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Posted on May 4th, 2014, by

Before 2001, Enron was officially successful, based in Houston, international company busy in energy, services, and commodities industries. It was a corporation with more than 50 years history, 20, 000 employees and approximate $100 billion revenue in 2000. The greatest rise of Enron is rooted to 1990, when the congress of United States of America has passed laws intended to deregulate the markets of electricity and natural gas.  However, in 2001 the financial world was shocked with a collapse revealed about this company. The revelations enlightened that series of fraud accounting operations beginning from 1990 led to Enron’s bankruptcy on November  2001. As the scandal was announced, corporation’s shares dropped from 90 dollars to 50 cents in price. This was unprecedented financial disaster.

Probably, the most crucial person in Enron scandal is Andrew Fastow, Enron’s former chief financial manager.  As it is stated in Portland Business Journal article, Andrew Fastow pled himself guilty during the trial to the counts of conspiracy to commit wire fraud and conspiracy to commit securities fraud. Also, he agreed to give up $23.8 million in assets (Darile). As the outcome of the procedure, he was indicted guilty in 78 counts of fraud, money laundering, and conspiracy. Eventually, former Enron’s chief financial manager was sentenced to 6 years of imprisonment, considering entered plea agreement and his cooperation with law enforcements. In general, Fastow’s fraud was based on design of complex web of off-balance sheet companies that allowed Enron to hide its true financial condition from investors.   Enron’s failure occurred when it became clear that most of company’s profits and revenue were the result of deals with special purpose entities (limited partnerships which it controlled). Fastow avoided these debts and losses reporting in its financial statements, thus, Enron was able to give its stake holders fault impression of financial wellness during long years, before the fraud was revealed.

Thinking about the effects of Enron tragedy (seemingly, the case can be called in this way), there is no special need to talk about thousands of personal dramas occurred to its stakeholders. Dozens of suicides, divorces, and mental illnesses of those who lost everything speak for themselves. It seems that it would be more relevant to talk about some less known facts and estimate general experience learnt by business and financial world.  In fact, the outcomes of Enron scandal had much more impressive consequences than we can assume. For example, Academic Dictionaries and Encyclopedias article presents pretty curious reference to political side of a coin. According to this publication, Enron failure led political fallout both in the U.S. and in the UK relating to the money Enron gave to political figures (around US$7 million since 1990). During Clinton’s eight years in office, the company and Lay contributed about $900,000 to the Democratic Party. In 1999 and 2000, the company gave $362,000 in soft-money donations to Democrats. Since 1996, between 72% and 94% of yearly American contributions went to the Republican Party, including heavy contributions to George W. Bush’s presidential campaign (Academic Dictionaries and Encyclopedias). One more relevant outcome is determined by Enron’s role to be the precedent. It is well known fact that trials on Arthur Andersen, outside auditor who was directly involved into the fraud, helped to find out pretty same violations in WorldCom corporation. These two cases gave a wave to a large list of other revealed accounting scandals, accompanied by different sorts of corruptions, inside data trading, fatal errors in accounting, money laundering etc..  In addition, we cannot leave aside the reaction of authorities to this and following cases. Probably, the most important of them is passed federal SarbanesOxley Act of (2002). In brief, it established more strict rules and principles of accounting.  SarbanesOxley Act contains 11 sections, which address the issues from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the law. As for particular section, legislatives mentioned: 1) Public Company Accounting Oversight Board (PCAOB); 2) Auditor Independence; 3) Corporate Responsibility; 4) Enhanced Financial Disclosures; 5) Analyst Conflicts of Interest; 6) Commission Resources and Authority; 7) Studies and Reports;  8) Corporate and Criminal Fraud Accountability; 9) White Collar Crime Penalty Enhancement; 10) Corporate Tax Returns; 11) Corporate Fraud Accountability (Academic Dictionaries and Encyclopedias).

The last point to pay attention to is rethinking of business ethics domain. In this regard, Enron’s Andrew Fastow: The Mistakes I Made article by Francesca Di Meglio looks pretty demonstrative. Remember, appropriate publication tells its readers about Andrew Fastow’s speech to students at the University of ColoradoBoulder Leeds School of Business. The main idea there was to teach students and future businessmen what not to do (Di Meglio). Seemingly, appropriate practice was unthinkable before Enron’s scandal. The point is in great, but still negative, experience that financial community learnt from Enron’s lesson.   In fact, experts emphasize that analyzed case gave the new birth to the term of business responsibility. Having a visual aid allows community to estimate the real consequences of business fraud. The tragedy of those who became the victims of Enron failure became an effective tool to get the new generation of ethical and responsible businessmen, and that’s probably the greatest effect of Enron’s case.

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