The Enron Scandal

       Enron Corporation was a Houston, Texas-based energy, commodities, and services firm. In 2001, it was revealed that the corporation had been utilizing accounting loopholes to hide billions of dollars in bad debt while inflating the company’s revenues, in one of the most contentious accounting scandals in the last decade. Enron’s stock price plummeted from roughly $90 to under $1 in a year as a result of the scandal, costing stockholders over $74 billion.

       The company’s CEO, Jeff Skillings, and former CEO, Ken Lay, hid billions of dollars in debt off the balance sheet, according to an SEC investigation. Furthermore, they had forced Arthur Andersen, the company’s auditor, to disregard the problem.

       Many Enron executives were prosecuted and sentenced to jail for a variety of offenses. In 2006, both Skilling and Lay were found guilty of multiple conspiracies and fraud offenses. Skilling was sentenced to more than 24 years in prison but only served 12. Lay, who faced a term of more than 45 years in jail, died before his punishment could be carried out. Fastow also pled guilty and was sentenced to six years in jail in 2006, but was freed in 2011.

       Arthur Andersen was also analyzed critically, and the US Department of Justice charged the business for obstruction of justice in March 2002. Clients that needed assurance that their financial statements would satisfy the highest accounting standards turned to rivals instead of Andersen. Employees from Andersen and the whole office eventually followed. Thousands more workers have also been laid off. Arthur Andersen was found guilty of destroying evidence on June 15, 2002, and their license to practice public accounting was revoked. Three years later, Andersen’s attorneys convinced the United States Supreme Court to reverse the obstruction of justice decision based on incorrect jury instructions. But by that time, the business had just 200 staff remaining to manage its cases.

       After the fact, the convictions were as contentious as the company’s demise, with prosecutor Andrew Weissman indicting not just individuals, but the whole Arthur Andersen accounting firm, thus putting the firm out of business. When the conviction was ultimately reversed, it was scant consolation to the 20,000 people who had lost their jobs.

      As a result, investors and regulators were concerned about corporate executives’ lack of integrity, and stock markets and trust in financial ventures both plummeted. In summary, businesses and various stakeholders experienced a crisis of confidence due to a loss of belief in their integrity, financial reporting, and operations. Thus Enron became one of the factors to a new ethics regulations in the world.

References:

Bondarenko, P. (2021, November 30). Enron scandal. Encyclopedia Britannica. https://www.britannica.com/event/Enron-scandal

Corporate Finance Institute. (2020, June 12). Accounting scandals – List of top 10 scandals in past decades. https://corporatefinanceinstitute.com/resources/knowledge/other/top-accounting-scandals/

The Financial Controller. (2020, February 24). Enron Accounting Scandal Explained! A Frequent Accounting Interview Question! [Video]. YouTube. https://www.youtube.com/watch?v=SMT5v5zT5KQ

Touvila, A. (2021, December 31). Mark to market (MTM). Investopedia. https://www.investopedia.com/terms/m/marktomarket.asp