Analysis of the Enron Fraud Scandal in Business Law and Ethics

This report provides a detailed analysis of the Enron fraud scandal, examining the legal and ethical violations that occurred within the company. The report highlights the inappropriate accounting practices used to manipulate financial statements and the subsequent impact on stakeholders. It explores the failures in corporate governance that allowed such practices to flourish, and the role of the Sarbanes-Oxley Act of 2002 in addressing these issues. The analysis covers the importance of ethical conduct in business, the role of independent auditors, and the significance of accurate financial reporting. The report emphasizes how the Enron scandal led to reforms in accounting and auditing practices to prevent future occurrences of fraud, and the need for transparency and accountability in the financial sector. The study also analyzes the role of the management and their unethical practices. The report concludes with a discussion of the lasting impact of the Enron scandal and its implications for business law and ethics.

Business Law and Ethics

Table of Contents
INTRODUCTION.......................................................................................................................................3
Task.............................................................................................................................................................3
Enron Fraud Scandal...............................................................................................................................3
CONCLUSION...........................................................................................................................................6
REFERENCES............................................................................................................................................7

INTRODUCTION
Business law is defined as all such regulations and laws issued by government that are
applicable over the companies and other business houses. This report is based on the case study
of enron corporation. Henceforth, report will emphasis over different legal regulations that are
applicable over the company involved in the case. This project will discuss the case study in
respect to corporate governance and the Sabane – OxleyAct of 2002 (Li, 2020).
Task
Enron Fraud Scandal
Enron Fraud Scandal entertained in the year 2001. This was the scandal happened in
Enron where company has entertained inappropriate practice by interfering in books of accounts
of company. In order to project better financial position void transactions projected in the
financial statements of company. In such a case company was facing a poor financial condition
and the organization was about to bankrupt. To protect the image in front of the stakeholders like
investors company started to practice showing void profit. This case was the biggest scandal of
that time. Company has used off the books accounting practice. Company also used special
purpose vehicles or special porpoise entities to hide the toxic assets of company from investors
and creditors. The practice of showing the irrelevant profit has supported the company in such a
way that due to this practice value of company’s share went up to $90.75. from $.26 (Amilin and
Suryanto, 2018). The entire case was against the concept of ethical corporate governance. This is
the key concept that resist any such practice that promote wrong financial position of the
organization. Any such practice that guide the organization to show wrong profit by interfering
company’s books of accounts is strongly prohibited on the basis of the wrong entries to improve
company’s income.
Ethical corporate governance principle support only the exact financial position of
organization. Irrespective of how bad the financial performance of organization is only the actual
figures and information must be a part of company’s books of accounts. In the case of Enron
management also involved in performing the practice even the decision was taken from the
management of company to perform wrong financial reporting that can highlight wrong profits
of company. On the basis of ethical principles and code of conducts this practice of the Enron
Company was against the regulations stated by Companies Act and all such legal regulations

applicable over the organization (Zhao and et.al., 2020). Financial code of conduct never give
emphasis to project untrue state of affairs of company. Ethics is an important part of business
activity and ethical principles drive the company to denote only such affairs that can point the
actual financial position of company. In case of void entries company try to polish the position of
company in market by showing wrong affairs that can denote unrealistic inflow of financial
resources. Management of Enron Company has done the same affair to improve the company’s
financial position by applying wrong entries in company’s books of accounts.
This fraud scandal was the reason behind the implementation of Sabane OxleyAct of
2002. Enron Scandal was the biggest scandal of that time where corruption was done by
interfering company’s books of accounts. To avoid the future, misbehave in company’s books of
accounts this legislation was introduced that drive regulations to stop this types of practices
where company projecting such transactions that never occurred in the actual business
circumstances. This act opposes the management and leaders of company to use any such
practice that can drive the company to interfere in company’s books of accounts just to improve
the financial stability of company. This act strictly prohibits any such practice that drive the
company to entertain any accounting treatment that only incurred to project better financial
position of company (Blanco, 2020). Accounting transactions are reported to analysis and assess
how the organization is performing in the market on the basis of the financial state of affairs like
income statement, trading account, profit and loss account and balance sheet. On the basis of the
accounting standards applicable over company it is clearly instructed to do only such entries that
clearly state the actual transactions of company. Void entries are strictly prohibited in this act.
Implementation of Sabane – OxleyAct of 2002 was a crucial step taken by government to avoid
such accounting misbehave any time in future.
Application of Sabane – OxleyAct of 2002 was done in the year 2001 on the name of
“Public Company Accounting Reforms” and also “Corporate and Auditing Accountability,
Responsibility and Transparency”. This entire aim project that government aimed to improve the
accountability in respect to accounting transactions occurred in the company’s financial
statements and also the transparency company government tried to improve with the support of
application of the Sabane – OxleyAct of 2002. Enron case was a complete misbehave with the
ethical code of conducts and also the financial code of conducts applicable over company. In this

case interruption also occurred in the auditing process of company. Every year company requires
to conduct the financial auditing where company’s books of accounts and financial statements
are audited by an independent auditor to analysis weather such statements show the exact
financial affairs of company or not. The application of Sabane – OxleyAct of 2002 guide
companies in United States to introduce independent auditor to read the financial affairs of the
organization (Jayamana, Abdullah and Saat, 2019). Every year company need to appoint an
independent auditor who would look over the accounting transactions company has entertained
in the entire year. The independent auditor would overlook each accounting entry and the
financial statements like trading accounting, profit and loss account and balance sheet of the
organization. In order to restrict the similar action in future government has introduced this
legislation to strengthen the financial stability of the organization. This law created a positive
impact over accounting frauds occur in United States as this could oppose companies to
introduce independent auditor that will analysis the entire financial records related to the
respective financial year.
The entire case was a complete misbehave with the ethical code of conduct and the
Sabane – OxleyAct of 2002. Management could oppose both these legal regulations with the
support of fraud accounting transactions in order to polish the financial position of the
organization. Introducing independent auditor will improve the transparency in the accounting
books of company as the independent auditor would not carry personal interest in the company’s
profitability and better financial stability. Auditor will assess all aspects of the company’s
financial affairs. Without being biased in any context independent auditor will overlook in
company’s books of accounts. The responsibility of the auditor has also set in Sabane –
OxleyAct of 2002 as the auditor will only assess that financial reporting of the company has been
done based on the accounting principles and not any void entries are conducted to project better
financial stability of the organization. Financial position of organization is a crucial statement in
respect to company as it projects the actual facts in regards to company’s books of accounts and
performance of organization. All stakeholders associated with the organization make business
decision on the basis of the financial statements of company. This legal regulation could make
the process and importance of the accounting more prominent as it has improved the significance
and reliability of the financial records of company (Shi, 2018). Accounting books of accounts is
the sole document about the company’s books of accounts and authentication of such financial

statements with the support of independent auditor will make the financial records more relevant
in respect to organization. Government could improve the reliability and significance of
company’s books of accounts with the implementation of this act. This step of government is
seen as the reforms in the accounting of company as it could improve the authenticity of
company’s books of accounts. That timed when the case happened people trust in the financial
records was on doubt. With the support of this law government could rebuild the trust in
company’s financial records and accounting transactions. Independent auditor can analysis the
financial records of company without any biasness and self-interest.
CONCLUSION
This report is based open the case study of Enron Fraud Scandal in the year 2001. The
entire case was a result of accounting misbehave in the company’s books of accounts. The
Sabane – OxleyAct of 2002 could promote the practice of independent auditor for analyzing the
authenticity of company’s books of accounts and accounting transaction. The act ensures
appointment of an independent auditor for evaluation of company’s books of accounts.
Independent auditor would look over the state of affairs of company without any biasness which
will further increase the trust factor of all stakeholders of company y in respect to company
books of accounts.

REFERENCES
Books and Journals
Amilin, A. and Suryanto, T., 2018. Exploring the link between Corporate governance and audit
Pricing: A Case of Indonesia Managing Economic Growth, Innovation and
Technology Transfer Through IP Regulations: Issues and Challenges in Indonesia.
Blanco, S., 2020. The Manifestation of Fraud in Language: An Enron eMail Corpus Case Study
on Fraudulent Language Markers (Doctoral dissertation, Hofstra University).
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.
Shi, C. P., 2018. Critical Analysis of the Present and Future Development of Audit Services
Within the Banking Industry after the Financial Crisis (Doctoral dissertation, Anglia
Ruskin University).
Zhao, Y. and et.al., 2020. Audit partner rotation and negative information hoarding: evidence
from China. Accounting & Finance.
Li, L., 2020. Book Review of Disruption in the Audit Market: The Future of the Big Four,
Financial Failures & Scandals: From Enron to Carillion, and The Future of
Auditing. International Journal of Auditing. 24(3). pp.431-435.
Online:
Sabane – OxleyAct of 2002, 2020. [Online]. Available Through:
< https://www.soxlaw.com/>.