Accounting is certainly the backbone of a company therefore it is extremely crucial to maintain a transparent and an accurate set of accounting records. Whenever discrepancies arise in the accounting records of a company, the stakeholders associated with it is responsible. A prominent example of misappropriation of internal and external audit is the case of Enron, which seemed to be a very successful company of its times. However, before the company went bankrupt, its top level management confessed that they have indeed manipulated the financial statements to inflate their profits and deflate their losses (Enron Annual Report, 2000).
Enron was a very successful company during the 1990s. The growth and demise of the Enron Corporation has received critical responses from across the globe. A company that claimed revenues of approximately $101 billion in 2000 fell from its grace a year later in 2001, when it declared bankruptcy. The rise and fall of the Enron Corporation came as shock to many small and large investors. After scrutinizing the financial statements investigators found that the figures in the financial statements were artificially inflated in a systematic manner, which is better known to us as the, “Enron Scandal” (Enron Annual Report, 2000).
This scandal is considered to be the biggest Accounting scandal. Enron enjoyed considerable growth and a strong reputation until it declared bankruptcy on December 2, 2001. However, even until August 2000 Enron’s shares were been traded at around $83 per share, but the value of the shares slipped to $0.22 by the end of 2001. The roles of the auditors were questioned as well during the investigation process which will be discussed further. The internal shadowy activities along with the altered financial accounts ultimately led to the demise of this large corporation and its shares experiencing a record fall (Enron Annual Report, 2000).
The Sarbanes-Oxley Act of 2002, also known as the Investor Protection Act or SOX, created to ensure more protected investment. This Act contains 11 titles that are meant to ensure safer environment for the financial investors (Research in Accounting Regulation, 2009) The Enron scandal was perhaps the biggest reason for the creation of this act. The 11 titles include the Public Company Accounting Oversight Board (PCAOB), Corporate responsibility, Auditor Independence, Enhanced Financial Disclosure, Analysts of the conflicts of Interests, Studies and reports, Commission resources, and Authority, White collar penalty Enhancement, Corporate, and Criminal Fraud Accountability, and Corporate Frauds Accountability. Each of these titles are meant to deal with a different aspect of the company (The Sarbanes-Oxley Act, 2012).
In general, companies usually spend around 0.036% of their revenues for complying with the Act. According to a research, conducted by the Social Science Research Network, the transparency of firms has increased significantly after the implementation of this Act. It has also been found that the borrowing costs of the firm has decreased significantly after the management exercised better internal control and their financial statements also tend to be very reliable. The Sarbanes-Oxley Act of 2002 is highly praised for increasing the transparency of the company, streamlining the operations and to ensure enhanced protection of the investors (The Sarbanes-Oxley Act, 2012).
References
1. Enron Annual Report. (2000). Retrieved on 11th May 2012 from http://picker.uchicago.edu/Enron/EnronAnnualReport2000.pdf
2. The Sarbanes-Oxley Act. (2012). Retrieved on 12th May 2012 from http://www.soxlaw.com/
