Scandal

In

1985, Kenneth Lay merged the natural gas pipeline companies of Houston Natural Gas and Inter North to form ENRON. In the early 1990s, he helped to initiate the selling of electricity at market prices and, soon after, the United States Congress passed legislation Enron rose to become the largest seller of natural gas in North America by 1992, its gas contracts trading earned earnings before interest and taxes of $122 million, the second largest contributor to the company's net income.

Enron's headquarters in Downtown Houston was leased from a consortium of banks who had bought the property for $285 million in the 1990s. It was sold for $55.5 million, just before Enron moved out in 2004.[

1.

2.

3.

Enron's nontransparent financial statements did not clearly depict its operations and finances with shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations. Revenue recognition: Enron and other energy suppliers earned profits by providing services such as wholesale trading and risk management in addition to building and maintaining electric power plants, natural gas pipelines, storage, and processing facilities. Mark-to-market accounting:Mark-to-market accounting requires that once a long-term contract was signed, income was estimated as the present value of net future cash flows. Special purpose entities: Enron used special purpose entitieslimited partnerships or companies created to fulfill a temporary or specific purposeto fund or manage risks associated with specific assets.

4. Executive compensation: Although Enron's compensation was designed to reward its most valuable employees, the setup of the system contributed to a disfunctional corporate environment that became obsessed with a focus only on short-term earnings to maximize bonuses. 5. Risk management:Before its fall, Enron was lauded for its sophisticated financial risk management tools. Enron was also famous for its business plan.

"At the beginning of 2001, the Enron Corporation, the world's dominant energy trader, appeared unstoppable. 1. Liquidity concerns. 2. Credit rating downgrade. 3. Bankruptcy.

1.

2.

Enron: Fastow and his wife, Lea, both pleaded guilty to charges against them. Fastow was initially charged with 98 counts of fraud(money laundering, insider trading,and conspiracy) among other crimes. Fastow pleaded guilty to two charges of conspiracy and was sentenced to ten years with no parole in a plea bargain to testify. Lea was indicted on six felony counts, but prosecutors later dropped them. Lea was sentenced to one year for helping her husband hide income from the government. Arthur Andersen: Arthur Andersen was charged with and found guilty of obstruction of justice for shredding the thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron. Although only a small number of Arthur Andersen's employees were involved with the scandal, the firm was effectively put out of business.

Employees and shareholders: Enron's shareholders lost $74 billion in the four years before the company's bankruptcy. As Enron had nearly $67 billion that it owed creditors, employees and shareholders received limited. To pay its creditors, Enron held auctions to sell assets including art, photographs, logo signs, and its pipelines. Sarbanes-Oxley Act: Between December 2001 and April 2002, the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services held multiple hearings about the collapse of Enron and related accounting and investor protection issues. On February 13, 2002, due to the instances of corporate malfeasances and accounting violations. In June 2002, the New York Stock Exchange announced a new governance proposal, which was approved by the SEC in November 2003. The main provisions of the final NYSE proposal include:

All firms must have a majority of independent directors. Independent directors must comply with an elaborate definition of independent directors. The compensation committee, nominating committee, and audit committee shall consist of independent directors. All audit committee members should be financially literate. In addition, at least one member of the audit committee is required to have accounting or related financial management expertise. In addition to its regular sessions, the board should hold additional sessions without management