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The Sarbanes-Oxley Act Of 2002

688 Words3 Pages

Many companies recur to fraudulent activities in order to falsify their financial statements. Typically, ‘cooking the books’ involves enhancing financial data in order to generate previously non-existent earnings. Examples of such activities used to ‘cook the books’ involve: • Fast-tracking revenues • Suspending expenses • Manipulating pension plans • Implementing synthetic leases • Recording debt payments as sales • Recognizing revenues too aggressively • Using holy own subsidiaries to move debt off the company books whilst retaining all the revenue These illegal types of ‘creative accounting’ usually lead to great loss. Typically a massive sell-off of the company shares is held resulting in a huge decline in stock price and most importantly …show more content…

Enron was found practicing various illegal accounting methods primarily in order to improve their overall financial figures. Analyzing the Enron case more deeply, we have managed to identify one of the main techniques, and accounting method implemented by then CEO of trading operations Jeff Skilling, this scheme was known as ‘Mark-to-Market’ accounting. Also known as ‘fair value accounting’ this method refers to accounting for the just value of an asset/liability based on its current market price. Although mark-to-market accounting can change costs on a balance sheet, as market conditions change it does not represent the current market value, summarizing past transactions …show more content…

By keeping their credit rating high, Enron’s stock values would persist abnormally high. And in comes another creating accounting method used by Enron, which was the creating of special purpose entities which were named the ‘Raptors’, they were ultimately created in order to cover Enron’s losses if the stocks in their other investments fell. Comparing the Enron case to a European case, we have the Parmalat scandal, dubbed as the Enron of Europe. The Parmalat outrage arose following a discovery of a $14 billion black hole in the company’s finances. Using completely different illegal accounting methods than Enron, Parmalat started of by forging transfer documents, and admitting false debts (of almost eight times more than what was initially stated). It was later found out that Luca Sala, Bank of America’s former chief of corporate finances in Italy participated in a ‘Kickback

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Sarbanes-Oxley Act of 2002 is a law enacted by US congress in July 30, 2002. The bill consists of 11 sections and was created as a reaction to high numbers of fraud and business misbehavior in major US corporations. The act clearly imposes responsibilities for the board of directors and defines the regulations all corporations have to comply with. The bill does not affect only US public companies, but it goes beyond that to over control companies under a US presence.

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Federal Safeguards: The Sarbanes-Oxley Act

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With pressure from shareholders, C-level managers, and others, the financial manager may find themselves in a situation where revenues may be misreported in order to meet goals. In 2002, Xerox was found at fault of prematurely recording $3 billion in revenue, and $1.5 billion in pretax earnings. This misreporting of revenue and earnings was partly due to to having to contend with declining sales and profit (Xerox, 2002).There are multiple federal safeguards in place to reduce financial reporting abuse. One such safeguard is the Sarbanes-Oxley Act, or SOX. The Sarbanes-Oxley Act “holds corporate advisors who have access to or influence on company decisions legally accountable for any instances of misconduct” (Titman et.

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The Sarbanes-Oxley Act Of 2002 (SOX)

416 Words | 2 Pages

Abstract On July 25, 2002, Congress passed the Sarbanes-Oxley Act of 2002 (SOX) in reaction to a series of financial accounting scandals involving companies like Enron, Tyco and WorldCom. SOX Act is a direct result of the legislature reaction to the above mentioned scandals. This paper presents the objective and main components of the SOX, criticism of SOX. The paper also deals with the economic impact of SOX and whether SOX met its goals.

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Stan Sewell's Unethical Practices

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Stan Sewell is consciously and deliberately manipulating his balance sheet to read a much higher value than it should be. Traditionally, under the Generally Accepted Accounting Principles (GAAP), reporting of assets is based on either the historical value or the fair value (Casabona, & Shoaf, 2007). However, Stan Sewell fixed the value of the franchise based on his perception and his desire to benefit more than the franchise was worth. His intention of fixing this value to $500,000 instead of reporting as $50,000 was to deceive his potential investors and creditors. The intent to falsify the facts on the financial information amounts to serious unethical practices.

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The Sarbanes-Oxley Act Of 2002: Internal Control Report

398 Words | 2 Pages

The internal control practice of separation of duties failed to prevent the fraudulent reporting by not separating the duties necessary to complete a task and assigning the separated duties to two or more employees (Edmonds, Tsay, & Olds, 2011). Separating duties to two or more employees would reduce the opportunity for an employee to defraud the organization (Edmonds, Tsay, & Olds, 2011). Although the CEO and CFO of Automation Company were aware the controller was reporting fraudulent revenues, by using separating duties, the fraudulent act would have required collusion between the controller and other employees to make up the numbers (Edmonds, Tsay, & Olds, 2011). The Sarbanes-Oxley (SOX) Act of 2002, holds the chief executive officer (CEO) and the chief

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Enron And The Sarbanes-Oxley Act Of 2002 (2002)

886 Words | 4 Pages

For example, in 1989 Ernst & Whinney merged with Arthur Young to form Ernst & Young and Deloitte, Haskins & Sells merged with Touche Ross to form Deloitte & Touche, which created the Big Six. In 1998 Price Waterhouse merged with Coopers & Lybrand to form the Big Five. In 2002, following the Enron and WorldCom accounting debacles, Arthur Andersen closed, which resulted in the current Big Four. As a direct result of the Enron and WorldCom events, US Congress passed the Sarbanes-Oxley Act of 2002 (SOX) to protect investors from the possibility of fraudulent accounting activities by corporations.

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341 Words | 2 Pages

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The Sarbanes-Oxley Act Of 2002 (SOX)

674 Words | 3 Pages

Shafer (2002) indicates the reason of accounting wrongdoings is materiality. Moreover, the management rationally and intentionally misrepresents financial statements, misleads investors, and commits the fraud for the personal gain (pp. 243-244). The regulatory changes promoted an aggressive financial reporting. The pressure of mandatory reforms and financial markets affects CFO’s personal financial interests and interests of corporation that management can manipulate with. Beaudoin, Cianci, and Tsakumis (2015) investigate the influence of incentive conflict and earnings management ethics on financial reporting.

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Although regulators and the public have demanded government regulation, “historically, the corporate tendency has been to react to fraud after the fact than to be proactive in its prevention. In most cases, blame is directed at accountants and auditors” (Davia). This reactive rather than proactive stance has and continues to foster the opportunity for fraud in corporate America. This was much the case with what has come to be known as The Salad Oil Scandal of 1963.

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Multiple Companies Associated With The Financial Scandals In The Early 2000s

348 Words | 2 Pages

There were multiple companies associated with the financial scandals in the early 2000s; Enron was one of the most famous (Ferrell, Hirt, & Ferrell, 2009). The company reported revenues of $111 billion in 2000 only to collapse a year later due to debt attributed to a mark-to-market method of accounting (Ferrell, et al, pg. 455, 2009). This accounting method gives value to an asset that has not been realized and based on current market prices, allowing the company to over exaggerate revenues by booking them in the current year. The collapse of the company led to a multitude of layoffs, thousands lost retirement savings due to stock losses, and three executives serving jail time. The major impact to this scandal was a loss in confidence of corporate

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Enron Case Study

1521 Words | 7 Pages

Q1: what were the individual factors that have contributed to the failure of Enron? The first individual factor that contributed to the failure of Enron is the greed of the leadership. The video shows that many leaders have corruption. For example, Lou Pai has fled from Enron Energy Service with a gain of $250 million in order to marry his stripper girlfriend and his corruption caused a loss of about $1 billion (Fredy 2015).

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971 Words | 4 Pages

When the board came together to decide on what to do with the two criminals, the CEO Jeffery Skilling decided not to do anything because they made the company so much money. Skilling took a risk doing this, and it ended up having both traders gambling all of Enron’s reserves, which if the company did not fluff their books the company had the possibility of failing. This is when the market-to-market accounting came into place to save the company by forecasting what Enron would make for the year and have traders sell that for

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517 Words | 3 Pages

When hearing the name Enron, it typically correlates to executive greed, dishonesty, corruption, and big business theft. The Enron Corporation, once a Fortune 500 company, imploded under dishonest and illegal accounting practices, while leaving billions of dollars of debt behind (Ferrell, Fraedrich, & Ferrell, 2013). The deceit manipulated by Enron, was further exaserbated by the fact that employees walked away with nothing. The case study and movie provided many of the same facts.

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“Enron was a pioneer; they were risk takers and treated their employees like entrepreneurs. Think big; take chances, go where no one has gone before. Unfortunately, it now looks like Enron’s profit was as volatile as the natural gas they traded” (DeLongs, 2002). This dilemma was gradual and was years in the making. The simplest summary of the dilemma was that Enron was pushing a culture of promoting rule-bending and legal loopholes to continue their economic growth and success.

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1009 Words | 5 Pages

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