Sarbanes-Oxley Act

In 2001, United States Securities and Exchange Commission (SEC) announced that they were investigating the accounting practices of Enron based on concerns raised by shareholders and analysts in last few years (Forbes, 2013). Investigation revealed manipulation of accounting rules, masking of huge losses and liabilities as well as several charges of money laundering, bank fraud, insider trading and conspiracy by then CEO Ken Lay, former CEO Jeffrey Skilling, CFO Andrew Fastow and several other high-ranking executives (Forbes, 2013). Accounting firm Arthur Anderson was responsible for the auditing of Enron, but firm issued favorable reports by ignoring Enron’s malpractices and received monetary benefits in exchange (Collins, 2019). SEC investigation found Arthur Anderson destroying the financial documents of Enron to avoid being caught. Court stopped the accounting firm from public accounting practices lead to closure of company followed by thousands of layoffs (Collins, 2019). The catastrophe could have been avoided by following corporate ethical and responsibility policy, which require truthful financial reporting, transparency, and auditing practices. Executive management acted poorly and did not follow the high standards of corporate ethics lead to bankruptcy of Enron. Moreover, external accounting firm Arthur Anderson did not perform their job ethically and professionally, which also lead to closure of their firm. The issue could have been avoided if,

1. Board had fulfilled their job of corporate oversight over Enron’s fiscal health.

2. Concerns of analysts and stockholders were not ignored.

3. Whistleblowers were not retributed for raising concerns on malpractices, and issues were corrected at the initial stages.

4. External audit firm held the CFO of Enron accountable for malpractices and manipulations, instead audit firm became part of Enron’s misconduct.

In 2002, Congress enacted Sarbanes-Oxley act due to WorldCom and Enron’s debacle (Super Pages, 2019). The act mandates certification of internal audits and setup civil and criminal penalties for security violations. Some of the highlights of the Sarbanes-Oxley act are:

1. All public companies, big or small are regulated for financial statements, accounting practices, and corporate responsibilities.

2. Act grants the external auditors more access to company data, with special provisions for compensation disclosure of upper management.

3. Act protects the whistleblowers from retribution by adding up to 10 years of prison time for the companies.

4. Act require correct financial statements to reflect company’s fiscal health and responsibility.

5. Company executives are required to sign off their financial statements for accountability under the act.

6. Act set up to 20 years of prison if corporate employees alter or hide or misfile documents to obstruct justice. Accountants can get up to 10 years in prison for intentionally throwing away documents before the five-year limit.

Sarbanes-Oxley act illustrates the significance of ethical corporate responsibilities, with stiff penalties for violations (Super Pages, 2019). Venzuela (2016) studied the effectiveness of Sarbanes-Oxley act’s financial code of ethics and found that earnings restatements due to financial mismanagement have reduced significantly since the enactment of act in 2002.

In summary, absence of Sarbanes-Oxley act would have resulted in continued corrupt practices in the upper financial echelons of publicly traded companies. Corporate greed often result in malpractice of accounting and financial rules, destruction of documents, reporting of falsified information and so on, which is why enactment of SOX was a necessary step to safeguard the trust of investors, held CEOs and CFOs accountable of their companies’ financial reports, streamline the internal audit procedures, and protect whistleblowers from retribution. Although there are still ethical and financial violations happening, but it could have been worse if SOX was not enacted in 2002.

References

Venzuela, L. (2016). Study validates effectiveness of Sarbanes Oxley 406 financial code of ethics. Retrieved from https://phys.org/news/2016-10-validates-effectiveness-sarbanes-oxley-financial.html

Forbes (2013). 5 most publicized ethics violations by CEOs. Retrieved from https://www.forbes.com/sites/investopedia/2013/02/05/5-most-publicized-ethics-violations-by-ceos/#5d5233224bbc

Super Pages (2019). Sarbanes Oxley Act Summary. Retrieved from https://www.superpages.com/em/sarbanes-oxley-act-summary/

Collins, D. (2019). Arthur Anderson – American Company. Retrieved from https://www.britannica.com/topic/Arthur-Andersen