Enron Scandal and the Implementation of Sabane-Oxley Act 2002

This essay discusses the Enron scandal, one of the most famous corporate scandals, and how it led to the implementation of the Sabane-Oxley Act 2002. It explores the facts of the case, the unethical practices involved, and the impact on the company and the economy. The essay also highlights the ethical principles that companies should follow to prevent corporate fraud.

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BUSINESS LAW AND
ETHICS

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TABLE OF CONTENTS
1. INTRODUCTION…………………………………………………….03
2. MAIN BODY
(i) Facts of the Case………………………………………………03
(ii) Enron Scandal…………………………………………………03
(iii) Ethical Principles which Should be Followed by Companies..04
(iv) Enactment of Sabane-Oxley act 2002………………………….05
3. CONCLUSION………………………………………………………..06
4. REFERENCES………………………………………………………..07

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1. INTRODUCTION
A business is formed primarily to gain the profit from the transactions which the business
is carrying on. There is a long debate going on regarding that how a business should maximize
its profit. The general principle is that a business must not do some unethical acts for the purpose
to increase their profit. The ethics plays a very important role in carrying out the business
activities. If the business organization will do the business by following certain ethics towards its
customers and shareholders, the brand image of the business will increase which will lead in the
growth and success of the business organization. Nowadays it has been seen that companies for
getting more profit, are adopting various unethical modes. These companies are doing fraud or
misrepresentation of their accounts to hide the actual condition of the company to the general
public. The one of the famous corporate scandal which was done by Enron in the early 2000s
which is commonly known as Enron Scandal. In this essay the researcher will be focusing upon
this corporate scandal and how this corporate scandal lead to the implementation of Sabane-
Oxley Act 2002.
2. MAIN BODY
Facts of the Case
Enron Corporation was an American Company which was having its headquarter in the
Houston, Texas. The Enron was founded in the year 1985 when two American companies
merged that were Houston Natural Gas & Internorth. Before this company went through
bankruptcy, it was showing that it is making huge profit. The Enron Corp was a major electricity
and natural gas company. In the year 2000 it has claimed that its revenue is around $200 billion
which was later found that, it was misrepresented to attract the investors. It is also the fact that
the Fortune has named the Enron as the “America’s Most Innovative Company” from 1996 to
2000(Abd Rahman, 2019).
Enron Scandal
In the end of 2001 it was found that all the accounts which were showing the profit of
Enron Scandal were misrepresented and due to this the company’s value of shares fell down
drastically. This resulted in the bankruptcy of the Enron Corp and through this only this
corporate scandal was disclosed. From that time Enron scandal has been regarded as one of the
most important example of willful corporate fraud and Corruption. This scandal which was
done in the year 2001 had also questioned the accounting practices and business activities of
many companies in United States of America as this was the time period when many such
corporate scandals had happened. These corporate scandals are regarded as failure of corporate
governance in the company. In Enron Corp. also the same has happened where some of the
directors of the company were directly involved in this fraud and others were negligent, due to
which only this corporate scandal was happened. This scandal was done by the upper officials of
the company for the purpose so that their personal financial greed could be satisfied. When this
scandal was disclosed in the year 2001, it was found that the financial statements of Enron were
highly institutionalized and it was very creatively planned to do such financial fraud(Allen and
Kraakman, 2016). The auditors who were auditing the accounts of the Enron Corp were also

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either negligent or involved in auditing the accounts of the company which was also the reason
of this corporate fraud. The Arthur Andersen which was a leading accounting firm in United
States who was negligently auditing the accounts and financial documents of Enron was also
dissolved as per the order of the court.
Further after this disclosure, the Enron has filed for the bankruptcy at the end of 2001.
The proceedings related to its bankruptcy was ended in the year 2004 and the court has ordered
for a plan of reorganization. After this new board of directors were formed by changing the name
of the company to Enron Creditors Recovery Corp and reorganized and liquidated various assets
of the pre-bankrupt Enron. In the year 2006 the life of this business came to a total end when it
sold its last business of Prisma Energy International Inc to Ashmore Energy International
Ltd(Ashcroft, Ashcroft and Patterson, 2016).
This scandal has not only affected the image of the company but also the people who
were working their because due to this scandal people who were working there lost their jobs.
This scandal has also affected the economy of the country also because stakeholders and
investors lost their trust and interest in the market due to which the flow of money which was
coming previously in the market was also hindered.
Ethical Principles Which Should be Followed by Companies
Ethical principles are nowadays discussed in the view of various corporate scandals
which have taken place in previous years. These discussions are majorly based upon the
professional misconduct and illegal practices. The investors and stakeholders of the companies
trust these corporations and it is the duty of these business entities that they act towards them in a
responsible manner. The corporate scandal which was happened in Enron was based upon
various factors such lack of ethical leadership and failure of corporate governance. The following
are the certain ethical principles which each company has to follow in order to prevent any type
of corporate fraud within their organization:
Ethical Leadership and Decision Making
It is a proven fact that if the leader of the business will follow all the ethics of a business,
its staff members will also do the same. So it is recommended that the upper management of the
company who are responsible for all the decisions of the corporation must act in ethical and
responsible manner in order to prevent any type of corporate scandals(Beatty, Samuelson and
Abril, 2018).
Corporate Governance
Corporate governance can be regarded as set of all the rules, policies and regulations
which each company and its members have to follow for the smooth running of the corporation.
It is highly recommended that the directors and owners of the company must ensure that each
member of the corporation is following these rules related to corporate governance. Majority of
the times it has seen that because the upper management was negligent about the corporate
governance policies which become the reason of corporate fraud and corporate scandal.

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Protecting the Rights of its Stakeholders
These stakeholders and investors are the people who are the actual reasons behind the
success of the company. So each company must protect their interest and any type of corporate
fraud would not be done with them. If any fraud would be done with them by the organization, it
will amount to unethical behavior(Cartwright, 2016).
Enactment of Sabane-Oxley Act 2002
The Sarbanes-Oxley Act of 2002 refers to a federal law which is mainly established to
sweep auditing as well as financial regulations from companies lie under public sector. Here,
lawmakers have created legislation for helping shareholders, protect employees and public from
any kind of accounting errors or fraudulent practices in finance. This legislation, also known as
SOX, that sought to improve the reliability of financial reporting of public companies and restore
the confidence of investors in wake of the high-profile cases regarding with corporate crime. In
addition, George W. Bush, The Former U.S. President has signed this act on July 30, 2002 into
law, with aim to regulate the financial reporting including other business practices run within
publicly traded firms. Although, provisions of this act also applies to all enterprises, private
companies even not-for-profit organizations, for stopping fraudulent activities. Along with this,
SOX established further penalties with its provisions for non-compliance. This act also enforces
by SEC i.e. Securities and Exchange Commission (SEC) and was named for sponsors - U.S. Rep.
Michael Oxley, R-Ohio and U.S. Sen. Paul Sarbanes, D-Md.
Concerning on corporate scandals in the beginning of 21st century, Federal lawmakers
also enacted SOX. One of such scandal includes energy firm The Enron Corp. Enron, which is
considered as one of the most successful, innovative and largest companies in U.S. in 2000, has
unveiled for running fraudulent practices into its business within two years, where criminal
activities done by executives came to limelight.
The SOX Act is categorized into 11 main sections, among which Section 302 and Section
404 are lie under the same.
Here, Section 302 relates with "Corporate Responsibility regarding with Financial
Reports”. According to this section, CEOs and CFOs of companies who are responsible mainly
for internal accounting controls, are needed to review all financial reports including the reports
which are "fairly presented" as well as do not contain any kind of misrepresentations. While
Section 404 deals mainly with " Internal Controls Management Assessment" that assists firms to
publish details regarding with internal accounting controls. In addition to this, entire procedures
of financial reporting also need to be presented, where main responsibility of corporate
executives is to personally certify overall reliability and accuracy of business financial
statements. This would make executives more liable in individual manner, if SEC finds any kind
of violations against them (Fita Ortega,2020).

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Key provisions lie under Sarbanes-Oxley Act of 2002
 It is mandated of companies to maintain disclosure of every transaction and relationships
which are off-balance sheet and could affect financial status;
 near-ubiquitous prohibition related with personal loans from a business entity to its
executives;
 establishment of fines including terms of imprisonment for destroying or tampering the
documents within events of investigations or certain court action;
 requirements for attorneys that represent the public companies before SEC for reporting
security violations to their CEO.
SOX states that employees and associated people are protected against any kind of dismissal,
discrimination and retaliation, it they report fraud and/or testify about fraud committed by their
employers (Hodge, 2017).
Auditing under SOX
SOX after establishment assists companies to new requirements for effective corporate
auditing practices. Including its many requirements, it is essential for public corporations to
employ independent auditors for reviewing accounting practices. In addition to this, it has also
created various rules for duties separation by detailing various non-audit services where, during
audits a company's auditor cannot perform the same. Such rules are designed for further guarding
against any kind of fraudulent financial practices (Jones, 2019). SOX also critics from beginning,
including various executives who felt unfairly burdened in terms of dishonest, negligent acts and
more by new regulations due to the. Here, critics also charged the act which was a politically
motivated reaction to albeit high-profile including financial scandals of corporates.
3. CONCLUSION
It can be concluded by the above essay is that Enron Scandal was one of the most famous
corporate scandal in the past due to which the Sabane-Oxley Act 2002 was enacted. Due to this
enactment all the financial accounting practices were modified to a greater extent. It is highly
recommended that all the business must follow the ethical principles while doing the activities
related to the business. For this various ethical principles were also discussed by the researcher.
These types of corporate scandals not only impact the brand image of the corporation who has
done this scandal but also the whole economy of the country.
4. REFERENCES

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Books & Journals
Abd Rahman, H., 2019. Offer and Acceptance in Islamic Law of Contract. Jurnal Syariah, 8(2),
pp.15-32.
Allen, W.T. and Kraakman, R., 2016. Commentaries and cases on the law of business
organization. Wolters Kluwer law & business.
Ashcroft, J.D., Ashcroft, K. and Patterson, M., 2016. Cengage Advantage Books: Law for
Business. Cengage Learning.
Beatty, J.F., Samuelson, S.S. and Abril, P., 2018. Business law and the legal environment.
Cengage Learning.
Cartwright, J., 2016. Contract law: An introduction to the English law of contract for the civil
lawyer. Bloomsbury Publishing.
Chandrika, M.P., 2016. A Comparative Analysis of UK and Indian Provision relating to
Intention under Law of Contract. International Journal of Law and Legal Jurisprudence
Studies, 3(4).
Fita Ortega, F., 2020. Essentials of the contract of employment.
Hodge, P.S., 2017. Judicial Development of the Law of Contract in the United Kingdom. Geo.
Wash. L. Rev., 85, p.1587.
Jones, L., 2019. Introduction to business law. Oxford University Press, USA.
Smith, D.G. and Williams, C.A., 2018. Business Organizations: Cases, Problems, and Case
Studies. Aspen Publishers.