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The Overview of Enron Corporation Scandal

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Table of contents

  1. Narrative of the Accounting Scandal
  2. Main Players
    How They Did It?
    How They Got Caught?
  3. Penalties
  4. Conclusion

Enron was created by Kenneth Lay in the year 1985 in Houston Texas through a merger between Houston Natural Gas Company and InterNorth Incorporated. Kenneth Lay became the CEO and chairman of Enron after his leadership from Houston Natural Gas Company and recreated the company to an energy trader and supplier. Kenneth Lay also created Enron Finance Corporation and entrusted Jeffrey Skilling as the head.

Narrative of the Accounting Scandal

The accounting scandal of Enron Corporation led to bankruptcy and it resulted to the dissolution of the audit and accounting partner Arthur Andersen. Many of the investors lost money during the accounting fraud and when the company wasn’t properly protected became the opportunity of the massive exposures. The employees were totally affected causing the loss of their pension benefits. The shareholders lost a large sum amounting to $74 billion. Flanagan said that during the third quarter, Enron reported a loss of $618 million and suddenly dropped. CFO Andrew Fastow manipulated the accounting rules and hid the debts incurred by Enron amounting to billions of dollars of losses through unlawful accounting practices. Arthur Andersen LLP was the accounting firm who handled Enron’s audits illegally by disclosing the company’s documents claiming they were destroyed by employees.

Main Players

  1. CEO Jeffrey Skilling earned his MBA from Harvard before working in McKinsey and joined Enron in 1990 and became the CEO working with Kenneth Lay.
  2. CEO Kenneth Lay is the founder of Enron and the CEO for 15 years.
  3. CFO Andrew Fastow was hired by Skilling and became the CFO by year 1998.

How They Did It?

According to Segal Enron faked the holdings and the off-the-books practices. They used the opportunity to alter their financial transactions by using Special Purpose Vehicle or the Special Purposes Entities in concealing their large losses. A blockbuster market was entered by Enron and intentionally overstated the income taken from the collaboration. CEO Jeffrey Skilling hide the financial losses incurred from the business operations including the projects they partnered with through the accounting practice mark-to-market. This accounting concept preferably recognized the current market value rather than the book value. CFO Andrew Fastow also cooperated in controlling the financial transactions by eliminating the losses incurred from the subsidiaries.

Arthur Andersen the accounting partner of Enron hid the fact of the actual large losses incurred from Jeffrey Skilling’s leadership and ordered their auditors to destroy the files or documents with the contents of falsification.

How They Got Caught?

Sherron Watkins the VP of Enron informed Ken Lay through a written letter about Skilling’s activities pertaining to the operations that were illegally performed. Sherron met Ken Lay and concluded that the CFO was in control of the Special Purpose Entities (SPE). Some of the employees who also participated in the accounting took their shares leaving Enron in a huge suspicion by the authorities.

The Securities and Exchange Commission (SEC) opened their investigation due to the sudden loss of $618 million and the sudden decreased of stocks. The authorities started their investigation from the transactions of Enron and CFO Fastow’s works regarding the SPE. They also investigated Enron’s way of accounting practices and their partnerships in finding the connections made in the accounting fraud. Also, some of the officials of Enron admitted to the fact that they overstated the revenues since 1997.


According to Segal Former CEO Kenneth Lay was charged with six counts of fraud and conspiracy including the four counts of bank fraud, however he died due to heart attack upon the imposed of his sentence. The penalties given to Jeffrey Skilling was 19 counts of conspiracy, fraud, insider trading and false statements and received a sentence of 24 years in prison. However, further investigations were enacted and behavior observations was done causing the decrease of Skilling’s 24 years sentence to 14 years or a decrease by 10 years. He was then fined a $42 million for the settlement of the accounting fraud to victims. He was to be clearly settled by year 2028 but was released two years ago on February 22, 2019. Andrew Fastow the CFO of Enron was guilty of two counts of conspiracy and served for more than five years in prison. He then was ordered to pay $23.8 million as a settlement in testifying against the other executives who cooperated in the accounting fraud. He was released by year 2011. Arthur Andersen accounting firm was pledged guilty for obstruction of justice in covering the losses.


Enron was the biggest bankruptcy filings in history which has more than $60 billion in assets. The accounting practices made by Enron resulted to the enhancement of accuracy of accounting standards practices through regulations and legislation.

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