The paper discusses the Enron scandal and its immediate consequences as well as the new legislation issued as a result of several fraud scandals: Sarbanes-Oxley Act. Enron Corp. is known as one of the largest scandals in U.S. history. As a result of the investigations and after a long trial, Enron's former chief executive, Jeffrey Skilling was sentenced to 24 years in jail.
While the bankruptcy of a small company is taken as a routine, Enron's case is different as the company was ranked seventh by Fortune 5001 .
During the 1990s, Enron expended quickly into several areas such as developing a power plant and a pipeline. This expansion, however, required large initial capital investments and long gestation period. By that time, Enron already raised a lot of debt funds from the market and hence any other attempt to raise funds would affect Enron's credit rating. But Enron had to maintain the credit ranking at investment rate in order to continue business. On top of that, the company wasn't making enough profits either, as it promised to investors. Hence, Enron began making partnerships and other special "arrangements" (Special Purpose Entity, or SPE). These companies were used to keep Enron's debts and losses away from its balance sheets, therefore allowing it have a good credit rating and look good in front of the investors.
Enron's goal was to bypass the rules of consolidation and still increase credibility. If a parent company (in this case Enron) financed less than 97% of an initial investment in a SPE, it didn't have to consolidate in into its own accounts. ...