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Enron And The Sarbanes-Oxley Act (2002)

1079 Words5 Pages

What is financial management? Experts refer to financial management as the science of money management. However, a broader definition of financial management would include the planning, organizing, directing, and controlling the financial activities of an enterprise which would include how a business ensures a positive cash flow and how the financial assets are administered and maintained. It is also the process of identifying and managing risks by applying general management principles to financial resources of the enterprise. From an organizational point of view, the process of financial management is associated with financial planning and financial control. Financial planning seeks to quantify various financial resources available …show more content…

The regulation forces companies to make market-sensitive information available to all parties at the same time.
Dramatic and sweeping amendments were made to the SEC's disclosure rules in the summer of
2002 with the passage of the Sarbanes-Oxley Act. This act was passed by Congress in 2002 in response to multiple financial scandals involving large conglomerates such as Enron and
WorldCom. The act held senior management of companies accountable for the accuracy of their financial statements, while also requiring that internal controls be established at these companies to prevent future fraud and abuse. Implementing these regulations was expensive, but the act gave more protection to people investing in financial services, which can increase investor confidence and improve overall corporate investment.

Generally accepted accounting principles (GAAP) and specific rules of the accounting profession require that certain types of information be disclosed in a business's audited financial statements. Even though these rules and principles do not have the same force of law as SEC rules and regulations, they are widely accepted and followed by the accounting profession. …show more content…

Certified financial statements contain a statement of opinion from an auditor, in which the auditor states that it is his or her opinion that the financial statements were prepared in accordance with GAAP and that no material information was left undisclosed. If the auditor has any doubts, then a qualified or adverse opinion statement is written.

Laws regarding financial transactions and other like issues are enforced to make sure that no institution goes out of its way to be fraudulent in their dealings. These regulations form guidelines and policies set by the government as part of the law. Applying to all public and private financial intuitions in a country, these restrictions are set forward to ensure the flow of cash within a country and save its institutions from being bankrupt by too much outflow of funds. The credibility of these institutions remains intact due to law enforcement of the country.
Rules directed by the government are also aimed at institutions that fail to adhere to the law.
When clients file complaints against these institutions, it is the government’s responsibility to investigate. These investigations are very thorough, ensuring that each business is

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The financial scandals in early 2000s caused the Sarbanes-Oxley Act of 2002 to be created. Enron, WorldCom and the accounting firm, Arthur Andersen, to intentionally mislead their shareholders by exaggerating their profits and understating their expenses. The scandals had raised the importance of internal control for enhancing corporate governance. Therefore, the government established the SOX to protect the interest of the investors and employees and to monitor the companies and auditors.

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