Enron Scandal

Enron Scandal

Sarbanes-Oxley Act

Cory D. Anderson

Ms. Divine

Miles College

Introduction

The Enron scandal was the start of the Sarbanes-Oxley Act. Enron Corporation was an American energy company based in Houston, Texas. Involved in the scandal was one of the five largest audit and accountancy partnerships in the world, Arthur Andersen. The scandal eventually led to the bankruptcy of the energy company in 2001. The ones who suffered the most in the scandal was not the masters of manipulation of numbers but the innocent bystanders who only invested most of their money in stocks in the company. Especially through they workers 401(k) programs (Millman, 2002). CFO of Dow Chemical Company, Pedro Reinhard says, “At the end of the day, we have seen that the ones that have committed the offenses are still walking around and managing their own fortunes” (Millman, 2002). The tale of the scandal is filled wih bad morality decisions. As one of the largest and most admired corporations scandalously imploded with major collateral damage. The collateral damage included not only the destruction of a Big Five audit firms but also any lingering post-tech-bubble faith in the integrity of securities analyst (Millman, 2002). Koehn suggests that Enron, like many other company’s develop a “good times” code of ethics that “presupposes that everything is going well with the core business, but does not address what happens when the core business is under attack” (Millman, 2002). One of the defining moments in the fall of Enron was when the managers of Enron realized that the core business was not what they had led their investors to expect (Millman, 2002). The investors believed in the Enron corporation was of real value. Joseph Badaracco, the John Shad Professor of Business Ethics at Harvard Business School says, “They really believed they ere on a crusade, innovating, getting traditional practices out of the energy business, and liberating a lot of capital. The defining moment came when they realized the business model was not working in the range of businesses they had committed to make it work in, and told themselves ‘we can either admit that an the stock goes down by 75 percent, or we can merge with somebody who has real assets and real cash flows (Millman, 2002). The managers thought it unthinkable to tell the truth to their investors. In 1999 Enron began to push the generally accepted accounting principles (GAAP) to the breaking point with special-purpose entities that disguised the actual financial condition of the company. The audit company Arthur Andersen approved Enron’s decision not to consolidate the derivative-related liabilities of these entities with the overall company’s liabilities. Theses entities not only supplemented the Enron executives, but also hid that Enron was at huge risk (Millman, 2002). Accounting firm PricewaterhouseCoopers conducted a due diligence and advised Veba that Enron’s accounting was considers “a house of cards”, and reported a debt/equality ration was 70-75 percent, which was not the reported 54.1 percent that the company’s financial reports registered. Popular philosopher of the 20th century, Alasdair MacIntyre, says, “ The problem with Enron was that the people trusted those whom they had no good reason to trust” (Millman, 2002). Enron was not the only one using special accounting to avoid showing that the company could not possibly perform at the high levels that the stock price showed.