Business Law Assignment: Enron Scandal, Legal and Ethical Implications

This business law assignment examines the Enron scandal, a significant case involving corporate fraud and ethical breaches. The assignment analyzes the events leading to Enron's bankruptcy and the role of Arthur Andersen, its accounting firm. It highlights the legal and ethical failures, including conflicts of interest, violations of accounting standards, and the destruction of documents. The assignment also discusses the importance of Generally Accepted Accounting Principles (GAAP) and the Accounting Standards Board in ensuring fair financial reporting. The conclusion emphasizes the impact of the scandal on financial statements and the need for ethical conduct and adherence to the law by both corporations and accounting firms. The assignment aims to provide a comprehensive overview of the legal and ethical implications of the Enron scandal.

Running head: BUSINESS LAW
Business Law Assignment
Name of the Student
Name of the University
Author Note

1BUSINESS LAW
Introduction:
Enron scandal which happened early in the year 2001 altered the face of business
forever. Enron was one of the “high flying energy trading company”, but it came out as
something which is not more than any slowly unravelling billion dollar finance scheme.
Thereby the employees and investors of the company had to suffer a loss of billions of dollars
after it was exposed. (Shoaib et al 2012) The company was then forced to go into
Bankruptcy. This Enron scandal brought down Arthur Andersen too.
Body:
In Arthur Andersen LLP v. United States, 544 U.S. 696 (2005), case in the United
States the Supreme Court overturned the accounting firm Arthur Andersen's conviction
of obstruction of justice in the fraudulent activities along with collapse of Enron, because
the jury instructions provided failed to properly express the law which Arthur Andersen
violated. Eventually as this case became famous the firm had to cease its audit activities. By
the last part of Enron, Arthur Andersen, which is the accounting firm of Enron ordered its
employees to destroy all the documents relating to Enron. This was done soon after the
officials learned about the investigation by the Securities and Exchange Commission.
“Charge of obstructing an official proceeding” with regards to the “Securities and Exchange
Commission” was thereby filed against the Arthur Andersen LLP in US District Court.
Andersen then appealed to the US “Court of Appeals”. It then affirmed the district court's
decision.
Conflict of interest happened in Enron and Arthur Andersen by the way of that the
consulting fees were 27% of the auditors’ total fees. It was gained Enron. The written report
which was done was not according to Accounting Standards Board. This amounts to breach
of standard of care. Here damages occurred which forced Enron towards Bankruptcy. Arthur

2BUSINESS LAW
Andersen can argue on the basis that Enron was negligent because they failed to prepare fair
financial statements. Conflict of interest in this regard instigated limitations to complete with
regards to Enron’s financial statements. This led to increase in audit risk.
To avoid the conflicts therefore fair and clear financial statements must have been
issued in accordance with Accounting Standards Board. It must be done without any
negligence.
This must have been done in accordance Generally Accepted Accounting Principles.
It states that financial records should be maintained separately. Monetary unit assumption,
Full disclosure principle, Time period assumption, Basic accounting, Revenue recognition
principle, Matching principle, Cost principle, these are the points which must be taken into
account while maintaining financial records.
Both the companies had used unethical means for profit maximisation. Arthur
Andersen could have given fair financial statements on the basis of Generally Accepted
Accounting Principles and Accounting Standards Board. As the Enron Scandal became
famous Arthur Andersen ordered its employees to destroy all the documents with respect to
Enron. If this was not done then Arthur Andersen would not been on fault. The Enron on the
other hand must have abided by the laws while running a company the changes which can be
made in this regard is that both the companies needs to abide by the law.
Enron and Arthur Andersen must have abided by law. If Arthur Andersen had not
asked its employees to destroy the documents. Then it would have been fair and legal on his
part.

3BUSINESS LAW
Conclusion:
Enron and Arthur Andersen’s involvement influenced financial statements. This
resulted in a huge corporate collapses in the history of US. Both firms were disloyal and they
adopted illegal means while issuing financial statements.

4BUSINESS LAW
Reference List:
Arthur Andersen LLP v. United States, 544 U.S. 696 (2005)
Generally Accepted Accounting Principles
Accounting Standards Board
Shoaib, M., & Rabeet, R. (2012). The Enron Scandal and Moral Hazard. Available at SSRN
1987424.