Enron Case Study: Financial Fraud, Legal Issues, and SOX Act Impact

This report provides an in-depth analysis of the Enron scandal, employing the ILAC method to examine the financial fraud, legal issues, and the application of the Sarbanes-Oxley (SOX) Act of 2002. The report details the fraudulent activities orchestrated by Enron's senior management, including misleading financial reports and the concealment of significant debt, which ultimately led to the company's bankruptcy. It explores the roles of key individuals such as Jeffrey Skilling and Andrew Fastow, as well as the involvement of Arthur Andersen. The report also references other corporate scandals like WorldCom and Tyco International to provide a broader context of the impact of these events. Furthermore, it discusses the legal ramifications, including lawsuits, criminal penalties, and the implementation of the SOX Act to protect investors and improve corporate governance. The report concludes by highlighting the significance of the SOX Act in mitigating future fraud and ensuring the integrity of financial reporting, emphasizing the importance of ethical business practices and governmental oversight.

Individual report
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Table of Contents
INTRODUCTION...........................................................................................................................3
ISSUE..........................................................................................................................................3
RULES.........................................................................................................................................4
APPLICATION...........................................................................................................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................8
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INTRODUCTION
In ILAC method it is necessary to find out issues and laws that are being applied to case.
This is because it becomes easy to analyse entire case and find out what laws are applicable. In
every country there are various types of laws and regulation which is followed. These laws differ
as per government. The business has to adhere these laws so that they work in ethical way.
Similarly, in present report Enron case will be discussed with help of ILAC method. also, it will
be explained about what laws are applied in it (Abrams,, 2016).
ISSUE
This is a case which resulted in banking fraud of united state energy. It occurred due to
different events that happened in nation new law in year 1990 natural gas affected on firm rights
and its operations. In this Jeffery who was consultant of company transformed entire firm into
trader. This deal with energy derivative contract and act as mediator between natural gas
producer and customers. He identified loopholes in accounting method and on basis of that
prepared financial report. With that he hide millions of dollars of debt and also failed some
deals. The CFO Andrew Fastow and other seniors also join him in this and they mislead BOD.
Besides that, they also pressurize Arthur Andersen as well to ignore issues related to scandal. But
shareholder of company filed a case of decrease in share from $90 to $1 in November 2001.
Thus, after dispute US security and exchange commission investigated the case to identify cause
behind it. But at same time competitor firm Houston competitor Dynegy offered a proposal to
buy that company. It was analysed that due to several reason the deal was not done. so, on
December 2001 company stated that they were bankrupt and filed it under chapter 11 of
bankruptcy code. This was the largest bankruptcy case of $63.4 billion in US (Bhasin, 2016).
Similarly, in next year another scandal occurred that is worldcom scandal. In that many people
were found to be guilty and set to jail by court. So, Arthur was also guilty for hiding info related
to SEC and doing illegal auditing of firm. The organisation lost its brand value and many
customers. but supreme court of US overturned the decision. Also, shareholder lost their amount
and only few people were given claim amount. Lay and skiling gave resign after it and Andrew
was not allowed to work for company. There are large number of lawsuits filed against Anderson
by shareholders and hence company is unable to operate in later stage. The scandal highly
impacted on laws related to accounting leads to new regulation and legislation to it.
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RULES
Corporate scandal of 2002
Here, the chairman Dennis ad CFO Mark was found as guilty of fraud of $150 million in
Tyco international. However, in March 2004 BOD of firm was contended and they were given
compensation for their work. So, in 2005 both of them were sent to jail for 25 years. Moreover,
the company has to pay amount of $2.92 bullion to defrauder shareholder (De Leo, 2018).
WorldCom scandal 2002
It is one of the biggest accounting scandal after Enron. CEO Bernard Ebbers orchestrated
and other seniors were accused of wrong accounting and $3.8 billion of fraudulent balance sheet
entries. Company was forced to accept that it shows $11 billion assets overstated. This fraud is
also known as largest in that particular time period.
Sarbanes-Oxley (SOX) Act of 2002
It is an act that is formed by US in order to protect investor from any misleading financial
report presented by organization. Also, it protects rights of investors as well from any type of
fraud that occurred. The act was passed in 2002 and is not included in CSR of organization. The
government monitor and regulate entire financial reports. Besides that, new penalties and fines
are imposed for any breaking of law. The big frauds and scams such as worldcom, Enron, etc.
has led to create negative image of companies in industry (Haswell, and Evans, , 2018).
Section 302 of the SOX Act of 2002
It states that it is duty of senior level management and director to certify in written that
statements related to finance of organisation cover SEC disclosure requirements and give all
details related to finance and operation of the organization. If signing authorities are found to be
misleading then they are subjected to criminal penalties and criminal laws.
Section 404 of the SOX Act of 2002
Management and auditors are responsible for controlling and reporting method related to
accounting and finance. However, the staff try to repeal which result in rise in cost of firm.
Section 802 of the SOX Act of 2002
It consists of 3 laws that are related to record keeping. Here, first rule is to look to the
people who indulge into destruction and falsification of records. The second rule defines time for
which record must be stored within firm. And last one deals with specific business record that
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firm has to maintain and stores it properly and it also includes electronic communication
(Jayamana, Abdullah, and Saat, 2019).
APPLICATION
It can be found that application of scandal in Enron is involvement of senior. The CFO ad
other people are responsible for misleading shareholder in equal way. They also confused BOD
by providing wrong accounting details. Arthur was forced to pass that accounting report and
overlook issue. The lawsuit was filed in court by shareholder against firm regarding fraud of $40
billion. As per scandal of corporate 2002 it is said that criminal must be sentenced for 25 years
imprisonment and also heavy penalty must be imposed on them. Furthermore, they are
responsible for compensating amount of investor and shareholder.
In addition to that, it is found that the people involved in fraud did not follow rules and
guidelines of SEC. so, it is found that there was high decline in stock price of company from $90
to $1 in such a short period of time. Therefore, more than one case can be filed against enron
first is not following SEV norms and second is doing fraud with investors in share market. Along
with that, it is found that in worldcom scam of 2002 BOD and top management were guilty for
treachery. Hence, they have to pay huge amount as compensation to investors and were sent to
jail as well (Kotb, Elbardan, and Halabi, 2020).
As per chapter 11 people involved in fraud was not able to pay such huge amount to
investors. Here, Arthur who also helped them is not trustful person thus he is responsible for
paying debt to investors. But it is said that Arthur refuse to pass that report. He can save
company and investors by providing info to SEC. So, Jeffery and Andrew are main victim of this
fraud as they earned a huge amount from it. Apart from that, BOD is also responsible for it as
they did not properly check audit report. Hence, crime can be prevented at starting stage only if
BOD properly checked report. This shows that there is loophole in accounting process and report
are not being properly prepared and checked. There is no monitoring done to do audit.
Hence, as per SOS act signing authority of company is responsible for this type of fraud.
Likewise, under section 404 is applied here where auditor is not responsible for checking
financial report. In addition, section 802 is applied as well where firm maintained wrong
accounting records in that (Primbs, and Wang, 2016).
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CONCLUSION
From report it can be summarised that section 11 in bankruptcy is giving several benefits to
firm as they are taking advantage for it. They are using it in illegal way to do frauds and scams.
In Enron scandal the top management of company was involved in fraud. Jeffery and Andrew
mislead BOD and did a proper planning of scandal. They also included other employees as well
in this fraud that led to decrease in investor money. Arthur was pressurised by them to disrupt
confidential and financial info for SEC and this was used against firm to apply for bankruptcy.
Other than this, there are various other frauds and scams as well like worldco, corporate etc.
where it is found that senior managers are involved in that (Zerban, 2017). They did mislead
accounting info and showed wrong information to government and shareholders. So, all
members were found to be guilty for doing scam and they had to pay the compensation amount
to investors and people. With the formation of Sarbanes-Oxley (SOX) Act of 2002 there has
been decline in fraud cases. It is found that companies are effectively following CSR practices
and showing correct financial report. Moreover, government is monitoring and regulating firm’s
financial info by doing regular audit. However, if law was passed earlier than organization was
found guilty under different sections of SOX Act of 2002 such as Section 404, 802 and 302.
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REFERENCES
Books and journals
Abrams, L., 2016. The Bancorp: A Test for Post-Enron GAAP. Available at SSRN 2850729.
Bhasin, M.L., 2016. Debacle of Satyam Computers Limited: A Case Study of India’s
Enron. Wulfenia Journal, 23 (3), pp.124-162.
De Leo, F., 2018. Good Bankruptcy Governance: Beyond Wishful Thinking?. In Edinburgh
Postgraduate Law Conference, Date: 2018/01/18-2018/01/19, Location: University of
Edinburgh (United Kingdom).
Haswell, S. and Evans, E., 2018. Enron, fair value accounting, and financial crises: a concise
history. Accounting, Auditing & Accountability Journal.
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.
Kotb, A., Elbardan, H. and Halabi, H., 2020. Mapping of internal audit research: a post-Enron
structured literature review. Accounting, Auditing & Accountability Journal.
Primbs, M. and Wang, C., 2016. Notable governance failures: Enron, Siemens and beyond.
Zerban, A.M., 2017. Enron of Saudi Arabia: Corporate Accounting and Auditing Failures. Open
Journal of Accounting, 7(01), p.1.
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