Business Law and Ethics Report: Examining the Enron Accounting Scandal

This report provides a detailed analysis of the Enron scandal, examining the ethical and legal failures that led to the company's downfall. The report explores the accounting fraud, mismanagement, and lack of corporate governance that characterized Enron's operations. It discusses the role of the Sarbanes-Oxley Act of 2002 in addressing corporate corruption and protecting investors. The report also compares the Enron scandal to the WorldCom scandal, highlighting the similarities in fraudulent practices. The conclusion emphasizes the importance of ethical conduct, adherence to business laws, and corporate social responsibility for the long-term sustainability of businesses. References to books, journals, and online resources are included to support the analysis, offering a comprehensive overview of the Enron case and its implications for the business world.

BUSINESS LAW AND
ETHICS-2

TABLE OF CONTENT
INTRODUCTION................................................................................................................................3
CONCLUSION....................................................................................................................................5
REFERENCES.....................................................................................................................................7

INTRODUCTION
Business laws are made by government to have control overall business operation so that no
harm can be caused to customers, employees and people that are living in society. Ethics are moral
values, principles and beliefs that are considered by particular individual and organizations while
performing its several functions. This report is based on a case study of company name as Enron
that has not undertaken ethical values or corporation policies that have adversely impacted on image
of firm in the market. So, the present essay discussed key point such as issue in Enron that have
contributed in scandal of fraud, Sarbanes-Oxley Act 2002 and remedies that can be taken by it in
order to grow and sustain in industry for longer time frame and retained customers trust.
Enron's fraud scandal is case related to business ethics as its executives does not honestly
and transparently show actual profit and loss that it has earned during particular financial years. It is
one of the enterprise that build homes for people to stay at affordable rates so that dream of various
individuals can be fulfilled. On October 2001, it was surfaced that seventh largest American
company have involved in accounting fraud and corporate corruption. As company by using “mark
to market” in order to make misused of special purpose entities and accounting fraud. Such as
company to attract stakeholders show less losses and higher sources of incomes therefore in short
cooked the books (Enron Scandal, 2017). The share of company was trading at high time $90.75 at
peak in mid of 2001 but suddenly value of share get low in November 2001. The firm was founded
to be the biggest audit failure and largest bankruptcy in American history. Many employees have
lost their jobs; shareholders have to bear loss of $74 because of bankruptcy of company thus this
scandal has negatively impacted on livelihood of each individuals. The major cause that have
contributed Enron case is financial issue as management has not disclosed true facts to public
investors. Therefore, after correct accounting statements it was found that 80% of profit has been
vanished by year of 2000 that have put questions on US system of regulatory system. As it has
caused loss to number of individuals that are interested in operation of business such as investors,
employees and customers.
There is certain key issue that have resulted in fraud scandal of Enron such as
mismanagement, ineffective consideration of ethical practices and moral values and auditing and
accounting issue. Management of Enron by following unethical practices to not to disclose the fact
related to actual loss faced by company have negatively impacted on growth and sustainability of
enterprise for longer time frame. Improper management of auditing and accounting have impacted
on trust and relationship of stakeholders or people that have invested their capital for growth and
success of firm (A view from the inside: How Enron went wrong, 2018). Therefore, overall the

scandal has affected each and every individual that are associated with company.
There are numerous laws and regulation made by government in order to have control over
business operation so that no threat or harm can be caused to other individuals that are living in
society. Such as Sarbanes-Oxley (SOX)Act 2002, is one of the law that was passed on July 30 by
U.S congress in order to protect investors from fraudulent financial practices followed by
corporation. As per recent scenario or changes in external environment, SOC act of 2002 and
Corporate responsibility act of 2002 need to reformed for better securities regulation. This laws
have come into existences due to some organizations like WorldCom and Enron that have
incorporated unethical practices which have caused huge loss to investors and people that are
working as employees in the firm (Sarbanes-Oxley (SOX) Act of 2002, 2020). The law has
promised that it will create public institution such as Public company accounting oversight board
that will be responsible for regulation and monitoring of auditing of different firms so that true
picture of financial statements can be disclosed to stakeholders. SOX act also emphasis more use of
information technologies, digital media or electronic products so that various data, financial
information can be safely and securely preserves and disclose to interest parties. So, that they can
make correct decision regarding whether they need to invest in capital of firm or not.
Corporate social responsibilities are act that is used to self regulates business that are
operating in international market as they emphasise that organization need to carry activities that
can benefits society. Company by incorporating CSR laws can easily build its brand image in minds
and hearts of customers thus contribute in growth of firm. But in case of Enron, management have
ignored CSR law that have led to dissatisfaction of investors and employees thus affected on
operation of business (Kelley, Hemphill and Thams, 2019). Therefore, government have punished
Enron for not implementing or abiding to CSR law while operating its functions.
One of the related case to Enron is Worldcom scandal which is second largest telephone
company in USA that have faced major issue related to accounting fraud in 2002. Senior executives,
CEO and founder have found schemes to inflate earning so that company can enjoy high prices in
stock market. So, it was discovered that $3.8 billion of fraud in balance sheet entries and
overestimated assets value around $11 billion (The Rise and Fall of WorldCom, 2020). Therefore,
such unethical practices and accounting fraud forces company to pay penalty and cease its operation
in industry it operates.
In recent time, people are becoming more aware and concerned about Corporate social
responsibilities, ethical values followed by enterprise. As there are numerous companies which
negatively impact on environment or use unethical practices in order to grow and gained
competitive advantages from other competitors. From the case of Enron, it has been understood that

company in order to influence more investors to invest their capital shows unfair financial
statements that cause huge loss to them. Due to unethical practices of Enron not only company have
to suffered but also investors, employees, suppliers and customers have to face challenges (Li, Li
and Xu, 2019). At the same time unethical practices have contributed in long term growth and
sustainability of enterprise in industry. Therefore, Enron has conducted offence that was harmful for
number of people so it forces government to take corrective actions so that no other corporation can
repeat in the future. It has to bear extra cost in term of penalty and fines and few losses as per law
introduce by government named as Sarbanes-Oxley (SOX). The law has stated the best punishment
that can be given to company that conduct accounting fraud just in order to maximise its benefits.
Huge penalty, closure of operation of business and jailed to executives, CEO and management that
have involved in unethical practices are some measure taken by government that have taught them
lesson to not to repeat in future.
Corporate social responsibilities are another act or law that have been made by government
due to increasing number of harm to society by corporate firm. The laws stated that company need
to undertake all such activities that are beneficial for number of individuals that are living in
society. Therefore, Enron by ignoring its corporate responsibilities to honestly and transparently
disclose necessary information to investors and other stakeholders have to incurred penalties
(Paiement and Chura, 2016). Enron's management, executives and top authority just see their
profitability and benefits and does undertaken into accounts the way this practices will impact on
employees and investors. Therefore, as per this law Enron is found guilty for over-showing its
profitability to enhance brand image of firm and attract more investors, customers.
The above discussion also helps in understanding that both case of Worldcom and enrom are
mostly similar as both have founded guilty for accounting fraud that have impacted on all
stakeholders of firm and operation of business (Alshbili, Elamer and Beddewela, 2019). In case of
WorldCom, as per SOX that company and management were given punishment like jailed and
penalty of specific amount so it can be justified that similar punishment was given to Enron.
CONCLUSION
Therefore, from above essay or evaluation of case study, it can be concluded that there are
key points that need to kept in mind of management so that company can grow and sustain for
longer period of time. Like management or senior executives need to invest more time and efforts to
now about existing laws, results that will be achieved by undertaking particular actions. As all such,
practices will help management of Enron or any organizations to take accurate decision that
whether it have to abide to unethical practices or not. Company by avoiding unethical practices or

truly representing financial report to investors and stakeholders or other interested party can prevent
itself from scandal of fraud and promote future operation of business. It can also be stated that
ethics are values, morals and belief that need to abide to corporate organization in order to satisfied
needs of customers in the best possible manner. It also protects company form penalty and fines
thus save extra cost and increase brand image of firm in competitive market. Therefore, it can be
illustrated from above study that business law and ethics are important part that need to be
considered by management and firm for benefits of organizations.

REFERENCES
Books and journal
Alshbili, I., Elamer, A. A. and Beddewela, E., 2019. Ownership types, corporate governance and
corporate social responsibility disclosures. Accounting Research Journal.
Kelley, K. J., Hemphill, T. A. and Thams, Y., 2019. Corporate social responsibility, country
reputation and corporate reputation. Multinational Business Review.
Li, Q., Li, S. and Xu, L., 2019. Auditing the Auditors and Stock Crashes: International
Evidence. Available at SSRN 3329045.
Paiement, A. and Chura, Z., 2016. The Quality of Financial Disclosure and its Implications on
Stock Prices for Credit Downgraded Firms.
Online
A view from the inside: How Enron went wrong, 2018, [Online]. Available
Through:<https://www.houstonchronicle.com/business/energy/article/A-view-from-the-
inside-How-Enron-went-wrong-13266739.php>.
Enron Scandal, 2017, [Online]. Available Through:<http://www.american-historama.org/1990-
present-modern-era/enron-scandal.htm>.
Sarbanes-Oxley (SOX) Act of 2002, 2020, [Online]. Available
Through:<https://www.investopedia.com/terms/s/sarbanesoxleyact.asp>.
The Rise and Fall of WorldCom, 2020, [Online]. Available
Through:<https://www.investopedia.com/terms/w/worldcom.asp>.