Enron Scandal and its Relevance to Corporate Governance and Sarbanes Oxley Act, 2002

This report discusses the Enron scandal, its impact on corporate governance, and the enactment of the Sarbanes Oxley Act, 2002. It highlights the need for transparency in accounting standards and independent auditing to protect the interests of investors and shareholders.

PROJECT

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Sarbanes Oxley Act 2002............................................................................................................5
Corporate Governance................................................................................................................7
CONCLUSION ...............................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
The corporate governance is the set of policies, rules and regulations which are used to
manage and direct the company. Its relevance has been increased after the rise in accounting
scandals in USA. The Enron scandal is the most famous scandal in the history of USA (Sorensen
and Miller, 2017). The use of fraudulent accounting practices resulted in activities which were
unethical and fraudulent in nature. This gave rise to enact a legislation, that is, Sarbanes Oxley
Act, 2002 to protect the interest of investors and bring transparency in accounting standard. This
report is based on Enron scandal of USA and its relevance to corporate governance and Sarbanes
Oxley Act, 2002.
MAIN BODY
Enron was a Energy trading company which was formed after the merger of two gas companies
named as Houston Natural Gas Corporation and Inter North. Initially company was constructing
gas pipeline but after deregulation of Gas distribution, the relaxation is been given to new
participants to enter into market. As there are many market player dealing into pipeline line
constructions, it eventually affected the market presence of Enron.
Now Enron transformed itself into electricity supplier and started trading into derivative
trading of the commodities like gas, freight, Coal, Paper and Pulp, etc. Due to there vast
knowledge and long market presence they were having sources to develop their own market
system. They have established its structure to trade amongst these commodities and started
making profit by not following transparent accounting practices. Enron started trading on over
the counter platform basis on New York Mercantile stock Exchange into energy trading market.
As the rapid growth of the market takes place after establishing its over the counter network it
had controlled more than 25% of trade. In 2000, enron's share price were around $90 per share in
the last week of 2000. As the financial analyst have a close check on the balance sheet, financial
report there were ambiguities into the practices adopted whilst calculating the profit as some of
the SPE's are showing up the assets on market value rather that fair value.
However the accounting firm of Enron were shuffling the assets offshore partnership,
many a times company was reporting inaccurate trading revenues by not disclosing the true
nature of transaction and the shaded business deals with the Special purpose entities. The

transaction made with other organizations, arrangements and obligations were not booked into
the financial reports submitted to Exchanges.
In October 2001 The Securities and exchange commission had begun an inquiry into Enron and
the partnership; a week later the inquiry had become a full investigation. Enron started
communication with government officials regarding its internal matters. The officials said that
the communication was with respect to information about issues involved into the matter which
need to be resolved. Enron have revised its financial reports for the previous years, and stated the
long term losses incurred during their previous year financial performances (Petra and Spieler,
2020).
The financial position of the company became weak and one of the competing company
have made it an offer to take over the company but due to lapse of time and no response from the
Enron, the deal was backed out. Enron have reported its downfall and trying to restructure its
business to have a backup its obligation.
Enron filed for bankruptcy proceedings and sued its competitor for wrongful termination
of failed acquisition. And the white house announced that the Department of Justice had begun a
criminal investigation on Enron.
The various factors which can be associated with the Enron's downfall with respect to the
Sarbanes oxley act are as follows:
As during their functioning into 1900 decade, the Company were busy in transacting
business without making the below mentioned disclosure such as no accountability of the
transaction as there were no responsibility of showing up financial reports to the Securities
Commission and Enron were trading off balance sheet transaction, arrangements which were
capitalizing the assets without disclosing the liabilities and obligations which have accumulated
the losses of years. Enron have formed many contractual relationship as an issuer with
unconsolidated entities which were not shown any liabilities associated with them. The company
was not complying with acquirements of showing up their current status as per accounting
standards. As there were no obligation to show up the commission the exact material correcting
adjustments that have been identified by a registered public accounting firm in accordance with
generally accepted accounting principles and the rules and regulation of commission.

The Enron was generating its working capital by issuing equity shares to the public and
raising up the funds on frivolous ground of strong capital market player without specifying its
correct position.
After sometime the Enron was offering to swap its equity with the original shares of its
company, and showing up strong financial position to its employees to raise money into the
market, but at the end of September, 2001 the dubious transaction were came forward and more
than 20,000 workers had left with loss. The accounting principles were not followed up by this
organization as it was the practice which had been follower up by Wall Street. The malpractices
have turned one of the biggest company of America into dust, as there were no more entities
available after its bankruptcy filed in Chapater 11. It have emerged as blue print of upcoming
good corporate governance structure as it have laid up the foundation to do business according to
the specified practices stipulated in legislation which would stop upcoming such consequences,
and made it mandatory for all the existing organization to comply with its requirement within the
180 days of coming into existence, with compliance to disclosure requirements with related to
off balance transactions.
Enron have created its whole empire of business with the emergence of online trading
into natural gas and electricity derivative, the whole framework of malpractices come into light
when Securities Exchange Commission started its investigation with respect to securities law and
find out the practices followed by special purpose entities. Enron have also established an
investment bank which have backed up the strong capitalist image of its trading business. The
settlement began with distribution of over $7 Billion Settlement Fund, in the Enron securities
class action has begun. The University of California serves as lead plaintiff for Enron investors
in the class action. The school had told that distribution of the assets is first step of process, and
will involve the distribution to approximately 2,00,000 victims of almost $5 billion of the $7
billion recovered.
Sarbanes Oxley Act 2002
According to 401 Sarbanes Oxley Act 2002, Disclosure in periodic reports were made
compulsory requirement:
(a) Disclosures required- Section 13 of Securities Exchange Act 1934 is amended by adding at
the end of following:

Accuracy of financial reports- All the financial statements which need to be published containing
financial reports , which are prepared by according to the principles under this title and
filed with the commission shall reflect all material correcting adjustments that have been
identified by a registered public accounting firms in accordance with generally accepted
accounting principle and the rules and regulations of the commission (O’Sullivan, 2020).
(a) Off balance sheet corporate is to be filed within 180 days of sarbanes oxley act, 2002 which
will issue rule according to the Securities Exchange Commission Act, 1934 on its provided
platforms to comply with requirements of off balance sheet transaction, arrangements and other
relationship of the issuers with respect to securities.
(c) Study and Report on Special Purpose Entities- 1. Study required- the commission will take
the decision after the the reports have been filed by the issuer to take further steps to provide its
approval to the issue and check the necessary compliance with the provisions of law to
determine-
A. the overall ambit of its accounting practices which wil include the treatm,ent of liabilities,
assets, losses, expenses,etc; and
B. whether generally accepted accounting rules result in financial statements of issuers reflecting
the economics of such off-balance sheet transaction to investors in a transparent fashion
(Megginson and Sitorus, 2018).
Report and Recommendations- Not later than 6 months after the date of completion of the study
required by paragraph (1), the commission shall submit a report to the president, the committee
on Banking, Housing, and urban affairs of Senate and the committee of financial services of the
House of Representatives, setting forth-
A. the amount or an estimate of amount of off balance sheet transaction, including assets,
liabilities, leases, losses of and the use of special purpose, and
B. specifying the limit of transaction which can be done by the special purpose entities:
C. transparency with respect to investors.
D. determination of the risk and rewards which are associated with the sponsored companyies of
issuer which have been consolidated by special purpose entities following the accounting
principles.

E. providing recommendation for improvement into the mechanism of transparency and quality
reporting which is essential for off balance sheet transaction in the financial statements and
disclosures which could be added into law.
Corporate Governance
The governance of Enron come under the ambit of investigation when securities
commission had made an inquiry about the conduct of business into securities market which
were not regulated by the official authorities and seen the financial transaction not supported by
the book of accounts maintained by the accounting firms, there were huge difference between the
actual and factual scenario, such as Special purpose entity here transferring assets to offshore
businesses (Jayamana, Abdullah and Saat, 2019). The board of directors were failed to fulfil its
duties to assigned to them by the article of association and believed the vague statements made
by the Chief Financial officer, the Chief financial officers played a vital role in related party
transaction with the permission of board of directo. The executives have witnessed the
wrongdoing done by the board of directors and not been followed up the whistle blowing
mechanism. The conflict of interest averts when the chief financial officer were allowed to
become the sole manager and had a role with the internal affairs of the company, the working
was affected by directing the work into the direction which were more biased for personal
purposes rather than the objective of the company (Bean, 2018).
CONCLUSION
From the above report it is concluded that Enron scandal has been the most notorious
scandal which gave light to the legislatures to enact the law on independent auditing system,
transparency in accounting standards and also to protect the interest of investors. The Enron
Corporation has been awarded as America's most innovative business for six consecutive years
by defrauding and hiding its actual financial health. This scandal was huge which has impacted
many shareholders, investors, employees, etc. Further it is concluded that Sabanes Oxley Act,
2002 was enacted immediately after this scandal to prevent other such scandals to happen and
also protect the interest of investors and shareholders by bringing transparent accounting system
and independent auditing.

REFERENCES
Books and Journals
Bean, E.J., 2018. Taking on Enron and Its Bankers. In Financial Exposure (pp. 85-122).
Palgrave Macmillan, Cham.
Jayamana, D.J.P., Abdullah, D.F. and Saat, M.M., 2019. A Review on the Impact of Corporate
Governance and Corporate Social Responsibility on Firm Performance. Management
Research Spectrum. 9(2). pp.39-41.
Megginson, W.L. and Sitorus, R.E., 2018. Convergence in Corporate Governance Toward US
Model? Evidence from Global Petroleum Industries. Convergence in Corporate
Governance towards US Model.
O’Sullivan, G., 2020. The Role of CSR and Corporate Governance in the Sustainable
Development of the World. In Social Responsibility and Corporate Governance (pp.
45-93). Palgrave Macmillan, Cham.
Petra, S. and Spieler, A.C., 2020. Accounting Scandals: Enron, Worldcom, and Global Crossing.
In Corporate Fraud Exposed. Emerald Publishing Limited.
Sorensen, D.P. and Miller, S.E., 2017. Financial accounting scandals and the reform of corporate
governance in the United States and in Italy. Corporate Governance: The International
Journal of Business in Society.