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 The Enron scandal was an accounting scandal involving Enron
Corporation, an American energy company based in Houston, Texas. It was
considered one of the largest securities fraud scandals in history, and the
investigation into the extent of the fraud committed by Enron is still
ongoing. Kenneth Lay created Enron in 1985. Enron changed its business
model to become a trader of energy derivative contracts, serving as a
middleman between natural-gas suppliers and their clients, under the
direction of Jeffrey Skilling, who started out as a consultant and ultimately
rose to the position of the chief operating officer. Andrew Fastow, who
quickly advanced through the ranks to become Enron's CFO, was one of his
smartest hires. Fastow supervised the company's funding through
investments in ever-more complicated products, and Skilling was in charge
of expanding its sizable trading activity. One of the largest accounting firms
in the world—and one of the top five—was Arthur Andersen. In addition to
acting as Enron's auditor during this time, Arthur Andersen also acted as a
consultant for the business. With over 85,000 employees working in 84
countries, Arthur Andersen, Arthur Andersen LLP was one of the biggest
public accounting firms in the 1990s. Several regional offices' auditors
failed to notice, disregarded, or accepted accounting irregularities for
major clients, including Enron Corp., during the partnership's final ten
years of operation. One of the three whistleblowers chosen as Time
magazine's Persons of the Year in 2002 was Sherron Watkins. In the historic
Enron crisis, Sherron Watkins disclosed corporate wrongdoing, which paved
the way for the passage of the SOX corporate reform statute.

The Enron scandal is a series of incidents that resulted in the

bankruptcy of the American energy, commodities, and services
conglomerate Enron Corporation as well as the demise of Arthur Andersen
LLP, one of the largest auditing and accounting companies in the world.
With more than $60 billion in assets, Enron's demise led to one of the
biggest bankruptcy cases in American history. This incident triggered a
contentious debate that resulted in laws that had long-lasting consequences
on the financial industry and were intended to improve accounting
standards and practices. As the boom years came to an end and the
business encountered greater competition in the energy trading industry,
Enron's revenues swiftly dropped. By employing mark-to-market accounting
to write unrealized future gains from a few trading contracts into current
income statements, the firm was able to provide the impression that its
current earnings were larger.
In order to address their concerns, the company's troublesome companies
were also transferred to so-called special purpose entities (SPEs), which are
really limited partnerships created with third parties. In order to convince
potential investors to take a chance and participate in the Enron
corporation, the company engaged in "mark to market," the manipulation of
financial statements, which is illegal. In order to manipulate the market,
they also transport electricity out of the state to increase demand and then
bring it back when the price is too high. When the Enron accounting firm
discovered the fraud, they immediately began shredding documents for
roughly a ton of paper, but it was already too late. Midway through 2001,
when experts started to pore into Enron's publicly available financial
documents, the seriousness of the issue started to become clear. When
Enron surprised investors by announcing that it would report a $638 million
loss for the third quarter and suffer a $1.2 billion drop in shareholder equity,
in part due to Fastow's partnerships, it did so in October. Immediately
after, the Securities and Exchange Commission (SEC) started looking into
the business dealings between Enron and Fastow's SPEs. Documents
pertaining to Enron audits were then started being destroyed by some
Arthur Andersen employees. Enron's stock fell precipitously as the
accounting scams' specifics came to light. Fastow was let go, and the stock
price of the firm fell precipitously from a high of $90 per share in the
middle of 2000 to less than $12 at the start of November 2001. Enron
agreed to be bought by Dynegy in an effort to avert a disaster that month.
However, Dynegy pulled out of the agreement a few weeks later. The
disclosure led to a decline in Enron's stock price to below $1 per share,
wiping out the value of the company's employees' 401(k) pensions, which
were largely based on the stock price. Enron filed for Chapter 11 bankruptcy
protection on December 2, 2001. A number of Enron executives were
charged with various crimes and received jail sentences as a result.
Notably, Skilling and Lay were both found guilty in 2006 of numerous
conspiracy and fraud-related counts. Skilling received a sentence of more
than 24 years at first, but only served 12. Lay, who was facing a term of more
than 45 years, passed away before receiving his punishment. Additionally,
Fastow entered a guilty plea in 2006 and was given a six-year jail term; he
was freed in 2011. In March 2002, the U.S. government launched an
investigation into Arthur Andersen as well. The company was charged by the
Department of Justice for obstructing justice. In favor of Andersen's rivals,
clients seek to reassure investors that their financial statements could
adhere to the highest accounting standards left.
They were quickly followed by the whole Andersen office as well as staff
members. Additionally, hundreds of workers were let go. The public
accounting license of Arthur Andersen was revoked on June 15, 2002, after
it was determined that it had destroyed evidence. The U.S. was convinced
by Andersen's attorneys three years later. The obstruction of justice
judgment will be unanimously overturned by the Supreme Court due to poor
jury instructions. But by that point, just 200 of the firm's personnel
remained to handle its legal matters.

According to the Investor Responsibility Research Center (IRRC),

scandals such as that at Enron have had some impact on how much
companies paid auditors in 2001 and early 2002. There is an evident change in
the proportion of non-audit and audit fees and a decrease in the auditors’
revenue after the scandal. The changes in internal auditing following the
accounting scandals at Enron are manifested in increased internal audit
budgets, staffing levels, meetings with the audit committee, and meeting
lengths. In response to the scandal, rules-based accounting standards have
been complemented with principles-based accounting standards.
Companies started adopting international accounting standards (IAS/ IFRS)
to improve internal control, management, as well as financial reporting to
reduce the possibility of fraud occurring. Also, the severity of the Enron
Accounting scandal case prompted the enactment of the Public Company
Accounting Reform and Investor Protection Act, also known as the
Sarbanes-Oxley Act (Sox) of 2002, and the subsequent creation of a new
regulator for the accounting profession called the Public Company
Accounting Oversight Board (PCAOB) which tightened auditing and financial
regulations towards corporations. The legislation focuses on ensuring that
the management is held accountable for the financial reports that they file
with the SEC; improving the independence of corporate boards as well as
the independence of the auditors; and increasing some of the penalties for
those who shred or tamper documents or violate the security laws.
Additionally, the statute made it illegal for auditing companies to conduct
any parallel consulting work for the same customers. This boosts the
confidence of financial statement users, especially investors as they will be
more protected from scandals like that of Enron.
 Indeed, there is no secret that will never be revealed. The downfall of
Enron was caused by its bad accounting practices. Enron took advantage of
the lack of policies that govern the accounting and auditing profession. The
company cut corners in order to keep the money flowing into the company.
Managers act unethically because of the pressure brought to them by
societal expectations. There is a lack of corporate governance in the
company- there are rules but been purposely ignored. The corporate
culture is messed up- internal whistleblowers are humiliated, hence, creating
weak internal control. There is a lack of independence on the part of the
auditing firm (that also acts as a consultant), as they are hired by Enron
which built a conflict of interest because the auditor has an incentive not
to issue an unfavorable report on the company that is paying them. The
enduring symbol of Enron as a corporate fraud tells us why strong corporate
governance is essential for any business to survive and thrive. Companies
that operate under bad accounting practices can boom but in the long run,
it will lead to their downfall.

REFERENCES:
Enron scandal - Downfall and bankruptcy | Britannica. (2022). In
Encyclopædia Britannica. [Link]
scandal/Downfall-and-bankruptcy
Analysis of how Auditing has Changed since Enron. 6000 word essay.
(2018). Writemyessay. [Link]
of-how-auditing-has-changed-since-enron-6000-word-essay/
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