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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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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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