Questions and Answers About the Enron Scandal

The Enron scandal

Question 1: What happened to Lay, Skilling and Fastow?

Kenneth Lay created in 1985 after assimilation InterNorth and Houston Natural Gas . Later, he employed the likes of Jeffrey Skilling and Andrew Fastow, who were to be involved with him in committing gross accounting misconducts. Together with these men and many others, Lay hid huge sums of cash in debt from unsuccessful contracts and plans. This was possible through the use accounting loopholes, poor financial reporting and special purpose entities.

Andrew Fastow, the Chief Financial Officer, and other Enron executives often misled the Enron’s audit committee and the board of directors regarding these high-risk accounting practices. Furthermore, they put immense pressure on Lay that he could not give attention to the details.

It is through these schemes that Enron became the main firm dealing in natural gas in the continent as at 1992. Natural gas trade brought became the second leading benefactor to Enron's net earnings. For instance, Enron achieved an earnings before interest and taxes (EBIT) totaling to $122 million owing to the natural gas trade. The formation of the online trading model, Enron Online, in November 1999 enabled Enron to further expand and expand its abilities to consult and run its trading business

It was not until November 2001 that the shareholders of Enron filled a complaint worth $40 billion. These shareholders could not understand how Enron’s share prices would flop from $90.75 per split in mid-2000 to $1 as at the close of the month, November 2001. According to these shareholders, this was beyond the logics of stock market, which even in the most risky moments would not yield such poor results. This suit prompted the Securities a...

... middle of paper ...

... of the benefits. Numerous empirical studies and surveys have indicated that SOX has improved the reliability of financial reporting, effectiveness of corporate governance, corporate and investor liquidity and has resulted in a reduction of financial statement fraud.

Consistency of Financial Information:

The innovative reason behind the effort that produced SOX was to restore public assurance in the financial statements organized by public companies. One of the main of objectives of the internal control must be to produce reliable financial information as the more effective internal controls are, the more reliable the information produced will be. As one of SOX’s necessities is the continuation of efficient internal controls one should sensibly suppose that consistent information would be produced. Support for this expectation can be found in several studies.