Enron Corp., the first nationwide natural gas pipeline network, shifted its business focus during the 1990s from the regulated transportation of natural gas totrading in unregulated energy markets. Until late 2001, nearly all observers -- including Wall Street professionals-- regarded this transformation as anoutstanding success. Rather than disclose its true condition to public investors, as the law requires, Enronfalsified its accounts. In other words, the firm'spublic accounting statements pretended thatlosses were occurring not to Enron, but to the so-called Raptor entities, which were ostensibly independent firmsthat had agreed to absorb Enron's losses, butwere in fact accounting contrivances created and entirely controlled by Enron's management. In response to the auditing and accounting problems at Enron and other major corporations scandals, Congress enacted the Sarbanes-Oxley Act of 2002 ( P.L.107-204 ), containing perhaps the most far-reaching amendments to the securities laws since the 1930s. Very briefly,the law does the following:
creates a Public Company Accounting Oversight Board to regulate independent auditors of publicly traded companies -- a private sectorentity operating under the oversight of the SEC;
raises standards of auditor independence by prohibiting auditors from providing certain consulting services to their audit clients andrequiring preapproval by the client's board of directors for other nonaudit services;
requires top corporate management and audit committees to assume more direct responsibility for the accuracy of financialstatements;
enhances disclosure requirements for certain transactions, such as stock sales by corporate insiders, transactions with unconsolidatedsubsidiaries, and other significant events that may require "real-time" disclosure;
directs the SEC to adopt rules to prevent conflicts of interest that affect the objectivity of stock analysts;
authorizes $776 million for the SEC in FY2003 (versus $469 million in the Administration's budget request) and requires the SEC toreview corporate financial reports more frequently; and
establishes and/or increases criminal penalties for a variety of offenses related to securities fraud, including misleading an auditor, mailand wire fraud, and destruction of records. As of December 31, 2000, 62% of the assets held in the corporation's 401(k) retirement planconsisted of Enron stock. Similar legislation has not advanced in the 108th Congress. See also CRS Report RL31507 , Employer Stock in Retirement Plans: Investment Risk and Retirement Security , by [author name scrubbed] ([phone number scrubbed]); and CRS Report RL31551 , Employer Stock in Pension Plans: Economic and Tax Issues, by Jane Gravelle. See also CRS Report RL31348(pdf) , Enron and Stock Analyst Objectivity , by [author name scrubbed]. 106-554 ) , by [author name scrubbed].
The sudden and unexpected collapse of Enron Corp. was the first in a series of majorcorporate accounting scandalsthat has shaken confidence in corporate governance and the stock market. Only months before Enron's bankruptcyfiling in December 2001, the firm waswidely regarded as one of the most innovative, fastest growing, and best managed businesses in the United States. With the swift collapse, shareholders,including thousands of Enron workers who held company stock in their 401(k) retirement accounts, lost tens ofbillions of dollars. It now appears that Enronwas in terrible financial shape as early as 2000, burdened with debt and money-losing businesses, but manipulatedits accounting statements to hide theseproblems. Why didn't the watchdogs bark? This report briefly examines the accounting system that failed to providea clear picture of the firm's true condition,the independent auditors and board members who were unwilling to challenge Enron's management, the Wall Streetstock analysts who failed to warn investorsof trouble ahead, the rules governing employer stock in company pension plans, and the unregulated energyderivatives trading that was the core of Enron'sbusiness. This report also summarizes the Sarbanes-Oxley Act (P.L. 107-204), the major response by the107th Congress to Enron's fall, and related legislativeand regulatory actions during the 108th Congress. It will be updated as events warrant.
Other contributors to this report include [author name scrubbed], [author name scrubbed], [author name scrubbed], and [author name scrubbed].