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

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
3

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.
4