The Sarbanes-Oxley Act (SOX) Act

The Sarbanes-Oxley is a U.S. federal law that has generated much controversy, and involved the response to the financial scandals of some large corporations such as Enron, Tyco International, WorldCom and Peregrine Systems. These scandals brought down the public confidence in auditing and accounting firms. The law is named after Senator Paul Sarbanes Democratic Party and GOP Congressman Michael G. Oxley. It was passed by large majorities in both Congress and the Senate and covers and sets new performance standards for boards of directors and managers of companies and accounting mechanisms of all publicly traded companies in America. It also introduces criminal liability for the board of directors and a requirement by

Between the years 2000 and 2002 there were over a dozen corporate scandals involving unethical corporate governance practices. The allegations ranged from faulty revenue reporting and falsifying financial records, to the shredding and destruction of financial documents (Patsuris, 2002). Most notably, are the cases involving Enron and Arthur Andersen. The allegations of the Enron scandal went public in October 2001. They included, hiding debt and boosting profits to the tune of more than one billion dollars. They were also accused of bribing foreign governments to win contacts and manipulating both the California and Texas power markets (Patsuris, 2002). Following these allegations, Arthur Andersen was investigated for, allegedly,

sprees, wild corporate “gatherings” became the norm. Employees who could not afford the lavish lifestyle created at Enron began to take a toll on them. Trying to keep up with the crowd, lower level employees found themselves maxing out their credit cards and putting themselves in debt. This created an environment that seemed to worry less about earning actual profits. According to Li (2010), shareholders and employees were told by Enron’s CEO the stock would probably rise but did not disclose he was selling his stock while telling everyone else to buy. Shareholders were completely unaware of the irregularities going on at Enron and were constantly lied to about the company’s actual health. Actually, employees were never told by any of Enron’s top management team, the true status of the company. Li (2010) stated not only until the investigation surrounding Enron’s bankruptcy enabled shareholders to learn of the CEO stock sell-off before February 14, 2002 which is when the sell-off would otherwise have been disclosed. However, the most damaging act was committed by the accounting firm Arthur Andersen. According to Li (2010), their reputation was damaged by their admission on January 10, 2002 that employees of the firm had destroyed documents and correspondence related to the Enron engagement. The shredding of documents was a clear admission of guilt which eventually caused Arthur Anderson to also file for bankruptcy. Auditor’s reputation is based on being reliable, honest, and

External auditors at the time failed to expose the fraudulent financial practices taking place at WorldCom. Although internal auditors expressed concern about the classification of operating expenses as capital expenditures, their efforts were purposely neglected by top level financial executives allowing the fraud to continue (Lyke,2002) WorldCom's financial standing was manipulated to show that the company was profitable when in reality was on the brink of bankruptcy; on top of that, WorldCom's CEO got a $400 million personal loan with lack of oversight from the board of directors (green 2004, p37 paper). The Sarbanes–Oxley Act brought about a series of financial regulations that could have prevented WorldCom's fraudulent practices. Sarbanes–Oxley requires principal executive and financial officers to certify the accuracy of financial statements and the effectiveness of internal controls for the compilation and disclosure of these statements with enforcement provisions such as fines or imprisonment. The Act prohibits the boards of directors from granting loans to executives. The Sarbanes–Oxley Act also established the Public Company Accounting Oversight Board to oversee the audits of publicly traded companies and regulate accounting practices. If all

The word “fraud” was magnified in the business world around the end of 2001 and the beginning of 2002. No one had seen anything like it. Enron, one of the country’s largest energy companies, went bankrupt and took down with it Arthur Andersen, one of the five largest audit and accounting firms in the world. Enron was followed by other accounting scandals such as WorldCom, Tyco, Freddie Mac, and HealthSouth, yet Enron will always be remembered as one of the worst corporate accounting scandals of all time. Enron’s collapse was brought upon by the greed of its corporate hierarchy and how it preyed upon its faithful stockholders and employees who invested so much of their time and money into the company. Enron seemed to portray that the goal of corporate America was to drive up stock prices and get to the peak of the financial mountain by any means necessary. The “Conspiracy of Fools” is a tale of power, crony capitalism, and company greed that lead Enron down the dark road of corporate America.

The Sarbanes-Oxley (SOX) Act of 2002 was legislated by Congress to restore reliability of financial statements with the objectives to raise standards of corporate accountability, to not only improve detection, but to also prevent fraud and abuse (Terando & Kurtenbach, 2009). Additionally, SOX was the response to general failure of business ethics such as the propagation of abusive tax shelters and greater aggressive tax avoidance strategies (Raabe, Whittenburg, Sanders, & Sawyers, 2015).

The authors note that in general Sarbanes-Oxley has succeeded in its mandate. There have not been, for example, any of the corporate accounting scandals of the Enron or Worldcom type that occurred before the law came into effect. There have been scandals in business, and failures, but none fell under the auspices of Sarbanes-Oxley. The failures of AIG and Lehman Brothers did not occur because of accounting scandals but rather because of business failures of other types. The Bernie Madoff scandal has also been cited by some SOX opponents, but that did not occur with a public company and was therefore not under the auspices of SOX either.

Enron was a one-hundred billion dollar company in 2000, until questionable accounting practices, known as mark-to-market, saw their stock prices drop from ninety dollars per share to just pennies (Ferrell, Hirt, & Ferrell, 2015). All of the top employees were charged and convicted of various crimes and sentenced to time in prison. Because of loss of confidence among investors, the government put into place the Sarbanes–Oxley Act of 2002 (SOX). SOX is a set of requirements put into law in an attempt to regulate corporations’ accounting practices, in an attempt to protect stockholders. Sox has proponents, but it also has it’s critics. Some experts claim that it has helped weed out some of the corruption in business accounting. While other

The Sarbanes-Oxley Act. An act passed by U.S. Congress in 2002 to protect investors and the general public from the possibility of accounting errors and fraudulent practices by corporations. The Sarbanes-Oxley Act (SOX), named after U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley, which contains eleven sections, mandated strict reforms to improve financial disclosures and prevent accounting fraud. The eleven sections of the bill cover responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct, and also requires the Securities and Exchange Commission (SEC) to create regulations to define how public corporations are to comply with the law. SOX other main purpose is also

According to Pompper (2014), “incidents of high-profile deception over the past” four decades “have threatened the reputation of the … accounting function” (p. 131). For instance, an investigation was conducted into the financial audit and reporting process after the savings and loan banking crisis in the 1980s (Pompper, 2014). In addition, the criminal convictions of executives and bankruptcies of Fortune 500 companies such as Enron and WorldCom in the turn of the century motivated Congress to pass the Sarbanes-Oxley Act (SOX) in 2002 to strengthen regulations within the accounting profession (Whittington & Pany, 2014). As a result, the SOX introduced provisions that changed the accounting function, such as the establishment of the Public Company Accounting Oversight Board (PCAOB) and other major elements; however, the SOX regulations subsequently resulted in consequences to its compliance.

This research paper endeavors to expose how the Sarbanes- Oxley Act of 2002 might have led to the accountability of holding corporate executives for their actions in the past and also in the future. The paper will examine and explore the genesis of the Sarbanes-Oxley Act as well as give details on the act’s relationship to the ethics of the institution and the persons who work and manage the institution. The paper also proceeds to discuss different corporations around the globe that have been endorsed with the Sarbanes- Oxley Act and their subsequent benefits and demerits as opined by different individuals. The paper shall prove to be a relevant tool for any administrator managing a public company. Anyone going through this

One of the “Big Five” accounting firms, Arthur Andersen, provided top-notch auditing, consulting, and tax service to several clients. Deemed as one of the leaders in the industry, Arthur Andersen services attracted major corporations and individual clients. Slowly, however, Arthur Andersen began to run their services with a greater focus on the clients’ management and performance and less on accounting standards and the investors’ well being. In June 2002, everything changed. Arthur Andersen became the first major accounting firm to be criminally convicted after being in “position as one of the leading professional services firm in the world, with over 85,000 staff in 84 countries and revenues in excess of $9 Billion” (Smith and Quirk 1). The company and its management began to act unethically and irresponsibly with several clients that they had been providing both auditing services and consulting services, a lethal combination. Ultimately, Andersen’s role in the scandals involving large corporations such as Enron, Waste Management, WorldCom, and Sunbeam led to not only these companies’ downfalls, but the

This case study was about different accounting company's that were investigated and charged with making fraudulent documents and records with money. These different company's in this case study were Enron, WorldCam, and Adelphia Communications (Ferrell, 2009). Enron was founded by former CEO Kenneth Lay, former CEO Jeffrey Skilling and former CEO Andrew Fastow. Enron was one in several other major corporations (most famous) accused of dirty dealings (Ferrell, 2009). Enron had reported 111 billion in 2000. The Corporation collapsed in debt after it had been concealed through a complex scheme of off balanced sheet partnership called mark-to-market. Mark-to-market accounting is assets that are yet to be obtained based on the current market prices. Mark-to-market allowed Enron to record future profits on books as present and ignoring sources of debt boosting the company's revenue on paper (Ferrell, 2009). Enron Corporation was forced to file Chapter 7 bankruptcy and had to lay-off 4,000 employees and a thousand more lost their retirement savings that had been invested in Enron stock. Later former chief financial officer Andrew Fastow was sentenced to six years in prison in exchange for giving prosecutors important information (Ferrell, 2009). Jeffery Skilling was sentenced to 24 years in prison and was ordered to pay back 45 million in restitution for his part in the scandal. Kenneth Lay died before he could began serving his 20-30 year sentence in prison (Ferrell, 2009).

The reason of Enron Corporation downfall for audit failure is conflict of interest and accounting fraud. This is because it has been suggested that conflicts of interest and a lack of independent oversight of management by Enron's board contributed to the firm's collapse. Some have suggested that Enron's compensation policies engendered a short-sighted focus on earnings growth and stock price. In addition, recent regulatory changes have focused on enhancing the accounting and strengthening internal accounting and control systems. In these issues, it begin with Enron's board. The conflict of interest between the two roles played by Arthur Andersen, as an auditor, he also as a consultant to Enron Corporation. While investigations continue, Enron Corporation has sought to salvage its business by spinning off various assets. As that, Arthur Andersen actually has admitted some

This case vividly illustrates the important role of trust, reputation, and confidence in corporate America, since the fall of both Enron and Andersen resulted from the loss of these critical elements. Because the Enron/Andersen debacle involves one of the largest bankruptcies and perhaps the single most significant audit failure in U.S. history, the level of student interest in this case is high. Thus, the case provides an excellent venue for discussion of many different topics ranging from auditor independence to the nature and intent of financial accounting standards. This case is ideal for use as an out-of-class written assignment or as a basis for class presentation and/or discussion. Either way, an in-class discussion of the issues is critical to vividly highlight the lessons of this case. If the case is to be used for an in-class discussion, we recommend having students read it prior to the in-class discussion, as the case is fairly lengthy. In class, students can meet in pairs or small groups to discuss and compare their conclusions. Once all students have had an opportunity to share their ideas and arrive at a group consensus, the instructor can randomly call on individual students to share their group’s answers with the class. Randomly calling on individual students to share their