I would like to share with you this famous auditing scandal which led to many changes in accounting and auditing standards as well as put the corporate governance issues into questions.
Enron scandal is one of the famous audit scandal revealed in October 2001. Enron Corporation was an American Energy company based in Texas with more than 22000 employees. Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and Internorth.
Few years later, Jeffrey Skilling was appointed and he developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and unqualified financial reporting, were able to hide billions in debt from failed deals and projects. Andrew Fastow who was the chief financial officer and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also put pressure on Arthur Andersen (their auditor) to ignore the issues. From being one of the leading electricity and gas supplier in the world and six times American most innovative company, Enron was filed for bankruptcy under chapter 11 of the United States Bankruptcy Code after the deal to buy Enron by their competitor Dynegy fell through and Weil, Gotshal and Manges were selected to be Enron’s bankruptcy counsel in late 2001.
Shareholders lost nearly $11 billion when Enron's stock price, which hit a high of US$90 per share in mid-2000, plummeted to less than $1 by the end of November 2001 which led The U.S. Securities and Exchange Commission (SEC) to begin an investigation.
Many executives at Enron were charged and were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a United States District Court, but by the time the ruling was overturned at the U.S. Supreme Court, the firm had lost the majority of its customers and had shut down. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients