Accounting

Enron is one of the biggest accounting scandals. Enron is an energy company that filed for bankruptcy in 2001. Enron had over 21000 employees. Enron made it appear as though they were earning more money than they really were by inflating profits with off the book partnerships and manipulating the energy markets in California and Texas. The management of Enron attempted to increase profits in order to raise the stock price as much as possible. As a result, Enron filed for the largest bankruptcy in history. Stockholders in the company lost money and employees lost their life savings and 401k plans. Arthur Anderson was the accounting firm for Enron. In order to protect their account with Enron, Arthur Anderson signed off on the misleading accounting at Enron and shredded documents relating to it when the investigation into Enron was launched. As a result, Arthur Anderson went out of business. The CEO of Enron, Ken Lay, was indicted on 11 counts of securities fraud in 2004. He was expected to serve 20 to 30 years in prison, however, he died of a heart of heart attack at the age of 64 while vacationing in Colorado in 2006. Jeffery Skilling the former CEO was also sentenced to 24 years in prison and ordered to restore $26 million of the Enron pension fund out of his own pocket.

In 2002, the Sarbanes Oxley act was passed to protect investors and restore confidence in large corporations after many accounting scandals came to fruition. It was designed to improve the reliability and accuracy of corporate disclosures. The act seeks to establish an accounting oversight board for public companies. Sarbanes Oxley was named after Senator Paul Sarbanes, and Representative Michael G. Oxley who wrote the act.

Recovery from an accounting scandal is an enormous task that is not always successful. Recovery may or may not involve bankruptcy. It usually involves restructuring the company and bringing on new management to take the corporation in a new positive direction. The inaccurate earnings will need to be restated. Often a fine will have to be paid. Huge decreases in stock price are common. Recovery often takes years, as confidence will need to be restored in the stock.