The financial collapse of Enron had substantial and far-reaching ramifications throughout the financial investment field, tax compliance professions and the accounting profession. Intense Congressional scrutiny resulted in a new era of transparency in financial reporting, stricter reporting standards as provided in Sarbanes-Oxley and substantial penalties for failure to comply with new financial reporting and tax compliance standards in the Internal Revenue Code (Bottiglieri et. al., 2009)
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron undoubtedly is the biggest audit failure (Bratton, 2002). Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives were able to mislead Enron's board of directors and audit committee of high-risk accounting issues as well as pressure Andersen to ignore the issues.
Enron's stock price, which hit a high of US$90 per share in mid-2000, caused shareholders to lose nearly $11 billion when it plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and Dynegy offered to purchase the company at a fire sale price. When the deal fell through, Enron filed for bankruptcy on December 2, 2001 under Chapter 11 of the United States Bankruptcy Code, and with assets of $63.4 billion, it was the largest corporate bankruptcy in U.S. history until WorldCom's 2002 bankruptcy (Benston, 2003).
Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a United States District Court, but by the time the ruling was overturned at the U.S. Supreme Court, the firm had lost the majority of its customers and had shut down (see Arthur Andersen LLP v. United States). Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the reliability of financial reporting for public companies (Benston, 2003). One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders (Cohen, Dey, & Thomas, 2005). The act also increased the accountability of auditing firms to remain objective and independent of their clients (Benston, 2003).
Impact on Stakeholders
Enron's shareholders lost $74 billion in the four years before the company's bankruptcy $40 to $45 billion was attributed to fraud (Axtman, 2005). As Enron had nearly $67 billion that it owed creditors, employees and shareholders received limited, if any, assistance aside from severance from Enron (NY Times, 2003). To pay its creditors, Enron held auctions to sell its assets including art, photographs, logo signs, and its pipelines (Vogel, 2003).
More than 20,000 of Enron’s former employees in May 2004 won a suit of $85 million for compensation of $2 billion that was lost from their pensions. From the settlement, the employees each received about $3,100 each (Doran, 2004). The following year, investors received another settlement from several banks of $4.2 billion (Axtman, 2005). In September 2008, a $7.2-billion settlement from a...
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