The Enron Corporation of Houston Texas was the result of two Houston companies merging together in 1985. Up until that point, Enron had been struggling financially and continued to struggle after the merge until ‘the deregulation of the electrical power markets took effect, and the company redefined its business from “energy delivery” to “energy broker”’ (Ronald, 2). In doing this Enron was able to begin making trades and contracts while profiting off of them. Workers were held by high expectations Chief Executive Officer Jeffry Skilling, which in turn gave the company a great work output. These employees worked so hard that they began to push the limits of ethical conduct so much so that it went unnoticed as they were chasing their success. This overlooked ethical conduct is what helped Enron succeed in becoming the biggest and fastest growing corporation America had ever seen to later filing for bankruptcy in just a single month. This bankruptcy, however, would not happen for many years. With the company’s growing success Enron was able to conceal any red flags investors might have. They created partnerships as an easy way to raise money, kept their debt hidden from analysts to ensure that the company was still thriving, and encouraged workers to invest in the company’s stocks. One of Enron’s biggest crimes was committing accounting fraud with the help of Arthur Andersen. He did this by having his ‘employees destroy important documentation regarding the Enron audit’ (Nelson). With the crimes of the Enron Company and Arthur Andersen exposed, the Sarbanes-Oxley Act of 2002 was put into place. This act was meant to monitor and regulate corporation audits so that theft and fraud could be avoided. To understand more about this act, it is first important to understand more about the Enron scandal and the ethics behind it.
As previously mentioned one of the ways Enron deceived the public was by forming partnerships. These partnerships resulted in writing down the profits that were anticipated to be made before a deal was made- if even made at all. The mental mindset that Skilling’s enforced on his workers began blurring the line of what needed to be done to make the company be the best and what was ethical. The other way Enron kept its reputation was by concealing the debt that they were in by keeping it off its balance sheet. This could also be seen as an ethical issue, however the company fought it by saying that this was merely a timing issue. ‘Moving debt was as easy as pre-dating a check, and would harm no one, and therefore was not an ethical issue’ (Ronald, 3). The most elusive move made by Enron, however, was keeping partnerships at a distance. They did this by making sure their partnerships were not viewed as Enron subsidiaries. Essentially these smaller companies were not ‘owned’ by Enron, and thus the accounting methods did not have to be as strict. In order to do this though, Enron needed help. This is where an outside accountant by the name Arthur Andersen came in.
Arthur Andersen played a crucial role in the Enron audit failure. His role as an auditor was to review Enron’s finances and in doing so he had to ensure that the company was maintaining its social responsibility. Social responsibility in this case is defined as ‘the continuing commitment by business to behave ethically and contribute to economic development…’ (Linthicum). However it has already been brought up that Enron had been deceiving investors through partnerships and debt avoidance. It was Andersen’s job to make sure these red flags stayed concealed through the financial papers of Enron. The corporation valued its reputation above anything else, and this is seen when Skilling pressured his workers into performing despite unethical values being present. Skilling, however, decided to leave the corporation in August of 2001 and sold all of the stocks he had bought for a large sum of money. It is when Skilling left that the company began to crack. ‘Only two months later, Enron restated earnings, stock prices dropped, and the company froze shares in an attempt to help stabilize the company’ (Ronald, 4). With workers slowly becoming aware of the fraud going on within the company and word spreading about this the public starting to question Enron and its ethics. While addressing the possible scandals and trying to calm the situation, Andersen was behind the scenes shredding any papers revolved around Enron’s finances. It is later on that Andersen admits he and his firm shredded the papers, which in turn ruined both his and Enron’s reputation. ‘Following AA’s admission of document shredding and the release of the Powers Report suggest that the market questioned AA’s independence, and thus questioned the credibility of AA’s clients financial statements’ (Linthicum).
Following this series of events on the second of December, 2001, the Enron Corporation ‘filed the biggest bankruptcy petition in the history of the United States” (Gledhill). Arthur Anderson was criminally charged ‘of obstruction of justice for “knowingly, intentionally, and corruptly” inducing employees to shred documents relating to Enron’ (Gledhill).