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The Sarbanes Oxley Act And Enron Essay

2237 words - 9 pages


This research paper explores the creation of the Sarbanes-Oxley Act (SOX) and the role Enron played in its enactment. Specifically, this paper will explore and discuss the Enron crisis, emphasizing the legal and ethical accounting breaches committed by the company. The purpose of SOX and the methods used to address those breaches. A discussion of the major provisions of the act including: (1) Establishment of the Oversight Board commonly referred to as the Public Company Accounting Oversight Board (PCAOB) (2) Restrictions on non-audit services (3) Rotation of audit partners (4) Auditor reports to audit committees (5) conflicts of interests (6) CEO and CFO certification of ...view middle of the document...

This paper draws on empirical research to demonstrate the limits of the law and the need for a shift in the ethics of compliance. Many of Enron’s practices involved outright breach of law, but they also illustrate the use of creative accounting. Enron demonstrates not just fraud but creative compliance at work—but the effect is the same. Corporate governance is undermined; false images of financial performance are projected, and shareholders and stakeholders are deceived (Rossouw & Sison, 2006). The immediate reaction to a scandal such as Enron is a demand for legal change, and the United States quickly complied with the passage of the Sarbanes-Oxley Act.
The purpose of the Act (SOX) was to protect investors by improving the accuracy and reliability of corporate financial statement disclosures, which come from two sources: the quarterly and annual filings now signed off by the chief executive officer (CEO) and the chief financial officer (CFO) (Section 302), and the audited accounts presented at the Annual General Meeting (Bather & Burnaby, 2006). The catalyst for the public’s interest was the collapse of Enron in 2001. A major consequence of Enron’s collapse was a full SEC investigation that implicated Enron’s auditor Arthur Andersen. Public disapproval of the conduct of Arthur Andersen was further exacerbated by revelations that in 2001 the firm earned $25 million in audit fees and $27 million from Enron for consulting work. Questions regarding conflicts of interest were raised (Tackett, 2004). Andersen’s lack of independence was blamed for the audit failure. A number of other very high profile corporate collapses, for example WorldCom, which was responsible for $11 billion of investor losses alone (Teather, 2005), Global Crossing, and Adelphia added to the alleged crisis of confidence in markets, fueling a need for the reforms of SOX. From the viewpoint of external auditors, who are generally viewed as independent judges of whether a company’s financial statements are accurately presented, the passing of SOX marked the end of self-regulation. Under section 101 of the Act, the Public Company Accounting Oversight Board (PCAOB) was created. (Bather & Burnaby, 2006).
According to (Bather & Burnaby, 2006) oversight of external auditors was given to the PCAOB. The PCAOB is responsible for setting audit standards, registering auditors and reviewing their performance, and enforcement and discipline duties. Since the intent of Congress was aimed at restoring confidence in capital markets SOX set up rules and oversight which addressed conflicts of interest on the assurance side as well as a lack of accountability on the corporate side. (Gifford & Howe, 2004). In March 2002, Harvey L. Pitt, then chairman of the SEC, spoke to Congress Committee on Financial Services concerning what is now known as the Sarbanes-Oxley Act. Pitt (2002) stated that:
The goal of the SEC is to ensure that our financial markets are transparent and fair to all investors, and...

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