The Sarbanes-Oxley Act of 2002
(often shortened to SarbOx or SOX) is legislation passed by the U.S. Congress
to protect shareholders and the general public from accounting errors and
fraudulent practices in the enterprise, as well as improve the accuracy of
corporate disclosures.
Sarbanes-Oxley Act was named after
sponsors U.S. Senator Paul Sarbanes and
U.S. Representative Michael G. Oxley.
SOX influenced public businesses through transformation of the financial
system. As a result of this act, top management must individually certify the
accuracy of financial information. In addition, penalties for fraudulent
financial activity are much more severe. The bill, which contains eleven
sections, was enacted as a reaction to a number of major corporate and accounting scandals
which include Enron Corporation.
In 2001, the year of the scandal,
Enron Corporation ranked number seven among the largest companies of the United
States of America. It bought and sold gas and oil futures. It built oil
refineries and power plants. It became one of the world's largest pulp and
paper, gas, electricity, and communications companies before it bankrupted in
2001.
As a result of the scandal, Enron's auditor firm, Arthur Andersen,
lost its accreditation. He was accused of applying reckless standards in its
audits because of a conflict of interest over
the significant consulting fees generated by Enron. The auditor's methods were
questioned as either being completed solely to receive its annual fees or for
its lack of expertise in properly reviewing Enron's revenue recognition,
special entities, derivatives, and other accounting practices.
The downfall of Enron was one of the
most momentous corporate scandals and bankruptcies in the history of the United
States of America. Enron's complex financial statements were confusing to
shareholders and analysts. In addition, its complex business model and
unethical practices required that the company use accounting limitations to
misrepresent earnings and modify the balance sheet to
indicate favorable performance.
The Enron scandal is one of the
biggest corporate collapses in the United States. It demonstrates the need for
significant reforms of accounting and corporate governance, as well as the
ethical quality of business’ culture not only in the US but also to the
businesses around the world. Although SOX Act has negative impacts, I believe
that it is for the greater good of the companies to be evaluated, with a
purpose of preventing fraudulent accounting practices.
