Table of ContentsIntroduction:Main CharactersEthical IssuesMarket and Community ImpactCharges and LawsuitsNew Regulation After the ScandalThe Sarbanes-Oxley ActRecommendationConclusionReferencesIntroduction:Enron was formed by the merger of two companies Houston Natural Gas Company and InterNorth Incorporated in 1985 (Segal, 2019). It was named “America's Most Innovative Company” by Fortune for six consecutive years between 1996 and 2001. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay In 1992, Jeffery Skilling obtained SEC approval to switch from the traditional historical cost accounting method to the mark-to-market (MTM) accounting method. MTM is a measure of the fair value of accounts that can change over time, such as assets and liabilities (Segal, 2019). Enron used this method to inflate its revenues and profits. Andrew Fastow, CFO, used special entities to hide his debts from creditors and investors. Enron reported earnings on projected and expected revenue, and on losses incurred it would transfer the business to an unaccounted company, thus making it unreported. On December 2, 2001, Enron filed for bankruptcy. Its stock price plummeted from $90.75 to $0.26 in a matter of months. Investors have lost approximately $78 billion over the years. Enron's accounting firm, Arthur Anderson, was accused of withholding information from the SEC when their general counsel David B. Duncan advised them to destroy all documents relating to Enron's financials. They were found guilty in June 2002. Andrew Fastow was sentenced to six years in prison and pleaded guilty to fraud and money laundering (Cernusca, 2011). Approximately 5,000 jobs and $1 billion in employee retirement funds were lost overnight when Enron filed for Chapter 11 bankruptcy (Flanagan, 2020).Major CharactersEnronCEO: Jeffery SkillingFormer CEO: Ken LayCFO: Andrew FastowArthur AndersonPartner: David B. DuncanEthical IssuesObjectivity is necessary: ​​To have a chance of holding yourself and your work to the highest moral guidelines, you should remain objective. Sometimes it becomes overly easy to rationalize or legitimize our activities when we realize that our conduct tends to abuse the Code of Professional Conduct. Ignorance is never a reason: playing the forgetfulness card doesn't work. (“In any case, I didn't realize I was breaking the Code.”) It is your obligation to know, maintain and abide by the Code of Conduct. You never get a free pass by spending money – Asking another person to do what you know is not right or distancing yourself from untrustworthy conduct does not guarantee that you will still be considered in violation of the Code of Conduct. The "it wasn't me" excuse is not a reason to ignore conduct that you know is not right. Customer violation can never be ignored: you are simply working for your customer, so their reckless activities do not concern you, do they? … This implies that you are allowing them to intentionally damage internal controls. So to speak, it is difficult to act morally when performing administrations for a client who attempts to deceive the administration, customers, investors or speculators. Doing administrative tasks for them makes you a backstabber in misrepresentation and no less trustworthy than if you did it without anyone else's help. Market and Community Impact Large numbers of Enron employees in the thousands lost 401(k) retirement plans that held company stocksociety. Public investors in Enron stock suffered extreme losses as Enron stock fell below $1 per share after the largest single-day trading volume for any stock listed on the New York Stock Exchange. Confidence and hope were lost in the market on accounting firms, especially Arthur Andersen after learning that thousands of Enron documents, including physical documents, computer files, and emails which came as a huge shock to the public. According to HG.org Legal Resources, “The Enron/Arthur Andersen legacy lives on in various changes that have occurred in the profession. While prior to this case the accounting industry had been significantly supervised by the Public Oversight Board (POB), after this case came to light the SEC Chairman, Harvey L. Pitt, in 2002 made a series of investigations into the self-regulatory system in the accounting profession without consulting the POB. This ultimately led to the vote to disband the POB in May 2002. As a result, the FASB emerged into the public spotlight as the leader of the self-regulatory system and took on a significant role in accounting standard reform. In January 2003, the FASB announced new accounting rules designed to force U.S. companies to move billions of dollars from off-balance sheet entities onto corporate balance sheets. The SEC has also tightened its oversight of the profession.” Accusations and Lawsuits Overall, a total of 41 charges have been brought against Enron founder Kenneth Lay and former CEO Jeffrey Skilling. Individually, Lay faced a total of six counts of fraud and conspiracy and four counts of bank fraud; while Skilling had 35 charges ahead of him. (Segal, 2019) Both gentlemen were accused of lying about Enron's current financial state before the company began to fail in December 2001. They began lying about the information just as they realized there were hidden debts and highly profitable profits. inflated. In all these cases, both executives have pleaded not guilty. There were a total of forty-one charges against both men. They are described below: First charge: - Conspiracy to commit securities crime and electronic fraud against Lay and Skilling. Skilling approved erroneous quarterly and annual earnings and organized fake conference calls with Wall Street analysts claiming that Enron was doing well. Count 2-6: Securities and Bank Fraud Against Skilling Skilling knowingly approved four fragile and unstable financial structures that were supported by Enron stock. This stock was used to cover inflated asset values ​​and also to keep millions in debt off the company's books. Count 12-13: Wire fraud against LayLay lied to Enron employees about the company's financial health via video and conference call. He said the third quarter performance looked great and that they would definitely hit their numbers. This was after he knew full well that Enron was about to announce a loss of $1.2 billion in stock capital alone. He also knowingly withheld information from analysts. Count 14-20: Securities Fraud Against SkillingSkilling knowingly lied to the SEC in quarterly and annual reports filed in 2000 and 2001. It lied that Enron's revenues and profits and this was due to accounting schemes that were put in place . Count 21-26: Securities Fraud Against Skilling Skilling again lied about Enron's earnings from energy trading in California. He mentioned that revenues from Enron's business operations in California were small; all the while lying to analysts on several calls and oneanalyst conference in 2000 and 2001. Count 27-30: Securities Fraud Against LayLay lied to and deceived a credit rating agency representative just a couple of days before the large losses were announced. He also stated that Enron was not hiding anything even when the company's financial health was made public. Counts 31-36: Making false statements to auditors, against SkillingSkilling apparently signed misleading letters to the auditors of Arthur Anderson LLP about the truth of Enron's financial statements in 2000 and 2001 Counts 38-41: One count of bank fraud and three counts of making false statements to banks against Lay. Lay allegedly took loans totaling $75 million from three banks and then gambled his deal with the lenders that he would not use the money to make Enron stocks Accounts 42-51: Insider Trading Against SkillingSkilling would hide the company's health and sold $62.6 million in stock as shares were inflated by the company. One of the deals occurred after his resignation in September 2001. Andrew Fastow was also found guilty of two counts of wire and securities fraud for aiding Enron's corrupt actions. Arthur Andersen was found guilty of destroying company documents to hide them from the SEC. It was later overturned on appeal. Meanwhile, for aiding Enron's business practices, Andrew Fastow pleaded guilty to two counts of wire fraud and securities fraud. (Segal, 2019)New regulation after the scandalDue to the Enron scandal, the entire Wall Street community was devastated and there was a strong consensus among all financial institutions on adopting strong laws that could prevent the occurrence of such unethical behavior in the future. There was a need for accurate financial reporting standards for all publicly traded companies. This topic has been much discussed among various economists and several laws have been suggested. After much deliberation, in 2002 Congress finally decided to pass the bill signed by President George W. Bush that would change the way financial reporting is done for publicly traded companies. This law was none other than the Sarbanes-Oxley law. The Sarbanes-Oxley law is "a mirror image of Enron: the company's perceived shortcomings in corporate governance are virtually matched point-for-point in the law's major provisions." (Deakin Simon, 2003). In addition to the Sarbanes-Oxley Act, the Financial Accounting Standards Board has adopted several other measures that would increase oversight of financial operations in public companies to increase ethical conduct. This led to a series of measures such as the firing and replacement of underperforming managers, an independent board of directors, oversight of company audits as well as verification of quarterly reports disclosed to the public and much more. The Sarbanes-Oxley Act The Sarbanes-Oxley Act was passed by Congress in 2002. Under the Sarbanes-Oxley Act, management of a public company must report on internal control over its annual financial reporting. Under SOX, a public company is responsible for having an internal control system and reporting on its effectiveness. Additionally, management is required to disclose any internal control deficiencies and material weaknesses. (Henderson, 2019). Due to the implementation of this law, many external audit organizations have received approval to verify the accuracy of all accounting information for any publicly traded company. This law created transparency in financial institutions andhas led to greater trust in the stakeholder community. Recommendation Between 1989 and 1995, Enron was named "America's Most Innovative Company" by Fortune magazine. In 2000, it was also the seventh largest organization in the United States by advertising capitalization. Despite this, the organization sought bankruptcy in 2001. Based on the theories illustrated, various authors have thought of concrete recommendations to improve corporate administration and prevent bankruptcy, for example that of Enron, from occurring in the future. For example, Johnson (2002) refers to the prerequisites that directors declare and continue to hold many shares of the organization during and after their tenure, the limits of the tenure, the intermediary providing details on the reputation of the directors in different companies in which the person in question also serves. on the number of positions a single individual can hold on the board, separating the CEO and director situation, requiring an independent director when the board conducts any type of self-evaluation, the exposition of individual directors' decisions on significant matters matters such as, compensation adequate, choice expenses, arrangement of appraisers, merger choices, etc. As indicated by the SOA, the CEO and CFO should also ensure annual reports and could face criminal sanctions for reckless certifications. The SOA also prohibits individual advancements to executives and execs by motivating strength-based compensation and benefits from stock deals if the accounts are overvalued. Likewise, it requires senior financial officers to disclose their corporate code of ethics. Foundations of economic institutions should be urged to recognize financial education, financial data and "business" financial advice. Any financial guidance related to business purposes should be transparent and unambiguously disclose any commercial nature where it is also advanced as a financial training activity. The government should take into account the ongoing scandals as an update to the fact that even a well-functioning business sector economy should continually strive to adjust individual responsibility and open governance. A very structured and implemented legislation characterizes positive and negative motivations, to enhance the conduct of reasonable and productive activity of the shopping center (Mandaci, 2012). Please note: this is just an example. Get a custom paper from our expert writers now. Get a Custom EssayConclusionMost reputable accounting firms can fail due to mismanagement in the interest of a legitimate client concern. Expanded rule and oversight was proposed a bill to help prevent corporate humiliations on the scale of Enron. The additional examination also protects associations and open accounting firms from having the types of errors that could ultimately contribute to their downfall. The essential party that could have conveniently prevented a significant number of accounting violations was its audit firm. The managers of Arthur Andersen and Enron did not set out to decisively influence the accounting business or any other industry. They decided to get the maximum amount of money for themselves as quickly as possible, given the circumstances. They were happy to do anything to acquire that money. These reckless and unquenchable acts led the two associations to potential devastation and even bankruptcy. Regardless, the accounting industry has responded by introducing changes that,