Elements of Fraud and Compliance Laws

Elements of Fraud and Compliance Laws

Due to the combination of two natural gas transportation firms, Kenneth Lay founded Enron. These two businesses, Houston Natural Gas Corporation and InterNorth Inc., combined to form a new business in 1986 that was dubbed Enron. However, the newly founded firm lost its exclusive right to engage in the pipeline industry after a number of regulations surrounding the deregulation of the sale of natural gas in the U.S. were implemented in the 1990s (Kim & Solomon, 2021). The knowledge of Jeffrey Skilling enabled the business to change into a dealer of energy derivative contracts, performing the middleman role. While this arrangement permitted companies to mitigate the risk of energy-price fluctuations by selling the product at a fixed price, Enron multiplied and became a monopoly of the natural-gas contracts (Kim & Solomon, 2021). This paper will provide an executive summary of the Enron fraud case, its impact on the U.S. economy, and the compliance laws formulated to curb such kinds of malicious activities.

Enron’s fraud case began in 2000 when the company’s operations began crumbling despite the successes realized over the years. In an attempt to create a positive impression, Jeffrey Skilling decided to hide the business’s financial losses through MTM accounting (Petra & Spieler, 2020). MTM accounting technique measures the security value based on the company’s assets concerning the market value. Under this technique, Enron would establish an asset such as a power plant and claim the profits from its books, yet no single cent had been realized.

Additionally, the company would transfer the asset to an off-the-books corporation if the power plant’s actual revenue was less than the planned amount. So, this loss wouldn’t be disclosed. By the end of 2000, Enron had lost $690 million due to this deception (Kim & Solomon, 2021). Fastow was fired as a result of the situation, but the business also lost the chance to merge with Dynegy after declaring bankruptcy on December 2, 2001. In 2002, the U.S. government created the Sarbanes Oxley Act in response to this fraud case (Petra & Spieler, 2020). Following many corporate accounting disasters, including Enron, the SOX Act was created to reestablish public trust in businesses under the efforts of Senator Paul Sarbanes and U.S. Representative Michael Oxley. By encouraging the company’s accuracy and dependability with regard to financial statements and other documentation, this law safeguards investors.

Corporate disclosures’ reliability is achieved by implementing the following measures. The first measure is that the act calls upon closing loopholes in accounting practices within the organization (Eckhaus & Sheaffer, 2018). The other measure is strengthening whistleblower protections as well as compliance monitoring. The act also mandates that businesses tighten their corporate governance guidelines, enhance the penalties for corporate wrongdoing, and give the go-ahead for the establishment of a Public Company Accounting Oversight Board (PCAOB) to keep a careful eye on employees’ actions (Eckhaus & Sheaffer, 2018). These regulatory requirements were created as part of the Sarbanes Oxley Act of 2002, which aimed to prevent corporate fraud.

In a nutshell, the Enron company was one of the most successful organizations in the energy industry, but this fraud case led to its sudden fall. The shareholders withdrew the remaining shares within the company, causing it to be declared bankrupt after losing over $600 million. Besides this, there is a thin line between governance and compliance as it relates to the Enron case. For instance, compliance involves the steps that corporate employees at Enron would have taken to reduce the likelihood of fraud occurring. On the other hand, governance entails the top leadership team setting the tone for the entire organization regarding risk, ethics, and business practices. The leaders at Enron, like Kenneth Lay, should have taken the front seat in setting the tone for proper ethical practices within the organization. This would have gone a long way in preventing the occurrence of this fraud case.

References

Eckhaus, E., & Sheaffer, Z. (2018). Managerial hubris detection: the case of Enron. Risk Management, 20(4), 304-325.

Kim, D., & Solomon, M. G. (2021). Fundamentals of information systems security. Jones & Bartlett Learning.

Petra, S., & Spieler, A. C. (2020). Accounting scandals: Enron, Worldcom, and global crossing. In Corporate fraud exposed. Emerald Publishing Limited.

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research the Enron fraud case and the compliance requirements of the Sarbanes-Oxley Act. You are to complete the following components:

Elements of Fraud and Compliance Laws

• Provide researched information and references documenting your findings. Identify elements of fraud and compliance laws that have been drafted as a result of Enron and other industries.
•Write an executive summary describing the Enron fraud case’s impact and the U.S. government’s reaction to it.
summarize your findings and the differences between governance and compliance connected to the Enron case.