Although you’d be hard-pressed to find an adult today who hasn’t at least heard of the collapse of Enron Corp. in 2001, decades of lawyers passed through law school and have practiced since his demise. Many of them have only a limited appreciation of the truly fundamental role Enron has played in reshaping the corporate governance and compliance landscape. Instead, to the extent that Enron is remembered in the collective consciousness, it is usually in the context of some of the most salient aspects of the scandal: being, at the time, the largest bankruptcy in history; causing the implosion of Arthur Anderson (thus transforming the “Big Five” accounting firms into the “Big Four”); and resulting in the indictment and incarceration of a number of Enron executives.
The most fundamental – or at least the most publicly acknowledged – reaction to Enron was the passage of the Sarbanes-Oxley Act of 2002 (SOX). Describing Enron’s accounting practices as a “canary in the mine shaft”, Senator Paul Sarbanes noted that the company’s “convoluted and often fraudulent accounting schemes” were used “to inflate profits, hide losses and make drive up their stock price. Enron’s subsequent collapse directly led to the bipartisan development of SOX’s increased financial and disclosure controls. Moreover, over the next 20 years, the corporate governance guidelines embedded in the provisions of SOX have become “best practices” for public and private companies.