In 2001, Enron Corporation, a USA energy company situated in Houston, hit its investors immensely when it filed for bankruptcy as a result of major corporate accounting forgeries carried out by its senior management and its auditor. The bankruptcy resulted in an estimated loss of almost $11 billion for its shareholders and the World saw a company with almost $63 billion market capitalization, file for bankruptcy (the largest dissolution in US history at that time) (Sterling, 2002). The major reason of the collapse of Enron Corporation was because of its fabricating and dubious accounting shams. The senior management of Enron was actively involved in recording fake Revenues within its accounting records. The practice carried out at the company saw the senior management of the company record Revenues on the basis of the present value of net future cash flows. This resulted in phony accounting treatment and misleading reports which was needed to match profits and cash in order to satisfy the shareholders. The company saw its stock price of $90 in the year 2000 fall to a meager $1 per share by the end of November 2001 (Rapoport et al, 2009; Sterling, 2002). This huge calamity saw the initiation of several new legislations including the Sarbanes Oxley Act, which was brought into existence in order improve the accuracy and the reliability of the financial statements and to provide a transparent picture to the shareholders (Rapoport et al, 2009). The legislation was passed by the US Congress in 2002 with a special focus of resuscitating investor confidence in corporations and others serving the capital markets. The title of the act clearly states its purpose. According to the title, SOX is “an act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” (Golden et al, 2006) The act is named after US Senator Paul Sarbanes and US Representative Michael Oxley. The legislation was put forwards in order to provide a stringent role towards any unscrupulous act. The act carried severe punitive measures against the wrongdoers and it provided increased powers to both the top management and the auditors. The act also enhanced its oversight role of the board of directors. The Act was introduced to look after several issues such as scrutinizing the Auditors, Directors’ and the top management’s roles. The act helped in reducing the conflict of interest between the shareholders, auditors, directors and the top management. Before its promulgation, auditors were self-regulated and were not answerable to any legislative or accounting body. Following the launch of the act, the Sarbanes Oxley legislation acted as a supervisory body which ensured that transparency was carried out while auditing the financial statements of a company. The Sarbanes Oxley act helped in overcoming the transparency issue. A research carried out by Stefan Arping and Zacharias Sautner concluded that the act helped in improving transparency. The research was carried out over a few US firms that were comparable on the basis of their operations (Arping & Sautner, 2010). The Section 404 of the act has also been under the limelight for quite some time now. The Section 404 requires companies to produce an Internal Control Report reporting over the adequacy of the internal controls and the financial reporting
Effects of Sarbanes Oxley Name University Effects of Sarbanes Oxley The start of the twentieth century unfolded several unfortunate events for the business arena, from that of the fall of the World Trade Center to that of the collapse of WorldCom. The WorldCom debacle was something which came forward in 2002 but this was not something which was not precedential…
Back in 2001 Enron shocked the world by declaring bankruptcy. A company that was profitable and worth over $90 a share 15 months earlier totally collapsed due to a lack of ethics, integrity, and the presence of fraudulent accounting activity. In the aftermath of this scandal the accounting profession changed forever with the arrival of the Sarbanes Oxley Act (SOX) of 2002.
It was enacted on 29 July 2002, and also referred to as ‘Public Company Accounting Reform and Investor Protection Act’ and ‘Corporate and Auditing Accountability and Responsibility Act’. It is named after its patrons in the Senate and Congress respectively, Paul Sarbanes and Michael G.
Due to this, the congress in the country enforced the Sarbanes-Oxley legislation of 2002. The legislation is very vital in the US corporate world. The law was passed to make the public trust and have confidence in the financial status of companies. The legislation is only applicable to the public held companies.
In the US Senate, the Sarbanes Oxley Act is commonly referred to as the Public Company Accounting Reform and Investor Protection Act (Shakespeare 333). In the House, the act is commonly referred to as the Corporate and Auditing Accounting and Responsibility Act.
With the advent of the Sarbanes – Oxley Act, information regarding every aspect of the business conducted by a company that influences financial performance has to be reported. This is in addition to the financial data
Some of these regulatory requirements such as state filing and fair lending laws are some of the commonly known compliance requirements that majority of businesses can relate with, having been in operation for
4 pages (1000 words)Research Paper
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