M7 Sarbanes and Oxley Act

7/31/2019 M7 Sarbanes and Oxley Act

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Sarbanes-Oxley and Enron Research

Sarbanes-Oxley and Enron

B6021XB Managerial Accounting

By Wanda Alexander


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Abstract

This article will present an overview of the following topics: the financial crisis that lead to the

fall of Enron, the enactment of the Sarbanes-Oxley Act, the key provisions and sections that

make up the act, internal controls for public companies, the board impact of the act on auditors,

the discussion from the legal and ethical facts including penalties, and the passage of the

Sarbanes-Oxley Act 2002. It will touch on some specific details of the provisions of the act that

were made for publicly traded companies. This article will also touch on the types of service that

is considered to be unlawful if publicly held by company auditors including names of some of

the key people involved in the Sarbanes-Oxley Act and the shutdown of Enron.


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The Sarbanes-Oxley Act was introduced back in 2002. The act introduced significant

alterations to the administration of corporate financial practice and corporate governance. The

Act got it name from Senator Paul Sarbanes and Representative Michael Oxley. The Sarbanes-

Oxley Act contains eleven titles which are divided into multiple sections. The most important

sections in the Act are sections 302, 401, 404, 409, 802 and 906. On December 2, 2001 the

Enron Corporation filed bankruptcy. Enron had inflated its earnings by $600 million dollars

within a 7 year period. (1994-2001) Enron became the largest bankruptcy in U.S history with

total assets of 62.8 billion. In results of Enron bankruptcy investors lost billions and employees

lost their jobs and savings. Months later President George W. Bush signed the Public Company

Accounting Act of 2002. Enron caused massive failures on many different levels. Employees had

to go thru a blackout period were Enron was holding employees stock as part of their pensions.

A lot of these drastic measures could have been prevented if the company audits had found

accounting irregularities. Sarbanes-Oxley Act abbreviated as SOX addresses the reconstruction

for auditing and accounting procedures, the administration of responsibilities for corporate

directors and officers and the governance of conflict of interest, conflict of interest in stock

analysts, any one thing that directly or indirectly affect financial results, criminalization of

fraudulent handlings of documents or investigations or violations of disclosure rules, and chief

executives certifying financial results themselves and signing federal income taxes. The


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Sarbanes-Oxley Act also protects investors who are assumed to be at a greater distance from

management.

Kenneth Lay formed Enron back in 1985 and many years later he partnered with Jeffrey

Skilling. Jeffrey hired a staff of executives that used accounting loopholes, special purpose

entities, and poor financial reporting. They were able to hide billions of debt from failed projects

and deals, causing shareholders to lose $11 billion when their stock prices dropped down to less

than $1 by the end of November 2001. Enrons auditor was Arthur Andersen and he was found

guilty in the United States District Court along with a variety of other executives. The rulings

were later overturned but by then Enron lost majority of their customers and the company was

shutdown. Enrons employees and shareholders didnt receive much in lawsuits and lost billions

in pension and stock prices. Enron was the main reason Sarbanes-Oxley Act was formed so

shareholders could not be defrauded. The act increased the accountability of auditing firms so

they will remain unbiased and independent to their clients. There are several key sections in the

Sarbanes-Oxley Act. Section 301, which is the Audit Committee, is accountable for employing

and compensating company auditors that require an established policy to receive, retain, and for

the treatment of complaints for finance, accounting controls or any audit matters. Section 302 is

the Responsibility for Financial Reports part. In this section, CEOs and CFOs have to issue a

certification with their quarterly report and annual reports that consist of their financial statement

to ensure the reports are accurate. This section also wants to make sure CEOs and CFOs are

responsible for creating, preserving, and reviewing internal controls. Section 402 focuses on

Conflict of Interest. This section restricts both directly or indirectly, including through any

subsidiary, the option to extend or advance credit, in the form of a personal loan for any director


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or executive officer. Section 404 is Managements Assessment of Internal Controls. In this

section each public company annual report must contain an evaluation, at the end of the fiscal

year, of the competency of their internal control structure and the procedures for issuing the

financial report. Section 406 is the Code of Ethics. The code of ethics is needed for senior

financial officers, comptroller, principle financial officers or accounting officer, or any person

performing corresponding functions. Section 407 is the Audit Committee Financial Expert. In

this section a public company audit committee is has to have one designated financial

professional. The financial wizard should be one who has expert knowledge of US GAAP, along

with experience in preparing and auditing financial statements and internal accounting controls.

The expert should also have an understanding of the audit committee. Section 802 is the

Criminal Penalties section for the altering of company documents. Section 802 focuses on the

creation of criminal penalties that include fine and/or imprisonment for up to 20 years for both.

These penalties are issued to whoever knowingly alters, destroys, conceals, falsifies, mutilate,

and covers up any untrue entries in any record, document, or a tangible object with intent to

destroy, change, or exaggerate in federal investigations and bankruptcy hearings. Section 806 is

the Whistleblower Protection which consists of protecting employees from publically traded

companies that report any wrong doing to the federal authorities and or supervisor. This section

provides civil liabilities to guard against the whistleblower. Section 906 is the Corporate

Responsibility for Financial Reports. This statement is a statement of mandated reports at various

times by the CEO and/or CFO that information contains the periodic report thats present, all

material respects, the financial shape and outcome of operations of the issuers. Last is Section

1107 which is Retaliation Against Informants. This section lays out the criminal liabilities

against those who retaliate against the informants that divulge truthful sources relating to the


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committing of any federal offense to any law enforcement agency. The criminal liabilities

include a fine and or imprisonment for up to 10 years or both. All of the sections are the key

provisions that make up the Sarbanes-Oxley Act 2002. The Sarbanes-Oxley Act was passed in

the mist of myriad of corporate scandal. The scandals included skewed reporting of select

transactions such as Enron. The Sarbanes-Oxley Act also impact international organizations.

International companies have to examine if their IT operations will comply with the act. The

reason is that there are financial materiality and significant risks to be considered.

The passage of the Sarbanes-Oxley Act of 2002 did also make it difficult for startups

technology companies and companies that were in their early stages that wanted to issue IPOs

(Initial Public Offering) during 2000 to 2003. For many companies trying to go public to draw

additional investors began to be very difficult due to the complicated bookkeeping required for

SOX and the expense thats required to implement internal controls. This led to a decrease in

IPOs. It is also believed that the passage of the Sarbanes-Oxley Act of 2002 lead to a

tremendous number of mergers and acquisitions.


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References

www.soxlaw.com

www.en.wikipedia.org/wiki/enron-scandal

www.articlebase.com/online-business-articles/key-provisions-of-sarbanes-oxley-act-

509714.html
http://www.soxlaw.com/http://www.soxlaw.com/http://www.en.wikipedia.org/wiki/enron-scandalhttp://www.en.wikipedia.org/wiki/enron-scandalhttp://www.articlebase.com/online-business-articles/key-provisions-of-sarbanes-oxley-act-509714.htmlhttp://www.articlebase.com/online-business-articles/key-provisions-of-sarbanes-oxley-act-509714.htmlhttp://www.articlebase.com/online-business-articles/key-provisions-of-sarbanes-oxley-act-509714.htmlhttp://www.articlebase.com/online-business-articles/key-provisions-of-sarbanes-oxley-act-509714.htmlhttp://www.articlebase.com/online-business-articles/key-provisions-of-sarbanes-oxley-act-509714.htmlhttp://www.en.wikipedia.org/wiki/enron-scandalhttp://www.soxlaw.com/

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