I am reading a case study for a marketing law class, but the finance/accounting/legality aspect is difficult for me to understand
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Leadership of a company care about the price of that company’s stock, because they’re paid in it and because it’s a measure of their job performance.
The stock price, in turn, depends on the financials of the company (among other things). All else equal, companies that are deep in debt tend to have lower stock prices than companies that are not.
This creates an obvious incentive for leadership to pretend the company’s financials are in a better state than they are. That is, it creates an incentive for them to commit *accounting fraud*. And the Enron scandal is one example of this. Enron’s leadership used a number of accounting tricks to make it look, on paper, like Enron’s financials were a lot better than they actually were. This inflated the price of Enron stock.
This is *supposed* to be prevented by [rules about how accounting is done](https://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles_(United_States)), and by *audits* done by third-party accountants where they go through the company’s finances. But Enron leadership exploited loopholes in those rules, and their auditor – one of the “Big Five” accounting firms at the time called Arthur Anderson – didn’t want to expose them because Enron’s fees represented a substantial chunk of *their* income.
But you can’t hide these things forever, and when it came out, Enron’s stock price tanked, effectively draining billions from the people who’d invested in the company. Enron went out of business, and Arthur Anderson’s reputation was so damaged by the scandal (and by resulting legal action) that they mostly did too. The scandal also resulted in the passing of the [Sarbanes-Oxley act](https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act), which strengthened the rules around accounting for publicly-traded companies.
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