Enron Scandal: Corporate Governance Failure and the Sarbanes-Oxley Act

This report discusses the Enron scandal, a corporate governance failure that led to the bankruptcy of the company. It explores the key takeaways of the scandal, ethical corporate governance issues, and the new regulation introduced in the form of the Sarbanes-Oxley Act. The evaluation of the Sarbanes-Oxley Act in relation to the Enron company is also discussed.

Individual report

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Overview of case.........................................................................................................................3
Key takeaways of the scandal......................................................................................................3
Ethical corporate governance issue in Enron scandal..................................................................4
New regulation (Sarbanes-Oxley Act) after scandal.................................................................5
Evaluation of Sarbanes-Oxley Act in term of Enron company...................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Ethical corporate governance refers up to processes and policies which a company have to
properly place while dealing with issues to administer and conduct ay to ay business. Ethical
values in the important aspect which tends to say all about organization. This helps firm to focus
on best possible product and service offering to their customer (Mustafa, 2020). Company Enron
is the merger of two natural gas transmission companies, Houston Natural Gas Corporation and
Inter North, Inc in the year 1886. In this report there will be discussion on the Enron corporate
scandal in year 2001 October leaded to bankruptcy of the firm. The case will be discussed in
relation to Sarbanes -Oxley Act of 2002.
MAIN BODY
Overview of case
In the late 90’s, Enron corporation have been widely acknowledging as one of the
pioneering firmer of nation. The firm is constantly operating in gas line and constructed power
plants owing level of popularity with distinctive trading business. Enron was featured as the
banner for top electricity, pulp and paper, natural gas line and communication corporation
worldwide. In the latter half of 2001, the firm have ben declared bankruptcy. Before the critical
situation, company yearly revenues have been increased roughly nine billion dollars in year 1995
to more than one hundred bullion dollars five year later (Luke, 2018). Several years before firm
bankruptcy, the government have de regulate with oil & gas industry allowing to have more
competitions. But this deregulation has made up easier for companies to act in more fraudulent
manner
But in end of 2001, the world has experienced shocking revelation about company supposed
financial condition to greater extent been sustained by the systematic, long standing and
innovation way of accounting fraud. As per the review of researcher, the firm stock price dip
from mi of 2000 of 90 dollar per share was not even 1 dollar by time of losing for next year. this
have resulted up in the losing up the shareholder amount of around 11 billion dollars. In the
further year analysis reviewing 5-year financials statement reported losses of 586 million dollars
turning out to declared bankrupt on December 2 ,2001.
Key takeaways of the scandal
Leadership fooling up
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Enron leadership have fooled up regulator with the fake holding and off book accounting
practices. The firm have peaked up the share worth $90.75 just prior to be declare as bankruptcy
in year 2001 and after towards trading at $0.26 (Dibra, 2016.). The Enron boards admitted the
certain oversight of failure which have inclusion of inadequate internal control which are poorly
monitored, failure in exercising the vigilance at sufficient level, failure in insisting proper flow
of information.
Special purpose vehicles (SPV)
Enron have used up the Special purpose vehicles or special purpose entities for hiding up
mountains of debts a toxic asset from investor and creditors. The SPV have been utilized for
concealing rated of accounting rather than focusing on imparting results
The firm have transferred up portion of assets and rising marketable value to the special
economic vehicle taking out cash or not in return. this have indulged on reduce counter party
risk. As pr the ethical corporate value, creating up the SPV anno be termed as illegal but in the
comparison of securitizations but in relation of debt, it could be termed as worst. It is impossible
for many investor and creditors to understand the complexity of transaction involved in SPV.
Hence the result company have paid up the creditors more than $21.7 billion from year 2004 to
2011 (Na,. and Younies, 2020). The corporation are compromised with special economic
entities are won’t be able to hedge up deteriorating market prices of stocks. The company have
faced up significant conflicts with respect to SPV.
Market to market (MTM) in the Enron scandal.
Enron CEO Jeffrey Skilling have transited accounting practice for historical cost accounting
method mark to mark accounting. The accounting practice have received up approval from the
securities and exchange commission during 1992. This practice reports up fair value of different
liabilities and asset for given duration and financial period (Aguilera, Judge, and Terjesen, 2018).
However, this method have get up with several manipulation which cause miserable failure to
business being reported as expected profits as actual on.
Ethical corporate governance issue in Enron scandal
Corporate governance check and balance the firm activity but also detect unethical
practices. This is the organizational arrangement which is helpful in serving interest of its
investors. The company board of directors have to look into executive compensation scheming
to all bankruptcy laws.
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The scandal is being significant in term of learning perspective of both financial and experienced
professionals. The scandal evaluate importance of strong corporate governance is only key to
success for any business to sustain and drive out profitability. Additionality it has taken by
insight regrading importance of accounting policies to be used and applied. any level of misuse
with policies will rut in drastic impact in business health (Bhatt, and Bhatt, 2017). The ethical
dilemmas Enron have been used by the enterprise in way of hiding up huge amount of debt from
investors. It has the ethical practice which is fully disclosing the up financial situation rather
than reflecting bad financial position.
In case of the Enron bankruptcy several employees have lost up with perks and pension
benefits verge of financial crisis. The crisis has been so deep as shareholder have lost amount
estimated value of $74billion. Such corporate fraud should be taken as learning why regulation
and compliance are necessary. Overall corporate governance was weak for Enron company as
board of directors are the group of people who have lack in moral character. They often willing
up negligence themselves in fraudulent activity for genuine root of corporate governance failure.
New regulation (Sarbanes-Oxley Act) after scandal
Enron collapse and financial havoc have wreaked up its shareholder and employees to the new
legislation and regulation. This will be helpful in promoting financial accuracy and reporting
publicly being within companies. in year 2002 July, President George W. Bush signed into law
the Sarbanes-Oxley Act. The act has properly heightened up the respective consequences for
destroying, altering and fabricating financial statement and trying out to defraud shareholders
(Detthamrong, Chancharat, and Vithessonthi, 2017). As per the researcher states, the act is
mirror image of Enron as company which have perceived up corporate governance falling
matching up virtually point in principal provision. The act has created up strict new rules for
accountant, auditors and corporate officer with imposed stringent recordkeeping requirement.
There ae new criminal penalties for violating securities law.
The act have been established up with cut down the incident of corporate fraud drafting up
by U.S. Senator Paul Sarbanes and U.S. Representative Michael Oxley protecting the investors
through improving up the accuracy and reliability regarding corporate closure in the financial
statement. They are following point are-
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Closing up loopholes in practice or accounting and strengthen up corporate governance
rules. There have been strengthening up the whistle blower protection and compliance
monitoring along with increase in penalties for corporate and executive malfeasance
Increasing accountability term along with requirement of discloser in corporation especially
with corporate executives, and corporations’ public accountants and auditors. There is need for
transparency between shareholder and description of financial transaction.
There is compete authorizing creation of public company Accounting Oversight Board
(PCAOB) in order to monitor corporate behaviours specially in term of accounting (Gu, and
Zhang, 2017). Beside the financial side, SOX will also have requirements for information
technology departments with electronic records. The act doesn’t specifies set of busines practices
but define records needed o be kept in file and for much duration.
Evaluation of Sarbanes-Oxley Act in term of Enron company
At the time, Enron collapse have been the biggest corporate bankruptcy hitting up world at
financial level. This scandal has drawn up the clear attention to the heat breaking accounting and
corporate frauds as it has caused loss of around $74 billion to shareholders in the last 4 years.
This have led them to be bankrupt and its employee to have lost of billion pension benefits.
Increase regulation under SOX act have keep the oversights enact to help out the
prevention from corporate scandal of Enron magnitude. However, many companies out are still
reeling up with damage caused up by Enron. Most recently, a judge granted investment Toronto
based for right to sue up Enron CEO Jeffrey Skilling, Credit Suisse Group AG, Deutsche Bank
AG, and Bank of America's Merrill Lynch unit over losses which are incurred with purchasing
up of Enron shares on March 2017.
As in response to collusion between Enron and public accounting firm Arthur Andersen &
Co. concerning Enron's fraudulent behaviour, SOX have changed the working out of corporate
deals in term of financial auditors. Enron board inattentiveness and unresponsiveness behaviours
have been the major reason for staggering failure (Bhabra, and Hossain, 2017). There is need to
have highly substantive provisions intending to support out public confidences in financial
market. This have to lead in prevention in corporate malfeasance and enchasing financial
reporting integrity. But SOX have not constituted much fared federalization in corporate
governance.
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SOX have been the torch in corporate responsibility movement but not collective substances
for provision of governance. There is change in landscape for public, non-profits and non-pubic
companies. It helps out in shaping up the focusses of different states courts a regulator to look
upon proper application regarding fiduciary duty law.
Hence in the wake of Enron disaster, the US congress have acted together bringing out
landmark passed SOX as a complex piece of legislations designed to prevent the corporate fraud
such as massive scale. Enron disaster have been warning sign as ominous foreshadowing of
complex derivative instruments really o be understood.
CONCLUSION
From the above file it can be conclude as Company Enron is the merger of two natural
gas transmission companies, Houston Natural Gas Corporation and Inter North, Inc in the year
1886. Company yearly revenues increased nine billion dollars in year 1995 to more than one
hundred bullion dollars five year later. Enron have been used by the enterprise in way of hiding
up huge amount of debt from investors (Chang, and Choy2016.). Overall corporate governance
was weak for Enron company as board of directors are the group of people who have lack in
moral character. Sarbanes-Oxley Act created as strict new rules for accountant, auditors and
corporate officer with imposed stringent recordkeeping requirement. this helpful in protecting the
investors through improving up the accuracy and reliability regarding corporate closure in the
financial statement.
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REFERENCES
Books and Journals
Mustafa, R.M., 2020. Case analysis: Enron; Ethics, social responsibility, and ethical accounting
as inferior goods?.
Luke, M., 2018. The Enron Scandal. Main Reasons for the Downfall of the Company. GRIN
Verlag.
Dibra, R., 2016. Corporate governance failure: The case of Enron and Parmalat. European
Scientific Journal, 12(16).
UKA, I.K., A Paper on the Causes of Corporate Failure A Case Study of Enron Scandal Case.
Na, T. and Younies, H., 2020. Corporate governance: on the crossroads of meta-regulation and
social responsibility. Journal of Financial Crime.
Aguilera, R.V., Judge, W.Q. and Terjesen, S.A., 2018. Corporate governance deviance.
Academy of Management Review, 43(1). pp.87-109.
Bhatt, P.R. and Bhatt, R.R., 2017. Corporate governance and firm performance in Malaysia.
Corporate Governance: The international journal of business in society.
Detthamrong, U., Chancharat, N. and Vithessonthi, C., 2017. Corporate governance, capital
structure and firm performance: Evidence from Thailand. Research in International Business and
Finance, 42, pp.689-709.
Gu, Y. and Zhang, L., 2017. The impact of the Sarbanes-Oxley Act on corporate innovation.
Journal of Economics and Business, 90. pp.17-30.
Bhabra, H.S. and Hossain, A.T., 2017. The Sarbanes-Oxley act and corporate acquisitions.
Managerial Finance.
Chang, H. and Choy, H.H., 2016. The effect of the Sarbanes–Oxley Act on firm productivity.
Journal of Centrum Cathedra.
Online
Enron Scandal: The Fall of a Wall Street Darling.2020.[online]Available through. <
https://www.investopedia.com/updates/enron-scandal-summary/>
Enron Scandal. 2020.[online]Available through.< https://graduateway.com/enron-scandal-
summary/>
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