Table of contentsIntroduction: Main charactersEthical issuesImpact on the market and communityCharges and prosecutionsNew regulations after the scandalSarbanes-Oxley ActRecommendationConclusionReferencesIntroduction:Enron was formed from the merger of two Houston Natural Gas companies 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 custom essay on “Why Violent Video Games Should Not Be Banned”?Get the original essayIn 1992, Jeffery Skilling obtained SEC approval to move from the traditional historical cost accounting method to the accounting method mark-to-market (MTM) assessment. . 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, chief financial officer, used special purpose vehicles to hide their debts from creditors and investors. Enron would report gains on projected and expected revenues, and in the event of losses, it would transfer the asset to an unregistered company, thus making it unreported. On December 2, 2001, Enron declared bankruptcy. Its stock price fell from $90.75 to $0.26 in a matter of months. Investors have lost about $78 billion over the years. Enron's accounting firm, Arthur Anderson, was accused of withholding information from the SEC when its legal counsel David B. Duncan advised them to shred and destroy all documents related to Enron's finances. They were convicted 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).Main CharactersEnronCEO: Jeffery SkillingFormer CEO: Ken LayCFO: Andrew FastowArthur AndersonPartner: David B. DuncanEthical IssuesObjectivity is essential: To be able to hold yourself and your work to the highest moral guidelines, you must remain objective. From time to time, it becomes exceedingly easy to rationalize or legitimize our activities when we realize that our conduct tends to abuse the Code of Professional Ethics. Ignorance is never a reason – Playing the unconscious card does not work. ("I didn't realize I was breaking the Code anyway.") It is your duty to know, maintain, and comply with the Code of Conduct. A free pass is never obtained by sending money back to yourself – Ask another person to do it. Doing what you know is wrong or distancing yourself from unreliable driving does not guarantee that you are already considered in violation of the Code of Conduct. “It wasn’t me” forgiveness is not a reason to ignore behavior that you know is wrong. Violation by a client can never be ignored: you are simply working for your client, so their reckless activities are none of your business. isn't it? …This implies that you are allowing them to intentionally damage the interior controls. Somehow it is difficult to act morally when you are performing administrative tasks for a client who is trying to deceive the administration, customers, investors or speculators. Performing administrative tasks for them makes you a traitor when it comes to misrepresentation and notless reliable than if you did it without anyone else's help. Market and Community Impact A large number of Enron employees, in the thousands, lost 401(k) retirement plans that held company stock. had invested in Enron stock suffered an extreme loss, 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 in accounting firms, especially on Arthur Andersen after learning that thousands of documents from Enron, such as physical documents, computer files, and emails, which was a huge shock for the public. According to HG.org Legal Resources, “The legacy of Enron/Arthur Andersen lives on in various changes in the profession. While before this affair the accounting field had been significantly overseen by the Public Oversight Board (POB), after this affair came to light, SEC Chairman Harvey L. Pitt in 2002 conducted a series of investigations into the self-regulatory system in the accounting profession without consulting the POB. This ultimately led to the vote to dissolve the POB in May 2002. As a result, the FASB emerged into the public spotlight as the leader of the self-regulatory system and played an important role in the reform of accounting rules. In January 2003, the FASB announced new accounting rules intended to force U.S. companies to move billions of dollars from off-balance sheet entities onto company balance sheets. The SEC has also strengthened its supervision of the profession. » Charges and Prosecutions 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 before him. (Segal, 2019) The two men were accused of lying about Enron's true financial situation before the company began to fail in December 2001. They began lying about this information just as they realized there were hidden debts and highly inflated profits. In all of these cases, both leaders have pleaded not guilty. In total, forty-one charges were brought against the two men. They are described below:Count 1: -Conspiracy to commit securities and wire fraud against Lay and Skilling. Skilling approved erroneous quarterly and annual results and held fake conference calls with Wall Street analysts stating that Enron was doing well. Count 2-6: Securities and Wire Fraud Against SkillingSkilling knowingly approved four fragile and unstable financial structures to be supported by Enron's actions. These actions were used to cover the inflated value of assets and also to keep millions of debts 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 teleconference. He mentioned that the third quarter performance was looking great and they were confident of hitting their numbers. This was after he knew full well that Enron was about to announce a $1.2 billion loss in equity 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. He lied that revenues and profitsof Enron were due to accounting systems. which were put in place.Count 21-26: Securities Fraud Against SkillingSkilling again lied about Enron's revenues from the California energy trade. He mentioned that revenues from Enron's California trading were low; while lying to analysts during several calls and an analyst conference in 2000 and 2001. Counts 27-30: Securities fraud against LayLay lied and misled a representative of a rating agency credit just days before the announcement of the massive losses. He also mentioned that Enron was not hiding anything even when the company's financial health was disclosed.Counts 31-36: False statements to auditors, vs. SkillingSkilling apparently signed misleading letters to auditors of Arthur Anderson LLP on the veracity 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 out loans totaling $75 million from three banks, then banked on his agreement with the lenders that he would not use the money. to manage Enron sharesChefs 42 to 51: Insider trading against SkillingSkilling allegedly hid the company's health and sold $62.6 million in stock while the shares were inflated by the company. One of the transactions occurred after his resignation in September 2001. Andrew Fastow was also convicted of two counts of wire fraud and securities fraud for aiding Enron's corrupt acts. Arthur Andersen was convicted of shredding 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 ScandalDue to the Enron scandal, the entire Wall Street community was devastated and there was a strong consensus among all financial institutions to put in place strong law that could prevent such contrary behavior to the ethics of happening in the future. There was a need for clear financial reporting standards for all publicly traded companies. This topic has been much debated among various economists and various laws have been proposed. After careful consideration, Congress finally decided in 2002 to pass the bill signed by President George W. Bush, which would change the way financial reporting of publicly traded companies occurs. This law was nothing more than a Sarbanes-Oxley law. The Sarbanes-Oxley Act is a "mirror image of Enron: the company's perceived failures in corporate governance are reflected virtually point by point in the main provisions of the law." (Deakin Simon, 2003). In addition to the Sarbanes-Oxley Act, various other measures have been taken by the Financial Accounting Standards Board that would strengthen oversight of financial operations at publicly traded companies to strengthen ethical conduct. This led to various measures such as the dismissal and replacement of underperforming managers, the establishment of an independent board of directors, the supervision of company audits as well as the verification of quarterly reports made public and well still others. The Sarbanes-Oxley Act The Sarbanes-Oxley Act was passed by Congress in 2002. . Under the Sarbanes-Oxley Act, the management of a public company must report on internal control in its annual financial reports. Under SOX, a public company isresponsible for having an internal control system and reporting on its effectiveness. In addition, management is required to disclose any material deficiencies or weaknesses in internal control. (Henderson, 2019). Through the implementation of this law, many external auditing organizations have received authorization to verify the accuracy of all accounting information of all publicly traded companies. This law created transparency within financial institutions and resulted in increased trust in the stakeholder community.RecommendationBetween 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 in terms of advertising capitalization. Despite this, the organization filed for bankruptcy in 2001. Based on the theories illustrated, various authors have developed specific recommendations to improve the management of the company and prevent a bankruptcy, for example that of Enron, from happening. happen in the future. For example, Johnson (2002) refers to prerequisites whereby executives claim and continue to hold a large number of shares of the organization during and after their tenure, term limits, an intermediary providing details of the reputation of directors in different companies where the person in question also serves. on, as far as possible, on the number of positions within the board of directors that a single individual can occupy, by separating the situation of CEO and director, by requiring an autonomous executive when the board carries out any sort of self-assessment, exposing individual executive decisions on important matters such as appropriate compensation, accounting for choices, arrangement of evaluators, merger choices, etc. As noted by SOA, the CEO and CFO must also ensure annual reporting and may face criminal penalties for careless certifications. SOA also prohibits individual advances to executives and expellees by motivating strength-based compensation and stock transaction benefits if accounts are overstated. It also requires top financial executives to disclose their company's code of ethics. Foundations of economic institutes should be encouraged to recognize financial education, financial data and “corporate” financial advice. Any related financial guidance for commercial purposes must be transparent and unequivocally disclose any commercial nature when also presented as a financial education activity. The government should point to ongoing scandals to show that even a well-functioning business economy should continually strive to adjust individual and open accountability in governance. A highly structured and implemented legislation characterizes the positive and negative motivations, to empower the conduct of the reasonable and productive activity of the shopping center (Mandaci, 2012). Keep in mind: this is just a sample. Get a personalized article from our expert writers now. Get a Custom EssayConclusionThe most trusted accounting firms can fall due to poor management in the interest of legitimate concern for clients. The expanded rule and oversight was proposed as a bill to help prevent corporate humiliations of the magnitude of Enron. The additional scrutiny further protects associations and open accounting firms from submitting the kinds of errors that could ultimately contribute to their downfall. The part