ENRON: Sarbanes - Oxley Act

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.