The Enron Scandal of the early 2000's was seen as one of the most known white collar

scandals in American history. After the revelation of the scandal, several key Enron

executives and accountants were persecuted for their crimes. The unethical policies and

falsification of documents by Enron led to the passage of the Sarbane Oxley Act of 2002,

increased role of the Securities and Exchange Commission, passage/guidelines of Generally

Accepted Accounting Principles (GAAP), the demise of Arthur Andersen, and role of publicly

traded companies in politics.

Enron was founded in 1985 due to a merger between Houston Natural Gas Company

and InterNorth Inc. After the merger, Kenneth Lay, former CEO of Houston Natural Gas

Company becomes Enron's CEO and chairman. Enron began trading commodities in October

1999 by establishing Enron Online (EOL). Between 1996 and 2001, Enron was named as

“America's most Innovative company” by Fortune. By 2000, Enron's profits began to decline

significantly. Enron CEO Jeffery Skilling found ways to hide the financial losses of Enron

leading to the demise of Enron (Investopedia, 2016).

Due to the collapse of Enron came the California energy crisis. With the tapes between

Enron exposed at the trial, it was revealed they took plants offline to overcharge their

customers to make more money (democracynow, 2006). These tapes showed that Enron

“manipulated energy markets in Canada and was planning to rig the California market...to

trigger an energy crisis in 2000 and 2001 which cost residents billions of dollars in

subcharges (Borcher, “Tapes”).” To salvage business, Enron sold various assets which

include the following: 1) Energy trading arm business with UBA Warburg will share some of its

profits, 2) Centrica purchased Enron's European arm for 96.4 Euros, 3) Dynegy, a smaller

rival of Enron won a pipeline in the US after merger talks fell through, and 4) Power project in

India's Maharashtra – India's biggest foreign investment project is still up for sale. Due to the

revelation of the tapes, key Enron executives and accountants were persecuted (BBC, 2002).
 Before the discovery of the Enron scandal, Enron had key political contributions in the

White House. It was a major campaign contributor to George W Bush's election. Moreover, it

was revealed that Kenneth Lay was a personal friend of Bush but Bush quickly distanced

himself from Lay after the revelation of the scandal. It was also proved that Enron executives

met with then Vice President: Dick Cheney to discuss the administration's energy plan (BBC,

2002). Thus, before the introduction of Sarbane Oxley Act of 2002, improved role of SEC

(Securities and Exchange Comission), GAAP, and establishment of PCAOB (Public Company

Accounting Oversight Board), it can be inferred that publicly traded companies like Enron, in

the past, were able to manipulate key politicians in the White House to advance their agenda.

Key proponents of the Enron scandal were convicted and put in prison. Kenneth Lay,

Enron founder died of heart failure six weeks after the trial ended but was convicted of fraud

and conspiracy. Enron CEO Jeffery Skilling had his sentencing reduced from 24 years to 14

years (set to be released in 2020) after U.S District Judge Simeon Lake reached “a deal

struck between prosecutors and Skilling's lawyers (Huffington, 2013).” Andrew Fastow, chief

financial officer appeared involuntarily and refused to speak at trial to avoid indicting

themselves despite being “the alleged author of the deceptive accounting practices (BBC,

2002).” He served 10 years after being found guilty of charges and is currently a speaker

giving talks about ethics and law (Huq, “Speaking”). David Duncan, chief Auditor at Arthur

Andersen shredded Enron's documents was not charged in the case but can still be

recharged (Houston, 2005). Joseph Beradino, chief executive testified at trial defending the

firm's involvement (BBC, 2005). A jury convicted him of obstruction of justice and currently

“commutes to his office from Greenwich, Conn.to his office on the 12 th floor of a Manhattan

skyscraper twice a week (Bloomberg, 2002).” Sherron Watkins, former Enron employee and

whistleblower of the scandal placed the blame on Fastow and Skilling instead of Lay (BBC,

2002). She currently is a speaker “against unethical organizational practices” and “talks to
other whistleblowers who have a sense of regret about what they have done because they

feel they paid too high a price for it — especially if the aftermath of their decision involves

career, financial and relationship difficulties (UT Dallas, 2016).”

Enron's main ethics policy is human rights, consisting of the sections: 1) Vision, 2)

Values, 3) Integrity, 4) Communication, and 5) Excellence (Thesmokinggun, “Enron”). Enron's

“tone of top” consists of leadership, culture, and management controls working together to

achieve its goals (Free et al, “Management”). However, earning a profit for shareholders

shouldn't be the primary purpose for which business should be conducted as evidenced by

Enron's “tone at top.” Furthermore, if the “tone of top” is ineffective, it means that leadership,

culture, and management controls have violated ethics.

After the collapse of Enron, the Sarbanes-Oxley Act of 2002 was passed. It helped

regulate accounting firms by having “management and internal auditors establish internal

controls and reporting methods of the adequacy of those controls (Investopedia, “Sarbanes”).”

It also mandated a requirement that senior management verify the accuracy of the reported

financial statement (Investopedia, “Sarbanes”). Moreover, PCAOB was established to

oversee accounting professionals who provide independent audits for publicly traded

companies (SEC, “Public”). The impact of Sarbanes-Oxley Act of 2002 is the following: 1)

accounting firms doing audits are liable for their audits, 2) companies may pay for internal

control software, higher price for audits,and create an internal control plan to track and review

their performance while auditors spend more time with due diligence to complete audits, 3)

companies perform an audit every one-three years, depending on size, 4) passed to ensure

accuracy of finanical statements to investors to protect against fraud, and 5) created a barrier

for foreign companies to operate in the United States (Slaughter, “Impact”).

Arthur Andersen was founded in 1913 in Chicago by Arthur Andersen and his partner:

Clarence DeLany. In its initial stages, it offered tax services and other services to address
other accounting problems. During the 1920s, they opened six new offices across the country

with an annual profit that rose to $2 million. Between 1947 and 1973, they kept expanding. In

1989, Arthur Andersen and Andersen Consulting became separate units which later became

known as Andersen Worldwide. At the beginning of the 21 st century, Andersen Ltd. And Arthur

Andersen became known as Andersen. At the wake of the Enron Scandal, Andersen stopped

providing audit services to clients and sold its overseas assets to other firms (Wilson et al,

“Andersen”).

Arthur Consulting, Andersen's business consulting unit was split from Arthur Andersen

in a court ruling in 2000 after a dispute over money. However, this ruling did not affect the

clients but was a victory to consultants. It allowed consultants to compete with Arthur

Andersen for the same clients. This ruling separated a company's consulting business from its

accounting firms (Leonhardt, “Andersen”).

After the court ruling in 2000 spliting Arthur Consulting and Arthur Andersen into

separate units offering different services, it can be seen as a form on internal control.

However, with the Enron Scandal, the main cause of the demise of Arthur Andersen is their

contributory negligence. There were disputes over the fees, failure to follow accounting

standards, conflict of interest between Enron and Arthur Andersen, lack of segregation of

duties, inadequate financial disclosures, and inadequate auditor opinion which led to the

discovery of fraud at Enron and the demise of Arthur Andersen (Idowu, “Enron”).

Due to lack of internal controls in auditing Enron, it can be seen that Arthur Andersen

did not use any professional skepticism while auditing Enron since 1985. Auditors destroyed

key documents that will have proved existence and rights as well as completeness to the

accuracy of the financial statements (Economist, “Lessons”). Furthermore, the financial

statements of both companies would have overstated their profits.

In conclusion, the Enron Scandal led to the role of ethics and law into the accounting
realm and profession with the passage of Sarbanes-Oxley Act of 2002. Due to lack of internal

controls and lack of professional skepticism on Arthur Andersen’s part, it led to the creation of

PCAOB which oversees accounting professionals. The introduction of Sarbanes-Oxley helped

regulate accounting firms.

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