Lesson 91 - Advanced Accounting Course

Lesson 91: Real-World Case Study – Enron and Financial Manipulation

🏢 Who Was Enron?

Enron Corporation was once one of the largest energy, commodities, and services companies in the United States.
Founded in 1985, Enron grew rapidly in the 1990s and was admired for its innovation, aggressive expansion, and supposed financial success.
By the year 2000, it was ranked #7 on the Fortune 500 list and had a market capitalization of $70 billion.

But behind the glowing headlines was one of the biggest accounting frauds in history — and by December 2001, Enron collapsed into bankruptcy.

🚨 What Happened? A Summary of the Scandal

Enron used complex accounting tricks to:

• Hide its debt 💸
  
  

• Inflate its profits 📈
  
  

• Mislead investors and regulators 🕶️
  
  

Instead of being transparent, the company manipulated its financial statements to create the illusion of strong performance.

📊 The Key Accounting Tricks Used

💼 The Role of Executives

• Jeffrey Skilling (CEO) and Andrew Fastow (CFO) played key roles in the fraud.
  
  

• They encouraged risky behavior, misleading reports, and hidden debt.
  
  

• Fastow created over 3,000 SPEs to shift losses away from Enron’s books.
  
  

🔒 While the company was falling apart, executives were cashing out millions in stock options.

🔍 Where Were the Auditors?

Arthur Andersen, one of the “Big Five” accounting firms at the time, was Enron’s external auditor.

❌ Instead of acting independently, Andersen:

• Shredded important documents 🗑️
  
  

• Signed off on false financial reports
  
  

• Failed to report the fraud
  
  

As a result, Arthur Andersen collapsed, and over 85,000 employees lost their jobs.

📉 The Collapse

• October 2001: Enron admitted to inflating earnings by $586 million
  
  

• December 2001: Filed for bankruptcy, the largest in U.S. history at that time
  
  

• $74 billion in shareholder value was wiped out
  
  

• Thousands of employees lost their jobs and retirement savings
  
  

🧯 Aftermath & Reforms

The Enron scandal led to major reforms in corporate governance and accounting practices.

🏛️ Sarbanes-Oxley Act (SOX) of 2002

🧠 Lessons Learned 

🎓 Reflection for Students

Enron is more than a story of fraud — it's a case study in corporate culture, ethical failure, and the importance of sound accounting practices.

Ask yourself:

• Would I have spotted the warning signs?
  
  

• How would I handle pressure to “make the numbers look better”?
  
  

• What would I do if I noticed fraud inside a company?
  
  

These are the questions that future accountants and business leaders must be prepared to answer.

📚 Summary

• Enron showed how financial manipulation can destroy even the biggest corporations
  
  

• It exposed weaknesses in auditing, internal controls, and regulatory systems
  
  

• It led to the Sarbanes-Oxley Act, reshaping modern accounting practices
  
  

• The scandal serves as a powerful reminder that ethics and transparency are the foundation of sustainable business 🧭