Enron: key events, SOX effective? Fortune 500 techniques

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1. Elaborate in a paragraph how the key facts and critical issues are presented in the Enron case.

Enron was likely the most well-known scandal that tarnished the accounting profession. This was a fabulously successful Fortune 500 firm, just hailed as the 30th best run firm in October 2001. What was not known about Enron was that they were speculating in fuel markets and hiding their loss positions with the help of the auditors. Under water futures trades (contracts to sell or buy that were under the market or over the market) were "sold" to entities that Enron set up so they could control the pricing of the transaction. As such, they could sell an unprofitable future control at an artificial price and make it look like a good one to the main company. If the price of the trade in the spin off organization did not improve prior to contract expiration, the loss was captured in the spin off entity.

How was Enron able to sell this inflated price securities? They obtained loans, guaranteed by the Enron, for created entities whose only purpose was to hold the losses. Enron hopes that the inflated price securities would correct (market go back up) before the loans taken out to buy those loss positions came due. Unfortunately, the loans came due and the securities did not yield enough in the market place to repay the debt taken out to buy them. Enron guaranteed the debt but did not have the funds to make up the difference. So, they went bankrupt. Enron knew about avoiding reporting the losses for some time as they had to do considerable work to create an entity that would buy the securities at above market rates. They even engaged the auditors to assist in creating these entities and making sure that the losses were not co-mingled with profitable results. The auditors not only were helpers in the deceit, they shredded the work papers to try to cover up their role. Key C-level managers claimed that they didn't understand the financial statements and used this supposed ignorance to avoid legal responsibility.

In addition to these serious issues, Enron made it even more egregious by refusing to permit their employees to diversity out of company stock in their pensions, showing that they were not ...