The Enron Scandal of 2001 was the largest, most complicated, and most notorious

accounting scandal of all time. It involve Enron Corporation, a US-based Corporation who
purposely misstated their financial statements so that their investors will continue buying
their stocks in the market and was able to trick its investors into thinking that the firm was
doing much better than it actually was. And Arthur Andersen LLP, a Chicago Based American
holding company and was considered one of the “Big-Five” Accounting Firms at that time in
which they were instructed by Enron Corporation to purposely ignore the issues about their
Corporation’s financial statements in their Auditor’s report. The Enron Scandal was
considered the worst audit failure and certain laws were established prevent this scheme to
happen again.

Before filing for bankruptcy in 2001, Enron Corporation was one of the largest
integrated natural gas and electricity companies in the world. Enron was incorporated as the
merger of Houston Natural Gas Company and Internorth Inc. in 1985. In 1995, the business
was recognized as the most innovative business by the Fortune, and it made it successful
run for the next six years. It was managed by Andrew Fastow as the Chief Financial Officer,
Jerry Skilling as the Chief Executive Officer, and Kenneth Lay as the former CEO, founder
and chairman of the Corporation. On the other hand, the firm of Arthur Andersen was
founded in 1913 by Arthur Andersen and Clarence DeLany as Andersen, DeLany & Co. The
firm changed its name to Arthur Andersen & Co. in 1918. They
provided auditing, tax and consulting services to large corporations. By 2001, it had become
one of the world's largest multinational corporations.

In 2000, the corporation started to crumble due to their Video Rental Chains
business. CEO Jeffrey Skilling concealed all financial losses resulting from the trading
business and broadband projects by applying the accounting concept of mark-to-market
accounting. The company kept building assets. It reported profits that were yet to be
earned. If the actual profit earned were less than the reported earnings, the loss was never
reported. Additionally, the business transferred the asset to the off-the-books corporation.
Like this, the corporation concealed their losses. To add to the agony, the chief financial
officer of the business Andrew Fastow deliberately resorted to the plan that displayed that
the business is in good financial shape even though its subsidiaries lost a lot of investor’s
money.

In the aftermath of the scandal, Enron shareholders filed a $40 billion lawsuit after
the company’s stock price and on December 2, 2001, Enron filed for bankruptcy under
Chapter 11 of the United States Bankruptcy Code. While the Arthur Andersen LLP, was
convicted of obstruction of justice in 2002 for shredding documents. It voluntarily
surrendered its licenses to practice as CPAs in 2002. Furthermore, US President George W.
Bush with sponsors Senator Paul Sarbanes and Representative Michael Oxley, promulgated
the Sarbanes- Oxley Act of 2002 which intended to protect investors by preventing
fraudulent accounting and financial practices at publicly traded companies.
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