PMBA BUSINESS ETHICS

TEST (15%)

NAME: ADIT ROBINSON

IC NO:
CENTRE:

Read the case and answer the following :

a) What were the impact of Enron's scandal to the financial world?

1.0 Background of Enron company

Enron Corporation was a large American energy, commodities, and services

company that was founded in 1985 and was based in Houston, Texas. At its peak,
Enron was one of the world's largest energy traders, with revenues of RM101
billion and over 20,000 employees worldwide. The company's growth and
profitability were driven by aggressive and innovative financial practices that
included using complex accounting techniques to manipulate its financial
statements. Enron became the first non-financial company to use the method to
account for its complex long- term contracts.

Enron was known for its innovative financial products and aggressive accounting
practices. It was one of the pioneers of energy trading and was involved in the
buying and selling of natural gas, electricity, and other commodities. Enron also had
a number of subsidiaries that were involved in everything from broadband services
to paper products.

However, Enron's success was built on a foundation of fraud and deception. The
company engaged in accounting practices that allowed it to hide billions of dollars
in debt and losses. It created off-balance-sheet partnerships that were used to
transfer liabilities off Enron's books and to inflate its profits. Enron executives,
including CEO Kenneth Lay and CFO Andrew Fastow, used these practices to
enrich themselves at the expense of the company's shareholders and employees.

In late 2001, Enron's fraudulent practices were exposed, and the company filed for
bankruptcy. Thousands of employees lost their jobs, and investors lost billions of
dollars. The scandal led to the downfall of the accounting firm Arthur Andersen,
which had been Enron's auditor.
 The Enron scandal is widely regarded as one of the biggest corporate scandals in
history and led to significant changes in corporate governance and accounting
practices. The scandal also resulted in the passage of the Sarbanes-Oxley Act of
2002, which imposed stricter regulations on corporate accounting practices and
created new oversight mechanisms for publicly traded companies.

Enron's collapse in 2001 was one of the biggest corporate scandals in U.S. history,
and it led to the company's bankruptcy, the loss of thousands of jobs, and the loss of
billions of dollars in investor value. The scandal was fueled by a series of unethical
and illegal practices, including the manipulation of financial statements, insider
trading, and the creation of off-balance-sheet entities to hide debt and inflate profits.
The company's executives, including CEO Jeffrey Skilling and Chairman Kenneth
Lay, were eventually convicted of fraud and conspiracy charges, and some of them
received lengthy prison sentences.

2.0 Content:

2.1 The impact of Enron's scandal to the financial world

The Enron scandal was a corporate fraud and accounting scandal that came to light
in 2001, involving the American energy company Enron Corporation. The scandal
had a significant impact on the financial world, causing a loss of public trust in
corporate accounting and leading to changes in the regulatory and legislative
environment. The Enron scandal had a significant impact on the financial world,
resulting in major changes to regulations, corporate governance practices, and
investor confidence.

Enron was estimated to have about RM23billion in liabilities, both debt outstanding
and guaranteed loans. Citigroup and JP Morgan Chase in particular appeared to
have significant amounts to lose with Enron’s fall. Additionally, many of Enron’s
major assets were pledged to lenders in order to secured loans, throwing into doubt
what if anything unsecured creditors and eventually stockholders might receive in
bankruptcy proceedings. The collapse of Enron, the largest bankruptcy in U.S
history, which led to thousands of employees losing their jobs and their life saving
plans tied to the company’s stock, which was calculated as 401(k).

However, in future years, the profits could not be included, so new and additional
income had to be included from more projects to develop additional growth to
appease investors. Due to large discrepancies of attempting to match profits and
cash, investors were typically given false or misleading reports. While using the
method, income from projects could be recorded, which increased financial
earnings.
Here are some of the ways the Enron scandal impacted the financial world:

Regulation: In response to the scandal, the U.S. government passed the Sarbanes-
Oxley Act of 2002, which increased corporate accountability and required more
rigorous financial disclosures from public companies. This law mandated stricter
accounting standards and required companies to have independent audit
committees, among other measures.

Reduced public trust in corporate accounting: The Enron scandal led to a loss of
public trust in corporate accounting and financial reporting. Investors and the
general public became wary of relying on financial statements provided by publicly
traded companies, leading to a decline in the stock market and increased scrutiny of
corporate practices.

Corporate Governance: The Enron scandal also led to a renewed focus on

corporate governance and ethics. Companies began to take steps to improve their
governance structures, such as separating the roles of CEO and board chair, and
implementing stronger internal controls.

Changes in regulatory and legislative environment: The scandal led to increased

regulatory oversight and changes in the legislative environment to prevent similar
frauds from happening again. The Sarbanes-Oxley Act of 2002 was passed in
response to the Enron scandal, which introduced new accounting regulations and
established penalties for corporate fraud.

Impact on accounting firms: The scandal also had an impact on accounting firms,
particularly Arthur Andersen, which was Enron's accounting firm. The scandal led
to the dissolution of Arthur Andersen and a decline in public trust in other
accounting firms.

Legal ramifications: Several Enron executives were indicted and sentenced to

prison for their role in the scandal, and lawsuits were filed against Enron's auditors,
board of directors, and investment banks. These legal proceedings had a lasting
impact on the financial world, leading to greater scrutiny of corporate practices and
the role of auditors and investment banks.

Investor Confidence: The scandal caused a loss of investor confidence in the stock
market, particularly in the energy sector. Many investors lost substantial amounts of
money as a result of Enron's bankruptcy, which led to increased scrutiny of other
corporations' financial practices.

Changes in Accounting Practices: Enron's use of off-balance sheet accounting

practices and other fraudulent accounting techniques led to increased scrutiny of
accounting practices and greater focus on transparency in financial reporting.
 Overall, the Enron scandal had a profound impact on the financial world, leading to
changes in the regulatory and legislative environment, reduced public trust in
corporate accounting, and legal ramifications for those involved in the scandal. The
Enron scandal exposed serious flaws in the financial system and highlighted the
need for stronger regulations and corporate governance practices to protect
investors and prevent future corporate fraud.

3.0 Conclusion

The Enron scandal had a profound impact on the financial world. It exposed the
dangers of accounting fraud, unethical business practices, and the lack of oversight
in corporate governance. The scandal led to the downfall of Enron, once considered
one of the most innovative and successful companies in the world, and resulted in
the conviction of several of its top executives.

The scandal also had far-reaching effects on the financial markets, leading to
increased scrutiny of accounting practices, more stringent regulation of
corporations, and greater emphasis on transparency and accountability in financial
reporting. The Enron scandal prompted reforms such as the Sarbanes-Oxley Act,
which established new standards for corporate accountability, transparency, and
oversight, and created the Public Company Accounting Oversight Board (PCAOB)
to regulate public accounting firms.

The Enron scandal demonstrated that even the most powerful and respected
companies are not immune to fraud and deception, and that the consequences of
unethical behavior can be severe. The scandal has had a lasting impact on corporate
culture, promoting greater transparency and accountability in business practices,
and reinforcing the importance of ethics and integrity in corporate leadership.

b) Discuss Sherron Watkins's role in Enron scandal.

1.0 Introduction

Sherron Watkins is a former Vice President of Enron Corporation who gained

notoriety for her role in exposing the company's fraudulent accounting practices. In
August 2001, she sent a memo to then-CEO Kenneth Lay detailing her concerns
about Enron's accounting practices, including the use of special purpose entities
(SPEs) to hide losses and inflate earnings. Her memo, which became known as the
"Watkins Memo," was instrumental in exposing Enron's fraudulent activities and
 ultimately led to the company's bankruptcy. Watkins became a key witness in the
subsequent investigations and trials related to Enron's collapse, and her actions
earned her praise for her courage and integrity in standing up against corporate
wrongdoing.

Sherron Watkins is an American former Vice President of Corporate Development

at Enron Corporation, an energy and commodities trading company that went
bankrupt in 2001 due to accounting fraud and corruption. She gained notoriety for
her role in uncovering the financial wrongdoing at Enron and for alerting the
company's top management, including then-CEO Kenneth Lay and then-CFO
Jeffrey Skilling, about the unethical practices that ultimately led to the company's
downfall.

Watkins became a whistleblower when she sent a letter to Lay in August 2001,
warning him of the company's accounting irregularities and potential financial
collapse. Her letter became public after Enron's bankruptcy and was widely credited
with helping to expose the fraud at the company. Watkins' courage and integrity in
speaking up against corruption have made her a symbol of corporate ethics and
accountability, and she has been honored with numerous awards for her actions,
including being named one of Time magazine's Persons of the Year in 2002.

2.0 Content:

2.1 Sherron Watkins's role in Enron scandal

Sherron Watkins was a former vice president of corporate development at Enron, an

energy company that was involved in a massive accounting fraud scandal in the
early 2000s. She played a significant role in exposing the fraud, which ultimately
led to the downfall of Enron and several of its top executives.

In August 2001, Watkins sent a memo to Enron's then-CEO, Kenneth Lay, warning
him about the accounting irregularities and financial manipulation that she had
observed at the company. She specifically raised concerns about the use of off-
balance-sheet partnerships to hide Enron's debt and inflate its earnings, and warned
that these practices could result in a "wave of accounting scandals" that would
damage the company's reputation and hurt its shareholders.

Watkins's memo was a crucial piece of evidence in the subsequent investigations

into Enron's accounting practices, and helped to trigger a series of events that
ultimately led to the company's bankruptcy in December 2001. She also testified
before Congress and other regulatory bodies about her experiences at Enron, and
became a key whistleblower in the scandal. Her warning was one of the first public
indications that something was seriously wrong with the company, and it helped to
 trigger the eventual collapse of Enron.

Watkins's actions were widely praised for their bravery and integrity, and she was
named one of Time magazine's "Persons of the Year" in 2002 for her role in
exposing the fraud. Her testimony and disclosures helped to expose the wider
culture of corruption and deceit at Enron, and brought much-needed attention to the
need for stronger regulation and oversight in the corporate world.

Watkins's actions played a significant role in exposing the Enron scandal and
bringing to light the unethical practices that led to the company's downfall. Her
courage in speaking out against powerful executives and her commitment to ethical
leadership have made her a respected figure in the business world and a champion
for whistleblowers. Her role in the scandal is considered to be instrumental in
bringing the company's corruption to light and initiating reforms in the accounting
industry.

3.0 Conclusion

Sherron Watkins played a significant role in exposing the Enron scandal, which
was one of the largest corporate scandals in history. As a former vice president of
Enron, Watkins was one of the first individuals to raise concerns about the
company's accounting practices and financial reporting to senior executives,
including then-CEO Kenneth Lay.

In August 2001, Watkins wrote a memo to Lay detailing her concerns and warning
him that the company could "implode in a wave of accounting scandals." Her
memo helped to bring the issues at Enron to light, and ultimately led to the
company's downfall.

Watkins was later recognized for her role in exposing the Enron scandal and was
named one of Time magazine's Persons of the Year in 2002. She has since become
an advocate for corporate ethics and transparency and has spoken out about the
importance of whistleblowers in bringing corporate wrongdoing to light.