Enron and SOX:The absence of transparency and accuracy leading to the Enron - Essay Example

Framework I. Introduction II. Enron Controversy III. Sarbanes-Oxley Act and its provisions IV. New Guidelines of FASB V. Reactions to SOX VI. Public Agencies and SOX Enron and SOX: The Absence of Transparency and Accuracy Leading to the Enron Controversy The controversy involving powerful institutions has made an immense impact in the corporate world leading to their downfall and the implementation of stringent laws of the government. Enron and Arthur Andersen faced the collapse of their careers which affected the industry and the birth of the Sarbanes-Oxley Act. The largest bankruptcy in history marked the existence of fraudulent accounting procedures by Enron and Arthur Andersen in 2001. The once blue chip stock ended up to be valued for small meager amounts. Debts resulted from unreported transactions in their financial statements by the company with their restricted partnerships and alliances. The Sarbanes-Oxley Act of 2002 or also known as SOX is law promulgated as government's response to Enron and Arthur Andersen financial controversy which aims to ensure the safety and security of company shareholders against fraudulent and unauthorized accounting procedures which disables them from rightfully knowing the truth with their stocks and properties. The law is implemented and monitored by the (SEC), which gives the timeframes for compliance and dissemination of information regarding the requirements. Sarbanes-Oxley is not a set of business practices and does not specify how a business should store records; rather, it defines which records are to be stored and for how long. The legislation not only affects the financial side of corporations, but also affects the IT departments whose job it is to store a corporation's electronic records. The Sarbanes-Oxley Act states that all business records, including electronic records and electronic messages, must be saved for "not less than five years." The consequences for non-compliance are fines, imprisonment, or both. IT departments are increasingly faced with the challenge of creating and maintaining a corporate records archive in a cost-effective fashion that satisfies the requirements put forth by the legislation. There are new eight guidelines mandated by the FASB that aims to aid in the risk assessment of companies' financial statements. The auditors have several duties and responsibilities which entails precision, efficiency and judgment. Auditors provide management information to the senior management, consolidation of Annual Operating Plan and Quarterly Profit Estimates for all departments, tax advisory and tax planning, continual improvement to finance systems, establish policies and provide guidance, contribute to establishing robust financial control environment across the different departments and promote consistency and align various departments with companies' finance infrastructure. Any issues that affect or endanger the company's financial information are discussed to the senior management by the auditor through presenting documentations and financial statements to back up their position. Advisory on recent developments in regulatory framework with emphasis on Sarbanes - Oxley and establishing policies across the different departments is also a part of the functions of the auditor. Management Information Finance provides an array of MI to companies' senior management. This information is both statistical and financial in nature while the frequency of requirement varies from designated intervals to ad-hoc. Further, analyses are made based on historical data as well as forecast data there by creating models for the future operations of the employees and management. While new accounting policy like Sarbanes-Oxley have required companies to take a harder look at their controls over financial data, this has not produced a significant fraud prevention result. At the end of the day, Sarbanes-Oxley requires little substantive development in the way company's documentation and account financial information. The procedure of complying with the legislation largely involves the documentation of actions and dealings used within companies. However, improvements to interior controls weren't mandated, so some companies completed no enhancements to their control procedures. The work required by such regulations has really formed a paperwork exercise for companies. They have reams and reams of paper that provide proof of what and how the company does in regards to financial data and operations. Yet that documentation itself doesn't thwart fraud. So if the regulations haven't been valuable in preventing fraud, then what was the point I think, in many aspects, Sarbanes-Oxley was feel-good legislation. Investors and users of financial statements required something to make them feel better after the big corporate frauds became public. It made good judgment that the government should step in and oblige companies to do something to struggle the financial statement frauds committed by executives like those at WorldCom, Enron, and Tyco. Yet in the dash to come up with something that would conciliate investors and the public at large, the legislation may be deficient in the impact for which everyone was hoping. Instead of requiring companies to proactively stop and identify fraud, the legislation largely requires just comprehensive documentation of procedures. Along the way, Sarbanes-Oxley has cost companies hundreds of millions of dollars annually to put into operation. One estimate cited a total cost of more than $1 trillion to date. While this has been a takeover for consultants, who assisted with compliance, what value did it really add for the shareholders and other corporate stakeholders The cost to maintain the Sarbanes-Oxley documentation from year-to-year should be significantly lower than the initial cost to comply, yet overall there has been a very significant cost to corporations. While the legislation required little substantive changes to the way companies do business, proactive companies can find benefit from the work done to comply with Sarbanes-Oxley. Some companies have used this opportunity to improve their basic internal controls including enhancements to reconciliations and greater segregation of duties. Information security enhancements may also be made as executives are made aware of vulnerabilities. The board of directors and the audit committee in particular, has begun to play a much more active role in many companies. The board is becoming more engaged in company activities, especially in the area of controls and governance. Public companies have different set of SOX regulations that they need to follow including the changes in taxation and the no-commission policy for auditors. Public company auditors should disclose out their audit with the Centre Managers or Function Head. For audits covering multiple departments, e.g. payments audit covering different company sites ensure that apart from closing out the audit with the respective Centre Managers, the Group Auditors should ideally have closing meetings with both Chief Operating Officers and if due to practical problems this is not possible, then at least with one. Once a public company has been provided with an audit report, an individual should be given responsibility and accountability for resolution of the audit comments. This should be included in their primary responsibilities until the majority of items are resolved. Ideally, this accountability should rest with the Head of the Process, e.g. Vice President. Make sure to only close audit items when they are fundamentally and comprehensively resolved. Deadlines must be set carefully and agreed formally - if unrealistic time constraints are set to close the audit items, there will be the inevitable temptation to compromise standards which is the slippery slope to repeat recommendations at the next audit. A thorough audit trail should be established to track and record the actions agreed and undertaken to close out each audit recommendation. Where required, a file (soft copy advisable) should also be maintained so that all correspondence relating to audit resolution can be retained. The management team is accountable for full resolution of the audit items on time and is directly accountable for any repeat recommendations. For issues identified as "Low risk" and reported separately as "Miscellaneous Low Risk Recommendations Document", the response will have to be directly provided by the Centre Manager / Function Head to the Group Auditors within two months from the receipt of the document. Corporate governance is a duty that a CPA has to fulfill in a morally and ethically acceptable manner assuring that all components are meeting the compliance guidance and the monetary information is reported impartially and transparently. The Sarbanes-Oxley Act is promulgated to require companies and financial institutions to be subject to executive accounting by a financial expert like a CPA to extensively audit the monetary transactions within the company. CPAs act as watchdogs safeguarding their rights of the company's shareholders from abusive and unfair accounting practices. The regulatory bodies are successful in their goal to improve the management of financial services. New laws are being drafted and reviewed and amendments are also being looked into. This is a good sign that the regulatory bodies are taking part in gathering the response and feedback of the people in the financial industry and that they are also able to evaluate the effectiveness and appropriateness of the rules that they promulgated. Aside from the regulations being set by the government regarding the delivery of financial services, the financial institutions and investors should also take part in making the financial system efficient, fair and progressive. The modern-day CPA is instrumental to company's success. AS cash flow pulsate through the organization, this individual is at the heart of what is happening. If finance is to play a general management role in the organization, the internal auditor must be a team player who is constructively involved in team operations and company's overall strategy. Aside from monitoring the flow of money inside the company, the auditor with the help of SOX will also be able to lessen the risk of manipulation of financial data entry. REFERENCES: En.wikipedia.org (2007) Sarbanes-Oxley Act. Retrieved March 7, 2008 from www.wikipedia.org Macey, Jonathan R, (2nd ed. 2001) A Pox on Both Your Houses: Enron, Sarbanes-Oxley and the Debate Concerning the Relative Efficacy of Mandatory Versus Enabling Rules. Mixter, Christian J. (3rd ed. 2003) United States v. Simon and the new certification provisions 76 St.John's L (.Rev.Ed. 2002). Read More