The Enron Scandal and Analysis- Business Law

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  • Topic: Enron, Enron scandal, Internal control
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The Enron Scandal and Analysis
Business Law I- LEG100

*Describe how Enron could have been structured differently to avoid such activities.

Enron lacked what every company, big or small, must have in place to survive and continue in the long-term. Internal controls and procedures is a company’s shield against theft, waste, and inefficiency. If Enron had structured their business around the five components of internal control the company may still be alive today. Those five components are: monitoring of controls, information systems, control procedures, control environment, and risk assessment. Internal auditors are employees of the business who ensure that the company’s employees are following company policies. Information systems provide accurate information to keep track of assets and measure profits and losses. Control procedures ensure that the business goals are achieved. The control environment demonstrates to employees that they should act ethically. Former executives of Enron failed to establish a good control environment and are in prison as a result. Enron poorly assessed its risk assessments and falsified financial documents to make themselves look better than they really were. The corporate scandals that followed Enron led to the passage of the Sarbanes-Oxley Act on July 30, 2002. This act revamped corporate governance in the United States and affected the accounting profession. The company’s lack of transparency in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its demise. The company had some of the best trained personnel within its company however even Enron's audit committee did not have the technical knowledge to properly question the auditors on accounting questions related to the company's operations (and were often confused at the explanations that were given). Enron's aggressive accounting practices were not hidden from the board of...
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