OVERVIEW
Enron scandal involved the collapse of Enron Corporation, a major U.S. energy company, and its auditor, Arthur Andersen LLP. Founded in 1985, Enron grew rapidly under CEO Kenneth Lay and COO Jeffrey Skilling, transitioning from an energy supplier to a trading powerhouse dealing in various commodities. To hide financial losses and maintain an image of profitability, Enron employed unethical accounting practices, including “mark-to-market” accounting and off-balance-sheet entities managed by CFO Andrew Fastow. These tactics inflated Enron’s financial statements, misleading investors and regulators.
In 2001, as Enron’s finances faltered and suspicions rose, a whistleblower exposed potential fraud. Soon after, Enron announced major losses, and the SEC launched an investigation. Arthur Andersen was found to have shredded Enron audit documents, leading to the firm’s indictment. Enron declared bankruptcy in December 2001, and Arthur Andersen soon dissolved.
Key executives were convicted of fraud and conspiracy, and the scandal led to the Sarbanes-Oxley Act of 2002, a major overhaul of corporate governance laws designed to prevent similar frauds.
ERON BANKRUPTCY AND CRIMINAL PROCEEDINGS
Following Enron’s 2001 bankruptcy, the U.S. Bankruptcy Court approved a reorganization plan, renaming the company “Enron Creditors Recovery.” The company’s mission was limited to asset liquidation, resulting in over $21.8 billion in creditor payments between 2004 and 2012, with the final payout in May 2011.
In the wake of Enron’s collapse, Arthur Andersen LLP, Enron’s accounting firm, faced conviction in 2002 for obstruction of justice due to document shredding. Although the conviction was overturned on appeal, the firm’s reputation was irreparably damaged, leading to its decline into a holding company.
Several top Enron executives faced significant criminal charges:
Kenneth Lay, Enron’s founder, and former CEO was convicted on six counts of fraud and conspiracy and four counts of bank fraud. Before sentencing, he died of a heart attack in Colorado.
Enron’s former CFO, Andrew Fastow, pleaded guilty to two counts of wire fraud and securities fraud for facilitating Enron’s corrupt business practices. He ultimately cut a deal for cooperating with federal authorities, served more than five years in prison, and was released in 2011.
Former CEO Jeffrey Skilling received the harshest sentence. He was convicted of conspiracy, fraud, and insider trading in 2006. Skilling received a 17½-year sentence which was reduced by 14 years in 2013. Skilling was required to give $42 million to the fraud victims to cease challenging his conviction.
Skilling was released on Feb. 22, 2019.
CONCLUSION
The Enron scandal spurred significant changes in financial regulations, most notably the Sarbanes-Oxley Act of 2002. This legislation introduced stricter requirements for financial reporting and imposed severe penalties for manipulating or destroying financial records, prohibiting auditing firms from providing consulting services to their clients.
