRODUCTION
Success of a business is dependent upon various factors. One of the factor upon which the
success of the business will be based is business ethics which all the business organisations
should follow. It is a fact that the main aim of formation of any business is gaining profit but the
people who are running the business for profit motive must ensure that activities through which
they are receiving profit must be ethical in nature. If an organisation will follow the ethics while
doing business it will create positive impact in the eyes of the general public and due to this the
brand value of business will improve. Doing business by following the ethics will ensure that the
brand image of the company get improved in the eyes of the general public. The business has to
follow various laws and regulations also passed by the legislature in order to ensure the smooth
functioning of business. In the second part of this project the researcher will examine that how
Enron Scandal has contributed in failure of Ethical Corporate Governance due to which a
new legislation Sabane-Oxley Act 2002 was passed.
MAIN BODY
PROJECT 2
Introduction to the Case
This report will talk about the failure of ethical corporate governance in the Enron which
is popularly known as Enron Scandal. In this scandal it was disclosed that the accounts of
Enron were mismanaged and there were many irregularities in those financial accounts of the
company which lead to the failure of ethical corporate governance in Enron. As this scandal was
disclosed in the year 2001, one act was passed to prevent these types of corporate governance
failure namely Sarbane-Oxley Act in the year 2002. This act was passed for the purpose so that
these types of fraud can be prevented in the future because these types of scandals leads in losing
trust of the investors towards the market. If the investors will lose the interest in market, they
will invest less money and due to which the economy will get badly affected(Gunning, 2017).
Facts of Enron Scandal
The Enron Corporation was founded in the year 1985 after two companies got merged in
United States of America. From the year 1996 it has got the title as “America's Most
Innovative Company” till 2001 because it was shown through its financial statements that the

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company is making huge profit but the reality was somewhat different(Zhang, 2020). Showing
outstanding profit was the conspiracy which was done by the owners of Enron and were doing
business in a fraudulent manner by misleading people and their investors regarding their actual
position. Due to this financial fraud the value of the shares of Enron fell down from $90.75 each
to $0.67 each. The company was declared as bankrupt and the people who had invested in the
company lost their money. Due to the failure of the ethical corporate governance in Enron many
of its employees lost their jobs. After this failure the Sabane-Oxley Act 2002 was legislated due
to which a significant change in the presentation of the financial accounts of the company were
introduced. The Enron has manipulated its investors for a long time by showing that their
company is the best place to invest their money. Due to this failure of corporate governance only
the life of Enron came to an end.
Ethical Corporate Governance and Overview of Sarbane-Oxley Act 2002
A success of any business organisation is directly dependent upon the ethics which it
follows. Following ethics leads in enhancing the image of the business in the minds of general
public. Ensuring the ethical corporate governance in any company is the best way to ensure the
growth of the business(Zalata and Roberts, 2016). Corporate governance can be defined as the
combination of various laws, rules and regulations which a company has framed to carry on its
day to day activities. The main aim for which any business get formed is to gain profit but the
company or any other business organisation should ensure that they are earning the profit by the
proper means by following the ethics and not through any fraud or any other illegal means. It has
seen many times that many reputed companies has fooled its investors by showing false financial
accounts to gain illegal profits. They also use certain anti competitive activities in order to get
upper hand over its competitors. The main aim for ensuring a strong ethical corporate
governance is to prevent such activities in the business organisation in order to protect the rights
of its investors and shareholders(Moore and Petrin, 2017).
Implementation of a strong Ethical corporate governance is one of the biggest challenge
for a company because the corporate governance should be framed in such a way so that it can
monitor each and every employee of the company because mistake of one employee can also
lead to failure of corporate governance which will ruin the image of the company. There are
various principles which should be taken into consideration while framing the policies related to
corporate governance in a company. Some of them has been discussed following:

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Accountability: Majority of the time it has seen that the main reason for the failure of
corporate governance are its owners and directors only. They do some fraudulent act in order to
fulfil their financial needs. As these people are directly accountable to the stakeholders and the
investors of the company, the corporate governance must be framed in such a way so that the
upper management of the company could be efficiently monitored.
Fairness: IT should be taken into consideration that the policies which are framed for
corporate governance are fair in nature for all the stakeholders. It should be taken into
consideration that in a company there is a proper forum through which the stakeholders and
investors can address their grievances and it should be ensured that all the shareholders of the
company must be treated equally(Poole, 2016).
Transparency: Having transparency in the policies which are framed for ensuring a
good corporate governance is also necessary as it will gain the trust of its investors that in this
company proper mechanism exist which will protect them from any fraudulent act(Siliquini-
Cinelli and Hutchison, 2019).
The main aim of enacting Sabarne-Oxley Act 2002 was to ensure that in future the
failure of ethical corporate governance due to the fraudulent act of its owners or employees
should not happen. In the early 2000s there were many companies in which this failure has
happened and one of the scandal which got disclosed was of Enron Corporation. Public
Company Accounting Oversight Board has enacted this act. By passing of this act it was also
ensured that the person who will be disclosing any such scandals who is known as whistle
blower, his rights should be protected and his security must be ensured. This act has made certain
provisions through which the directors of the company can be held liable in case where any
discrepancy would be found in the accounts of the company. It has also improved the audit of the
financial accounts of the company by establishing a quasi public institution which will be
regulating all the audit activities in the company.
Relationship Between Ethical Corporate Governance and Sabrane-Oxley Act 2002
As in the year 2001 the market was badly affected due to Enron Scandal and to prevent
these types of scandals in future this act was enacted. Enactment of this act has ensured a good
corporate governance in the company(Smits, 2017). This act has also changed the way that how
financial accounts will be presented before the auditing authority. It has also imposed high
amount of penalties upon the company if any such failure takes place because failure of

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corporate governance not only affect the concerned company but the whole market and the
economy of the nation. To prevent these types of corporate scandals in the future this SOX was
framed by Paul Sarbanes and Michel Oxley.
CONCLUSION
In this part of this project it was discussed that how Enron Scandal has given the birth to
a new act which is Sarbanes-Oxley Act 2002. It was also discussed that how the failure of
corporate governance in the company affects the market and what all principles should be taken
into consideration while making a strong corporate governance. It was also seen that these types
of scandals take place which lead in failure of corporate governance in those corporation only
where either the upper management is too negligent while monitoring the activities of the
corporation or they are actively involved in such scandals. It is recommended that the directors
should focus upon enhancing its brand value because it will give huge profits to the company in
a long run.

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REFERENCES
Books & Journals
Gunning, J., 2017. Assisted Conception: Research, Ethics and Law: Research, Ethics and Law.
Routledge.
Moore, M. and Petrin, M., 2017. Corporate Governance: Law, Regulation and Theory.
Macmillan International Higher Education.
Poole, J., 2016. Textbook on contract law. Oxford University Press.
Siliquini-Cinelli, L. and Hutchison, A., 2019. More Constitutional Dimensions of Contract Law.
Springer International Publishing.
Smits, J. M. ed., 2017. Contract law: a comparative introduction. Edward Elgar Publishing.
Zalata, A. and Roberts, C., 2016. Internal corporate governance and classification shifting
practices: An analysis of UK corporate behavior. Journal of Accounting, Auditing &
Finance. 31(1). pp.51-78.
Zhang, K., 2020. The History and Reality of the Market Failures Approach to Business Ethics.
SPICE: Student Perspectives on Institutions, Choices and Ethics. 15(1). p.5.