Enron Fraud Scandal: Ethical Corporate Governance and the Sarbanes-Oxley Act

This article provides a brief description of the Enron fraud scandal, focusing on ethical corporate governance and the Sarbanes-Oxley Act. It discusses the case study, ethical law breaches by Enron's chief director, and the impact of the scandal on the corporate sector. The article also provides relevant information about the Sarbanes-Oxley Act and its role in preventing unethical actions related to accounting and auditing.

ENRON FRAUD
SCANDAL

Table of Contents
INTRODUCTION ..........................................................................................................................2
Brief description of the Enron fraud scandal about ethical corporate governance and the
Sabane – Oxley Act of 2002........................................................................................................2
Case study....................................................................................................................................3
Ethical law breach by chief director of Eron...............................................................................4
Impact on of scandals at workplace:............................................................................................4
CONCLUSION................................................................................................................................6
REFERENCES...............................................................................................................................6

INTRODUCTION
Ethical corporate governance provides guldline to work in a mnaerr which ot break any
moral vaue of norm of sociaslty. It define accountlaiby, legality, trasperacny and complien
rulwes in legal mnner. But indlvuals for fulfil their person need, brek rules an poces of governce.
To iderstand this concet, Enron case has need takem.This report is brefly derfinr each part of
how eron scandel is done and the reason behin his frad, impact of this scandel on corporte sector.
It also guive relevent information regarding Sarbanes–Oxley Act.
Brief description of the Enron fraud scandal about ethical corporate governance and the Sabane –
Oxley Act of 2002
Ethical corporate governance is a combination of systematic policies and procedure
which help managers to flow and ethically conduct their business. Organizations to generate
profits, sometimes, intentionally or unintentionally behave engaged in unethical activities. TO
control or reduce these unethical actions, ethical corporate governance developed. It concerns
fiduciary duty, accountability, mechanism related wit audit. Paul Sarbanes & Michael Oxley
developed this act to protect the right of the investor by accurate and reliability of establishing
corporate discloser. This act is enacted in July 2002. Sections and procedures have enacted this
act which is related to financial as well as audit discloser, corporate. The main reason for passing
this act is to control accounting and corporate scandals. After, Enron accounting fraud case, it is
essential to make rules which prevent unethical actions related to accounting and auditing
(Bhasin, 2016).
Enron scandals the biggest financial fraud at that time in American history. its director breaks all
the rules regarding working ethically. Following is the description of how was engaged in the
accounting fraud and the way the government caught them and the impact of this act is defined
below
Case study
Enron was established in 1985. Key Kenneth Lay, key managerial person of Enron, to
establish this organization, merge Houston Natural Gas with Inter North, these cor[oration
engaged in dealing gas pipeline produce and serve to their customers. Enron trade electricity and
after approval of the government the organization started trading natural gas. In 1992, Eron

becomes the leading organization that sells natural gas. They start online trading through an
online website. The company is at its peak period, to enhance growth, Enron, apply a
diversification strategy, they start dealing in pipeline, electricity, paper-plastic, water plants, and
also provides broadband internet service in the global market. The stock price of this
organization increased from 1990 to 1998 after they apply diversification strategy, it goes down,
in 2001 the price of shares of Eron badly fell from 91$ to 1, it makes investors in shock that how
organizations share prices were falling at the highest rate. Shareholders of Eron filed a case
against the organization (Blanco, 2020)
During the investigation, it was found that the head department of Eron makes filled to the
shareholders by maintaining face accounting fraud financial statements.
Arthur Andersen was hired by Eron for their audit of the company's financial statements. But
they are also engaged in this scam.
The chief director of Enron was the mastermind of this scam as they mislead and give the correct
accounting information. Andrew Fast was the guide audit committee to not shown the real
document and hide all the loss deals from their shareholder. They also forced them to use the
mark to market strategy to record accounting documents.
They prepare a free side sheet, to hide, debt, and value of the toxic side from their investor.
The organization needs to pay more than 22 billion the American dollar to its creditors. It was
the biggest scam of American which changed the overall law structure related to account and
auditing regulations.
Ethical law breach by chief director of Eron
Inappropriate use of the company's assets: Director of Enron was using assets of this
organization for their personal use. It is unethical behaviours and according to the rules
of Sarbanes–Oxley Act is based on the concept of the members of the company no can use the
organization's assets (Broni, Velentzas and Papapanagos, 2017)
Hiding real information:Andrew was hiding real profit value from its investor, they never
show the value of loss deals to their investors. Even its auditor hide and does not get a real
document to show the people. They not charged files for not paying tax and fulfil liability of
creditors, rather they engaged in provides support to its chief director in hiding information.

Making hidden profits: The main purpose of this accounting fraud by Andrew, is to make
secret profits by misrepresenting their investors. The financial assets of Mr. Andrew in those
years went more than their real income which the organization gives them for their work.
The exploitation of investors: These unethical activities directly impact the worth of
shareholders who invest in Enron. They were morally felt depressed and they even don't know if
the organization will be able to pay their money or not. As per the Sarbanes–Oxley Act, it was
against the law and every person is liable to pay a fine for using personal assets.
Improper audit of documents: Not only chief director, but Arthur Andersen will also libel to
not fulfil their duty in ethical manner. Government sue on them for unethical behaviour as
conducting inappropriate auditing is also charger in unethical business activities (Eckhaus and
Sheaffer, 2018)
Impact on of scandals at workplace:
CEO of the Company is sue against engaged in unethical business activities. They will be
liable for charging fee. Jeffrey Killing becomes the new CEO of the company and reorganization
pan was approval by them. Name of the company has been changed, from Enron corporation to,
Enron Creditor ,Recovery Corporation. The whole structure of this organization has been
changed its workforce is negatively impact from this scandal, workers is not believe in this
organization. Ration of employee turnover get high. They face lack of trust, communication gap
issue organization workplace.
Arthur Anderson is considers as one of the most famous audit corruption in entire world, but it
dissolution after this scandal.
Charged filed against Enron breach rule of ethical corporate governance
Enron had faced more then 5.91 million of loss in this current year and their debt liability
was around 700 million $. Enron treated as bankrupt corporation and penalties charge against
this organization .
The company pay $ 21.7 million to their creditors (Kim, 2016)
Arthur Andersen charged against obstructing justice and not providing relevant information for
its shareholder.
Executive of Enron was found guilty by breaking the rule of ethical corporate governance of
conspiracy, security fraud, and insider trading.

CEO of Enron was charged with wire fraud, security fraud, and using corrupt business policies.
For this, they get 5 years of prison. And paid penalty charged also. Their directorship number is
also sealed by the government ((Mustafa, 2020)
Sarbanes–Oxley Act established and in this act following rules and sanctions has been
made in order to prevent and control issues arise of financial fraud.
It has 11 sections that are related to rules of ethical corporate governance, criminal penalties,
disclosure of financial assessment, structure rule regarding auditing procedure, and penalties of
insider trading scandals.
Section 1 is related to the Public Company Accounting Board, which is formulated to define
audit procedure, concept, policies compliance with auditing manner.
Section 2 is defined the power, and responsibility of external audits to, their rules and way of
audit all relevant documents.
Section 3 compliance with section and define corporate responsibility of audit. It defines the
responsibility of the internal and audit committee, filing reports,. It includes penalties charge
breaching rules (Petra and Spieler, 2020).
Section 4 is made to enhance companies to disclose their real financial disclosures.
Section 5 and 6 are related to charging penalties against interest and build secret profits.
Section 6 and 7 related to securing the interest of investors.
Section 8 is related to a criminal fraud case related to accountancy. This section definer penalties
chard on personal for alternation, misusing, and manipulate financial statements.
Section 9 also deals with a criminal offense and the last 2 sections define charges of not paying
tax liabilities.
The main purpose behind the enaction of this act is to control or prevent further Enron
accounting fraud. It is the duty of the management department to use an effective management
information system and work in an effective manner. In order to not engaged with this type of
insider trading activity. It helps them to maintain a position in the market place (Rupp, 2020)
CONCLUSION
From the above analysis, it has been concluded that individuals to make their profit, engaged in
unethical business activities which are against the legal constitution. They asker secret profit and
hide real information, they enjoy the property of the business corporation all these activities

violate rules of ethical corporate governance. The American government, to prevent the right of
investors, enacted the Sarbanes–Oxley Act. Which define all the relevant law regarding
accounting and audit fraud.

REFERENCES
Books and Journals
Bhasin, M. L., 2016. Fraudulent reporting practices: the inside story of India's Enron.
International Journal of Management Sciences and Business Research.
Blanco, S., 2020. The Manifestation of Fraud in Language: An Enron eMail Corpus Case Study
on Fraudulent Language Markers (Doctoral dissertation, Hofstra University).
Broni, G., Velentzas, J. and Papapanagos, H., 2017. Marketing Ethics and Communication
Strategy in the Case of Enron Fraud. In Advances in Applied Economic Research (pp.
269-278). Springer, Cham.
Eckhaus, E. and Sheaffer, Z., 2018. Managerial hubris detection: the case of Enron. Risk
Management. 20(4). pp.304-325.
Kim, Y. H., 2016. Effectiveness of the Sarbanes Oxley Act on Corporate Governance: Evidence
from Executive Turnover. Journal of Applied Business Research, Forthcoming.
Mustafa, R. M., 2020. Case analysis: Enron; Ethics, social responsibility, and ethical accounting
as inferior goods?.
Petra, S. and Spieler, A. C., 2020. Accounting Scandals: Enron, Worldcom, and Global
Crossing. In Corporate Fraud Exposed. Emerald Publishing Limited.
Rupp, A., 2020. Securitization and earnings management: evidence from the Sarbanes–Oxley
act. Journal of Financial Regulation and Compliance.