The Sarbanes-Oxley Act of 2002 (SOX) was introduced to Congress as a result of deception and fraudulent accounting practices taking place at Enron in December of 2001. Up to that date, the bankruptcy of Enron, with more than $60 billion in Wall Street market value and $2.1 billion in pension plans was the largest corporate economic failure in United States history (Appleby, 2006). As a result, over 20,000 employees lost their jobs, retirement savings, 401(k) stock options and medical benefits. To boot, Arthur Andersen, then one of the world's five leading international accounting firms, provided Enron from 1998 through 2000, with external and internal auditing. For all intents and purposes, in June of 2002, the accounting plead guilty of obstruction of justice in the world-shocking Enron case. After the Enron debacle, it was apparent federal legislation was necessary to prevent this from occurring in the future. As a result, SOX was established as a direct response to the fraudulent accounting practices that took place at Enron. …show more content…
Many have questioned whether SOX puts into place the necessary provisions to prevent a irregularities like the one that took place from occurring again.
If SOX was enacted to do some good, why are the companies still divided on the effectiveness of the act more than a decade later? In a Forbes article called The Costs and Benefits of Sarbanes-Oxley, it stated “…many in the business world spoke out against SOX, viewing it as a politically motivated over-correction that would lead to a loss of risk-taking and competitiveness.” To understand where each side is coming from, I will highlight some of the benefits of SOX, and discuss specific company examples and explain what in SOX can prevent this from happening in the
future. Analysis Quintessentially, the act was created to protect shareholders' equity. Take Enron, for example, which hid their losses by using mark-to-market accounting. They claimed the projected profit on its books even if they haven’t made a single penny of off it. When revenue did arrive and if it was less than the predicted amount, rather than take the loss, Enron would transfer the assets to an off-the-books third-party corporation resulting in the loss being unreported. In other words, the loss wouldn’t hurt the bottom line of the company. This method was able to trick shareholders. To avoid this from happening again, the SOX mandates companies to disclose information about their risk profiles, assets, debts and their commitments. This way, shareholders have information vital to make a sound decision or compare between public companies to make sure they decide on investing. In this manner, shareholders' confidence is increased which then results in money flowing into the company markets. Equally important, is the management directive to test internal controls on a quarterly basis and then file a report on whether those controls are suffice and effective internal controls. While this directive is considered a benefit, it is definitely the most expensive to comply with. More importantly, it will potentially eliminate management overrides. For example, let's look at WorldCom. WorldCom, the world’s second largest telecommunications company with over $107 billion in assets , filed for bankruptcy in 2002, after the disclosure of $3.8 billion in egregious expenses booked as capital investments. The actual fraud can be attributed to the lack of transparency between senior management and the company's board of directors. Conversely, did I fail to mention Arthur Andersen, who was their accounting firm too. Once again, a company's checks and balances designed to prevent accounting wrongdoing and irregularities simply failed to function. Additionally, another benefit with SOX's internal control testing is to have corporate senior officers and board directors certify as to the accuracy of financial statements filed with the SEC. To greater extent, it provides for forfeit of bonuses and profits from the sale of company stock if restatements have been made as a result of misconduct in financial reporting. Conclusion Without the fundamental changes in how internal and external accounting practices and related consulting services are regulated, the quality of fraudulent financial statements will not improve. To recap, I highlighted some of the benefits that I thought played a role in future deterrence of irregular company auditing practices. Also, I used two specific company examples and explain what in SOX can prevent this from happening in the future. If the checks and balances system is allowed to continue being unmonitored and uncorrected, the troubled past of Enron and WorldCom will happen again in the future.
A Guide to the Sarbanes-Oxley Act of 2002 (2006). Retrieved December 16, 2009 from www.soxlaw.com
The Sarbanes-Oxley Act was drafted to encourage and protect whistleblowers from retaliation after the fraud scandal that cause the collapse of Enron in 2001. In a 2010 Senate Report found that “external auditors detected only 4.1 percent of uncovered fraud schemes, “whistleblower tips detected 54.1% of uncovered fraud schemes in public companies” and were thirteen times more effective than external audits” (Turpan, 2016). Whistleblowers serve an important service to the public and are more effective than external audits. The CFAA has been used to by employers to retaliate against employees who act as informants for agencies like Internal Revenue Service or Security Exchange Commission to expose fraud. There employees, not to their financial gain, gather information as evidence of fraud by the company. With a broad interpretation of CFAA, the employee would "exceed their authority" and was "unauthorized" to access the information, therefore allowing the company to hide their illegal
The CFO, Andrew Fastow, systematically falsified there earnings by moving company losses off book and only reporting earnings, which led to Enron’s bankruptcy. Any safeguards or mechanisms that were in place to catch unethical behavior were thrown out the window when the corporate culture became a situation where every person was looking out for their own best interests. There were a select few employees that tried to get in front of the unethical accounting practices, but they were pushed aside and silenced. The corporate culture at Enron became a place where if an employee would not make unethical decisions then they would be terminated and the next person that would make those unethical decisions would replace them. Enron executives had no conscience or they would have cared for the people they ended up hurting. At one time, Enron probably was a growing company that had potential to make a difference, but because their lack of social responsibility and their excessive greed the company became known for the negative affects it had on society rather than the potential positive ones it could have had. Enron’s coercive power created fear amongst the employees, which created a corporate culture that drove everyone to make unethical decisions and eventually led to the downfall and bankruptcy of
CEO Jeffery Skilling and Kenneth Lay, the CEO prior to Skilling, were taken to trial. They were both found guilty of committing multiple types of financial crimes, and sentenced to 24 years in prison. CFO Andrew Fastow was also taken to trial and was found guilty and sentenced to 10 years in federal prison. The collapse of such a large corporation led to changes in financial controls. U.S. Congress passed the Sarbanes-Oxley Act in 2002. The SOX Act protects investors from deceitful accounting actions by companies (4). The Financial Accounting Standards Board increased its ethical behavior. FASB is responsible for generally accepted accounting principles, which provides standards for financial statements of publicly traded companies. These changes brought to life after the Enron scandal have decreased fraud and increased investor confidence. Although the acts that Enron committed were immoral and destroyed thousands of lives, it has lead an increase of controls and compliance, preventing something like this from happening in the
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The rise of Enron took ten years, and the fall only took twenty days. Enron’s fall cost its investors $35,948,344,993.501, and forced the government to intervene by passing the Sarbanes-Oxley Act (SOX) 2 in 2002. SOX was put in place as a safeguard against fraud by making executives personally responsible for any fraudulent activity, as well as making audits and financial checks more frequent and rigorous. As a result, SOX allows investors to feel more at ease, knowing that it is highly unlikely something like the Enron scandal will occur again. SOX is a protective act that is greatly beneficial to corporate America and to its investors.
The Act of Sarbanes Oxley of 2002 was enacted in July 30, 2002. This reform is designed to cover all public company boards, management and public accounting firm.
The company concealed huge debts off its balance sheet, which resulted in overstating earnings. Due to an understatement of debts, the company was considered bankrupt in 2001. Shareholders lost $74 billion and a lot of jobs were lost because of the bankruptcy. The share prices of Enron started falling in 2000 and in 2001 the company revealed a huge loss. Even after all this, the company’s executives told the investors that the stock was just undervalued and they wanted their investors to keep on investing. The investors lost trust in the company as stock prices decreased, which led the company to file bankruptcy in December 2001. This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
First Year of SOX Compliance: Success Fifteen plus years ago public corporations were being scrutinized due to numerous accounts of dishonesty, fraud, collusion, and lack of accountability to their investors. The cries of investors were heard and answered by the creation of the Sarbanes-Oxley Act of 2002 (SOX). “SOX became law on July 30, 2002, the Securities and Exchange Commission (SEC) enforces it, and the Public Company Accounting Oversight Board (PCAOB) oversees the accounting industry” (Balance, 2016). The tide was turning, and the new blubbers stemmed from the corporations themselves on how they would appropriate the money, workforce and time to ensure that all the SOX mandates were in place by December 31, 2004. One company that stood
Unethical accounting practices involving Enron date back to 1987. Enron’s use of creative accounting involved moving profits from one period to another to manipulate earnings. Anderson, Enron’s auditor, investigated and reported these unusual transactions to Enron’s audit committee, but failed to discuss the illegality of the acts (Girioux, 2008). Enron decided the act was immaterial and Anderson went along with their decision. At this point, the auditor’s should have reevaluated their risk assessment of Enron’s internal controls in light of how this matter was handled and the risks Enron was willing to take The history of unethical accounting practic...
“SOX revamped corporate governance in the United State and affected the accounting profession” (Hornger & Harrison 2007, pg.408). Some of the things that SOX provisions are that public companies must use issue internal control reports, accounting firms may not audit a public client and provide consulting services for that same client, and a stiff penalties for any violators for making false statements. As it was stated in Accounting 7e the top chief executive of WorldCom and the top executives of Enron were each sentenced to 25 years in
Enron was on the of the most successful and innovative companies throughout the 1990s. In October of 2001, Enron admitted that its income had been vastly overstated; and its equity value was actually a couple of billion dollars less than was stated on its income statement (The Fall of Enron, 2016). Enron was forced to declare bankruptcy on December 2, 2001. The primary reasons behind the scandal at Enron was the negligence of Enron’s auditing group Arthur Andersen who helped the company to continually perpetrate the fraud (The Fall of Enron, 2016). The Enron collapse had a huge effect on present accounting regulations and rules.
Although, the Sarbanes-Oxley Act has enhanced corporate governance and lowered the incidence of fraud, recent studies reference that investors and management still have concerns about financial statement fraud. For example:
Through an organizational culture that focused on financial greed for self, illegal accounting practices, conflicts of interest partnerships, illegal business dealings, fraud, negligence, and massive corruption at all levels, the Enron scandal help to create new laws and regulations with stiff penalties if violated (Ferrell, et al, 2013). The federal government implemented the Sarbanes Oxley Act (SOX) (Ferrell, et al, 2013).
Sarbanes-Oxley was created in response to the scandals of three large corporation: Enron, Tyco, and WorldCom. These companies misrepresented their financial information either though acquiring another company, hiding operating expenses, or hiding the amount of debt the business had. These ethical failures led to the complete collapse of Enron and WorldCom, and caused investors to lose millions of dollars in stock value for