Enron scandal

The Enron scandal was an accounting scandal involving Enron Corporation, an American energy company based in Houston, Texas. When news of widespread fraud within the company became public in October 2001, the company declared bankruptcy and its accounting firm, Arthur Andersen – then one of the five largest audit and accountancy partnerships in the world – was effectively dissolved. In addition to being the largest bankruptcy reorganization in U.S. history at that time, Enron was cited as the biggest audit failure.^[1]: 61

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, Lay developed a staff of executives that – by the use of accounting loopholes, the misuse of mark-to-market accounting, special purpose entities, and poor financial reporting – were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives misled Enron's board of directors and audit committee on high-risk accounting practices and pressured Arthur Andersen to ignore the issues.

Shareholders filed a $40 billion lawsuit (and were eventually partially compensated with $7.2 billion), after the company's stock price, which achieved a high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001.^[2] The Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until the WorldCom scandal the following year.^[3]

Many executives at Enron were indicted for a variety of charges and some were later sentenced to prison, including former CEO Jeffrey Skilling. Then CEO and Chairman Kenneth Lay was indicted and convicted, but died before being sentenced. Arthur Andersen LLC was found guilty of illegally destroying documents relevant to the SEC investigation, which voided its license to audit public companies and effectively closed the firm. By the time the ruling was overturned at the Supreme Court, Arthur Andersen had lost the majority of its customers and had ceased operating. Enron 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 accuracy of financial reporting for public companies.^[4] One piece of legislation, the Sarbanes–Oxley Act, increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.^[5] The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.^[4]