Analysis of Enron Scandal, Ethical Governance, and Sarbanes-Oxley Act

This report delves into the Enron scandal, a major accounting fraud case that occurred in the early 2000s, and its implications for ethical business governance and the Sarbanes-Oxley Act of 2002. The report provides an overview of the scandal, discussing how Enron's executives misled stakeholders through deceptive accounting practices. It examines the role of the Sarbanes-Oxley Act in preventing future accounting frauds by mandating stricter financial disclosures and strengthening corporate governance. The report also explores the concept of ethical corporate governance, emphasizing the importance of policies and procedures that ensure a company's operations are conducted ethically. It offers suggestions for Enron to overcome the side effects of the scandal, including the adoption of ethical business practices and the implementation of robust internal controls. The analysis highlights the importance of transparency, accountability, and ethical behavior in preventing corporate fraud and maintaining public trust. The report concludes that by adhering to business law and ethics, companies can prevent scandals and maintain a positive market image.

Business Law and Ethics
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Table of Contents
INTRODUCTION...........................................................................................................................2
TASK...............................................................................................................................................2
Discussion Enron Fraud Scandal in relation to ethical business governance and Sabane Oxley
act of 2002..............................................................................................................................2
Suggestions for further tactics and plans in context of chosen company...............................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
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INTRODUCTION
Business law and ethics are specially developed to address moral concerns of companies.
While they are comprised of range of every changing subject, a comprehending of roles they
play within firms is a good place to begin. Business law identifies minimum standards of
attitudes expected of sole proprietorships and firms. Business ethics go beyond easy legality, it
defines way a company should act; how a firm does what it is legally obligated to do. The
current assignment will be based on Enron Corporation, which falls under category of
commodities & services organizations. This study will explain Enron fraud scandal case in
relation to Sabane Oxley act of 2002 and ethical corporate governance.
TASK
Discussion Enron Fraud Scandal in relation to ethical business governance and Sabane Oxley act
of 2002
Enron Corporation was an American energy, merchandise and services firm based in
Houston Texas. Company was founded in 1985 as a joining between InterNorth and Houston
Natural gas, both relatively small regional organizations (Messina and Ak, 2020). It was
considered as American’s most creative enterprise for six consecutive eras. But at the end of
2001, Enron reported financial situation was sustained by a systemic, institutional and creatively
planned accounting fraud, named as Enron scandal. This scandal brought into query the
accounting activities and practices of many businesses in US and was an element in enactment of
Sarbanes Oxley act of 2002. It also affected wider corporate world by causing dissolution of
Arthur Andersen accounting company, which have been auditor of Enron’s for years.
Enron scandal was an accounting scandal of company, CEO and other executives mislead
organization’s board of members and audit committee on high risk accounting activities and
pressured Arthur Andersen to avoid problems, these are the main causes of fraud.
Fraud case in relation to Sarbane Oxely Act of 2002-
The act is a United State. Federal regulation that aims is to protect and prevent business
investors who invest money in specific project by making venture disclosures much accurate and
reliable. It was spurred by major accounting frauds, Billions of dollars were lost as a outcomes of
these financial issues. Primary aim of this act was to fix auditing of nation’s public firms,
consistent with their full, legal name. This law was passed in response to a number of business
accounting frauds that occurred in 2000-2002 era (Gorshunov and et.al., 2020). Sabane Oxely
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Act was spurred by the biggest accounting frauds such as Enron. Spearheaded by senator Paul
Sarbanes & Representative Michael Oxley, regulation was signed into law by American
President George W. Bush. It can be put into place in revert to widespread scandal at Enron
company, set new standards for corporate management, public accounting companies and
corporate Boards of directors.
This act is related to Enron fraud scandal because it mandates strict reforms to enhance
financial disclosures from companies and prevent accounting frauds. This case is related to
above act, as it introduced norms and principles that can help company to overcome negative
effect of scandals or accounting fraud when they follow it appropriately. Sarbane Oxley act
comprised to 11 sections that defines ways to prevent corporations or investors from frauds. For
example, according to section 302, company’s business documents have been reviewed by
signing authority and passed internal controls within last 90 days. This act imposes harsher
punishment for obstructing justice, mail, wider and securities fraud (Connell, 2017). It increased
maximum penalties for any scandal from 5 to 20 eras of prison period. Under accounting frauds,
Enron Corporation also pay more than 40 billion after scandal as punishment. It affects its
business growth and market image in negative manner. It became the biggest stock collapse and
bankruptcy in history up to 2002. Firm employed deceptive and shoddy accounting activities to
hide their financial losses. Methods of structured finance, difficult financial transactions
developed to hedge risks included in venture activities.
This big scandal showed American public and their representatives in congress that new
compliance norms for public accounting were sorely require. This act guide firms to disclosures
their financial statements and key documents by closing loopholes in accounting activities,
strengthening business governance rules, maximising responsibility and disclosure needs of
business especially corporation’s public auditors and accountants and venture executives
(Awolowo and et.al., 2018). Need for internal financial controls after Enron scandal or fraud case
as regulations came out in U.S that help by protecting investors and other stakeholders to any
scandal and its negative impacts.
Case study in relation to Ethical corporate governance-
Ethical corporate governance is term used to refer to policies and procedures by which a
company is effectively directed and controlled (Dibra, 2016). It refers, especially to manner
power and responsibility flow between boards of directors, senior manager, chief executive
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officers and other shareholders. It defines a practices and activities that a firm has in place to deal
with complexities or problems concerning how it is conducts and administered daily business.
According to this term, it is actually very essential to remember that organizations exist primary
to develop a service or produce product, which is utilized to generate profit instead of conducting
activity that can be considered unethical. This term has much become a buzzword in recent time,
just about every firm like Enron, thinks it’s proclaim and good idea to follow it, but what really
is it and how can people know for a sure that an organization is practicing what it preaches.
Enron accounting fraud or scandal covers under federal and state law, CEO can be subject to
prison time, in an act brought by federal department of Justice.
Enron accounting fraud scandal is one of the biggest corporate frauds in 2001. Firm
turned from an acclaimed organization into most unpopular company in the world. There was
range of business governance problems, leading to scandal. Corporate boards of directors were
subject to difficult scrutiny. Members, whose chief role is to represent stakeholder’s interest,
utterly failed to protect or detect administration fraud. Ethical Corporate governance is designed
to especially manager and handles these types of cases (Kabeyi, 2019). Its intention is to balance
and control firms pursue profits and sales without crossing over borders into realms of unethical
behaviour. It helps to prevent market position of companies like Enron and allow them to operate
their business functions and operations by following business ethics, which are quite beneficial
for any brand or corporate in the world in term of building positive image in specific market,
increasing productivity and sales rather than before. Earlier many organizations such as Enron
may have exploited their position to inhibit rivalry or even threaten local populations, ECG
exists to prevent this occurs.
Corporate governance policy must also cover desire conduct of senior members of
companies for instance CEO and other senior administration, who are often seen as exempt from
common policies applied in Enron. It is a multi faceted concept with varied layers of complexity.
An significant element of business governance deals with fiduciary duty, responsibilities and
mechanisms of control and auditing (Salin and et.al., 2019). When Enron Company consider all
these things while managing business they can prevent its brand image in market and venture
from all fraud cases, it will be quite helpful and beneficial for them.
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Suggestions for further tactics and plans in context of chosen company
 Enron Corporation was recognized as one of the new breed of American organizations
that participated in range of ventures related to energy. It bought and sells oil and gas
features, builds power plants and oil refineries, and became one of the biggest paper, pulp
and gas electricity firms before it filed for bankruptcy. 2001 is the tough’s time for
company and its business. In order to overcome side effect of scandal, organization
should follow ethical business practice and adopt it.
 Firm must publish a detailed statement in its annual reports explaining and clearly
defining structure of internal controls utilized. All the information related to venture must
be made accessible regarding process used for financial reporting (Abu Amuna and Abu
Mouamer, 2020). Statement should assess effectiveness and efficiency of internal
controls as well as reporting processes.
 Financial statement should be accurate and represents any off balance liabilities,
obligations and transactions. Enron must conduct ethical practice and assure that
everyone will take part in decision making to give their suggestions and ideas that will be
used to prevent frauds. Management should urgently disclose drastic modifications in
their financial place or existing operations, including divestments, major personnel
departures and acquisitions. These kinds of changes must be presented in unambiguous
and clear term.
 They should create and maintain internal controls over each activity that will detect fraud
and prevent it from them. It includes restricting access to financial account data,
establishing multi person sign off and on expense reimbursements, inventory access and
overtime, and other accounting functions to assure integrity of notes.
 Organization must train their staff to prevent fraud; workers in fraud prone areas of
venture should known warning signs of scandal, prevention skills and how to report
suspicious actions by consumers and co-workers.
 All above actions are covered under ethical corporate governance that should be followed
by company in systematic manner.
CONCLUSION
From above analysis, it has been discussed that Enron Corporation effectively overcome
scandal by following principles of business law and ethics, which are very beneficial for its
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market image or position. Furthermore, it has been summarized that by implementing and
focusing on above suggestions firm effectively prevent from further scandals. Ethical Corporate
governance and Sabane Oxley act of 2002 helping company to handle the overall situations.
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REFERENCES
Book and Journals
Abu Amuna, Y.M. and Abu Mouamer, F., 2020. Impact of Applying Fraud Detection and
Prevention Instruments in Reducing Occupational Fraud: Case study: Ministry of Health
(MOH) in Gaza Strip. International Journal of Advanced Studies of Scientific
Research. 4(6).
Awolowo, I.F and et.al., 2018. Accounting scandals: Beyond corporate governance. In 9th
Conference on Financial Markets and Corporate Governance (FMCG).
Connell, M., 2017. The Fall of Enron and the Creation of the Sarbanes-Oxley Act of 2002.
Dibra, R., 2016. Corporate governance failure: The case of Enron and Parmalat. European
Scientific Journal. 12(16).
Gorshunov, M.A and et.al., 2020. The Sarbanes-Oxley Act of 2002: Relationship to Magnitude
of Financial Corruption and Corrupt Organizational Cultures. Journal of Management.
21(2). p.73.
Kabeyi, M.J.B., 2019. Corporate Governance in Manufacturing and Management with Analysis
of Governance Failures at Enron and Volkswagen Corporations. American Journal of
Operations Management and Information Systems. 4(4). pp.109-123.
Messina, J. and Ak, B.K., 2020. The Quiet Revolution of Lease Accounting.
Salin, A.S.A.P and et.al., 2019. The influence of a board’s ethical commitment on corporate
governance in enhancing a company’s corporate performance. Journal of Financial
Crime.
Online
10 Steps to Avoid Business and Employee Fraud. [Online]. Available through: <
https://www.cpapracticeadvisor.com/small-business/article/12429935/10-steps-to-avoid-
business-and-employee-fraud>
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