Sarbanes-Oxley Act of 2002
Enron was a very successful natural gas company that began in 1932, then known as the Northern Natural Gas Company. In 1993, Enron began establishing special purpose entities. These offshore entities helped to hide a lot of Enron’s debts and losses. Through accounting loopholes, Enron was able to hide billions of dollars in debt. This helped to raise stock prices to $83.13 a share by the end of 2000. In October 2001, the Securities and Exchange Commission began investigating Enron and found that the company was guilty of fraudulent accounting. The company filed bankruptcy in December 2001. Along with Enron’s downfall, their auditing firm, Arthur Andersen LLP, ...view middle of the document...
It is designed to protect the investors from fraudulent accounting and to put confidence back in the market. The original standards for accounting were set in the Securities Exchange Act of 1933 and 1934, but since the occurrence of these major scandals, it was decided that the rules and regulations needed to be stricter. The changes are comprised of eleven titles in the Sarbanes-Oxley Act. Each title summarized below:
* Title I establishes the Public Company Accounting Oversight Board, which oversees the audits of the companies to ensure the audits are accurate and informative. Also, the Board establishes quality control and ethics, conducts investigations and disciplinary proceedings, and enforces compliance with the Act.
* Title II sets the guidelines for external auditors. Among these is the prohibition of auditors providing non-audit services to their clients. Also, auditors must report to audit committees. And to prevent a conflict of interest, a Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, or any equivalent must not have been employed by the public accounting firm in the year preceding the initiation of the audit.
* Title III says that the senior executives must take individual responsibility by ensuring that the corporate financial statements are accurate and complete and sign off on them. It also requires the officers to approve quarterly financial statements and prohibits insider trades during pension fund blackout periods.
* Title IV requires the timely reporting of off-balance sheet transactions and pro forma figures. It also requires all officers and directors to report any stock transactions.
* Title V defines the code of conduct for the analysts and requires them to report any known conflicts of interest.
* Title VI gives the Securities and Exchange Commission the authority to censure securities professionals from practice due to the lack of required qualifications, character or integrity, or if the securities professional has willfully violated provisions of the securities law.
* Title VII requires the Securities and Exchange Commission and the director of the Government Accountability Office to study the consolidations of public accounting firms, the role of credit rating agencies, enforcement agencies, and investment banks, and to report any violations found.
* Title VIII describes the penalties for anyone who knowingly manipulates or falsifies any document or financial statement. These may be financial penalties or imprisonment, or both.
* Title IX increases the criminal penalties of white-collar crimes and conspiracies.
* Title X says that the company tax return must be signed by the Chief Executive...