The Importance Of The Sarbanes-Oxley Act

In 2001, Enron, one of America’s leading energy companies, disappeared overnight. At its height, Enron had “a stock price over $90...a marker value of 70 billion… [and] gigantic executive compensation incentive packages” (Giroux). After being exposed of unethical business and accounting methods, Enron eventually went bankrupt. Enron was convicted of fraud, money laundering, conspiracy, and over 50 other charges. The Enron Scandal is a watershed moment in accounting because of the exposure and reevaluation of faulty business administration and unethical business ethics, the creation of the President’s Corporate Fraud Task Force, and the creation of the Sarbanes-Oxley Act.
The Enron Scandal is a watershed moment because it revealed holes in
business administration and unethical business practices, leading to changes in policy and accounting. Business administration and proper business ethics are central to a successful accounting and overall business. One of Enron’s flaws was its administration. Corruption in its administration led to unethical business practices; Enron used one method called mark-to-market accounting. Mark-to-market accounting misrepresents the value of assets and hides loses by moving them to offshore accounts. Although it does work in some cases, this method of accounting does not account for depreciation, or the money required to obtain an asset. Using this method, Enron seemed to be a profitable company and their stock price grew immensely. On the other hand, Enron went into copious amounts of debt, about $630 million (Britannica), without being tracked (Gary). This led to their eventual bankruptcy and downfall. After Enron’s fall, mark-to-market accounting became a debatable method, the Financial Accounting Standards Board increased its ethical conduct standards, and changed how Boards of Directors track companies. By doing this, accounting methodologies and business ethics became more reliable, but restrictive. In the long run, accounting became more heavily scrutinized because of Enron. Enron is not only a watershed moments because of its faults, but also the creation of the President’s Corporate Fraud Task Force.
The President’s Corporate Fraud Task Force is very important to modern day accounting. Kenneth Lay, Enron’s CEO, allowed Enron to step into the political world. Lay had direct political connections with President George W. Bush and Vice President Dick Cheney. When Enron fell, President Bush created the President’s Corporate Fraud Task Force. This task force President’s fraud task force has more than 20 federal agencies and 94 U.S. Attorney’s offices (Anonymous), To this day, the President’s fraud task force “ has made great strides in facilitating increased investigation and prosecution of financial crimes” (Department). Also, it has contributed to criminal justice by investigating and convicting hundreds of cases. The President’s Corporate Fraud Task Force and the fall of Enron have led to the development of accounting through new laws and creating a task force devoted to catching illegal accounting.
After the fall of Enron, the government passed the Sarbanes-Oxley Act in 2002.
The Sarbanes-Oxley Act is a law that prevents fraudulent accounting by having senior management certify the accuracy of financial statements. The Sarbanes-Oxley Act requires the use of a tracking system and the possession of financial documents for a certain period of time. Although it sounds simple, the Sarbanes-Oxley Act is very strict and must be followed verbatim. Because of this, fraudulent accounting has drastically fallen. The Sarbanes-Oxley act has changed the accounting industry by creating new standards. By creating new standards for accountants to follow, Enron’s collapse has led to laws that prevent an event like it from occurring
again.
Some may hold the opinion that the Enron scandal is not an important part of the accounting industry, but Enron’s political, social, economic ties, and its lasting impact shows it is accounting’s most crucial watershed moment.
Enron provided electricity and natural gas for people across the nation, gave thousands of people jobs, and funded President Bush. When Enron fell, people from across the nation felt the effects. People lost electricity, stocks, and jobs. This led to the creation of the Sarbanes-Oxley Act, the President’s Corporate Fraud Task Force, higher energy prices, and a rise in unemployment. Furthermore, Enron was the straw that broke the camel’s back. The fall of companies like Worldcom and Tyco did not change society outside of the economy. In addition, few of them had laws made because of them. Although previous scandals have occurred, the fall of Enron in 2001 is the most influential watershed moment in
accounting.
The Enron Scandal is the most crucial watershed moment in accounting. It led to not only the creation of the Sarbanes-Oxley Act and the President’s fraud task force, but the renewal of business ethics and administration. Without the fall of Enron, we would not have such strict accounting practices. Furthermore, without Enron, society would have never seen the impact accounting can have on the wellbeing of a business. The fall of Enron is a prime example of what happens when companies fail to recognize the importance of following basic ethical standards. By setting an example for other companies and indirectly creating new laws and regulations, the the Enron Scandal is a watershed moment in the field of accounting.