Abstract
Enron scandals should have taught us a lesson or two on investment fraud. Once a company has filed for bankruptcy act it should not be allowed to go on with normal business activities. Enron was left to still fair on, and it bought some time forge a scam. The government should have foreseen these problems earlier. How did they manage to publish their financial accounting books without thorough auditing? That’s why the Sarbanes-Oxley Act of 2002 was incorporated in the accounting laws to help curb accounting irregularities.
Introduction
Enron started operating in 1985 as an interstate pipeline company. The company was developed from merging two companies, Houston Natural Gas and Omaha-based Inter North. Kenneth Lay who was the executive director of Houston Natural gas took over Enron chairmanship a year later. In 1999, Enron moved into two fields; Enron online a company website for trading commodities via internet and energy trading company. The company became one of the largest business site in the world and it drew most of the companies income came from trading online. In 2000, Enron experienced tremendous growth in the US of $100 billion of annual revenue. The energy-trading and utilities company traded its stocks at high of $85 and had huge earnings that no one would suspect its fraud, this shocked investors and analysts. It did not show company accounts suspected of hiding its debts and losses and its dealings were very shady which falsely inflated the company’s revenue (BBC NEWS online).
In December 2, 2001, Enron scandal deception unfolded, creditors and investors withdrew from the company forcing it to go into bankruptcy. Enron scandal shocked many people since it was the largest company ever in American history. Its growth was so fast, it emerged from nowhere to being the America’s seventh largest corporation in only 15 years of operation. The company employed 21,000 staff and it was operating in more that 40 countries. The company chairman Mr. Lay, was a close ally of the US president Mr. Bush and donated about $2 million to finance his campaigns but when the scandal started coming to light, Bush administration kept its distance. When Securities and Exchange Commission (SEC) began investigating fraud allegation and its irregularities, Enron tried to sell another of its energy company in Houston but it did not succeed in doing so. Enron quickly filed for chapter 11 bankruptcy protections to stop the investigators filing a suit against the company (BBC NEWS online).
Jeffrey Skilling, Enron’s president at the time shed some light on the company’s losses of $29 billion on broadband network business. Analyst did not disclose the losses to the public but instead remained deceptive on the matter. Enron’s analyst had conflicting loyalties, they argued on whether publishing the company financial reports that would be useful to investors or offensive to the chief executives. Many people could not understand Enron’s new line of business, but they were still holding on to the good stories being told by the company and the huge profits the company was making. Financial reports in question were hidden by erroneous accounting. In early 2000, Enron considered offering separate public shares for internet operation, this proposal raised eyebrows for analyst since they knew that the company reports were suspicious but the I.P.O plans never happened. Another proposal for broadband business, a unit that traded capacity in telecommunication bandwidth, did not come through either (BBC NEWS Online).
If wall street had asked questions about Enro’n’s shady business dealings, the skyrocket increase of 50 percent shares in first half of that year and the company losses that president Jeffrey Skilling pointed out , It would have saved investors money and from Enron’s pulling out of market value (BBC NEWS Online).
In 2006, charges were brought against Ken Lay and Jeff Skilling of fraudulently misrepresenting Enron financial statements that led to its bankruptcy. Both were found guilty but after the convictions, Lay died suddenly and charges against him were withdrawn. Skilling was left to serve his sentence of 24 years in prison. While Enron employees lost their retirement savings, the executives sold off their shares making millions. Other people who were involved in Enron’s scandal were Arthur Andersen, the company accountant and Andrew Fastow, former chief financial officer together conspired to destroy incriminating documents on the firms accounting book. Enrons chief auditor David Duncan, was under legal obligation to check the company’s accounts but failed to do so. He shredded key documents which were crucial to the case therefore destroying evidences (BBC NEWS Online).
Ken Lay, Enron founder and his family were the biggest financial supporter of Bush’s political endeavors. The family donated $140,000 in the president’s political campaigns that took place in Texas. The two grew so close to an extend that the president nicknamed Kennedy Lay as ‘Kenny Boy’. Enron employees added $600,000 donations to Bush’s political campaigns. From all this financial support, Enron company played a major part in helping Bush rise to power whereas Bush payed back by helping the advance Enron’s aggression deregulation agenda. His help placed the company on a higher energy trade scale as the seventh-biggest U.S Company. Bush’s relationship with Enron founder helped the company get easier regulations within the U.S and also made the U.S taxpayers foot the bill for loan guarantees. The energy trader also risked insurance for its company’s overseas ventures with Bush’s support (Parry online).
Bush’s close relationship with the company helped it extend its network across the world. Since everyone knew the success of the company, it used its position to pull millions from investors. National Security council Staff commanded strong-armed India to concede to Enron’s demands on the exigency Dabhol power plant that Enron was anticipating to sell for $2.3 billion. They continues pressuring the company until September 11 the same year when Washington really wanted the countries support in the war on terrorism that needed the Indians to stop the border dispute it hard with Pakistan. Internal administration documents retrieved and the evidence gathered suggested NSC staff with Bush’s command put Enron’s interest ahead of U.S citizens security interests. On the trail, the company admitted to have overstated its profits by $586 million since 1997. Enron manipulated its company accounts by shifting debts into affiliated partnership. The friendship wasn’t that tight after all, Bush distanced himself from Lay after Enron collapsed. As company glided into bankruptcy, its stocks lost $ 26 million in market value shares; a lot of people lost their jobs including 4,000 employees at Enron Houston headquarters (Parry online). (The Sarbanes-Oxley Act of 2002).
Overview
Since the world scandal of Enron in March 2002, audit committees and national stock exchange have listing requirements for all public companies. The requirements set up are incorporated in the already existing Blue ribbon committee (BRB) in order to improve the effectiveness of Corporate Audit Committees assigned to a particular task. Prior to commencement of any activity in the organization, the audit committee must be informed about all financial and operational endeavors of the company is undertaking; the committee should receive sufficient and timely information regarding company’s statements. Auditing committee’s responsibility is to ask questions about property of the company’s financial reporting process and effectiveness of internal control system. The task of the committees is to keep up to date with the financial reporting developments affecting the running of the company.
Since Enron scandal and other related financial frauds in US, Sarbanes-Oxley Act of 2002 legislation was introduced to regulate and amend changes in financial practice and corporate governance of companies. The purpose of this legislation is to protect investors and the public by providing accurate and reliable financial statements. And also provide corporate disclosures that are inconsistence with security laws. Deadlines were put in place for failing to compliance with the said laws. The most pertinent compliance sections are; section 302, it certifies that the reports published should not contain any untrue statements, omission of materials or misleading information. Signing officers must review the reports, and responsible for internal controls and report their findings within 90 days. Financial statements must be presented fairly and true of its position, any significant changes in internal controls that have a negative impact must be reviewed with urgency. Section 401, states that financial statements should include all material facts, balance sheet liabilities and should abide by accounting principles at all times (Sarbanes-Oxley Act Online).
Section 404 provides that registered accounting firms should publish all information regarding annual reports including; adequacy of internal control structure, procedures for financial reporting and effective of internal controls. The company should report on assessment of the internal control structure and procedures for financial reporting and also attest the effectiveness of the same. Section 409 states that companies should disclose information on any changes that may have occurred in company’s operations and the information gathered must be presented in simple terms for the general public to understand. The changes made should be supported by trend and qualitative information on graphic presentation appropriately (Sarbanes-Oxley Act Online).
Section 802 imposes penalties and fines to people found guilty violating accounting policies and punishments awarded of up to 20 years imprisonment is also awarded. Breaking accounting policies includes falsifying records documents or tangible objects with intention to obstruct evidence, altering, destroying, mutilating, concealing information in relation to accounting records (Sarbanes-Oxley Act online).
Few titles which are enlightened in this act are (1) Public company accounting oversight board title (2) Audit independence regardless on conflicts of interest which arise earlier in Enron because of their different opinions of the auditors. Title (3) corporate responsibility; strict measures on directors bars and penalties, fair funds for investors, corporate responsibility for financial reports. Title (4);enhanced financial disclosures like periodic reports quarterly, revealing transaction involving management and principal stockbrokers like in Enron the directors were said to have sold there shares in discovering the company was undergoing liquidation (Sarbanes-Oxley Act online).
Management should frequently assess internal controls. Title (5) analyst displaying conflicting interest in registering securities. Title (6) states that commission resources and authority, federal court imposing penny stock bars, dealers and brokers should be qualified in dealing with public finance. Title (7), studies and reports on enforcement actions, reports on violators and violations on different offenses, reports regarding credit rating agencies. Title (8), corporation and criminal fraud accountability, different sections in it states that, criminal penalties for altering documents by accountants and subordinate staffs, penalties for defrauding shareholders of public traded companies, protecting employees who provide evidence in this defrauded public companies (Sarbanes-Oxley Act online).
Title (9) White collar crime penalty enhancements, violation of employee retirement income security act of 1974 by fraudulent companies, attempts and joining in conspiring to commit criminal fraud offenses like what enron auditors did. Corporate should be responsible for their own financial reports regardless of its separate legal entities. Title (10) corporate tax returns should be signed by chief executives which makes them fully responsible in case of misleading information. Title (11) Corporate fraud and accountability: this explains that corporate leaders should be made responsible for fraud caused by its accountants (Sarbanes-Oxley Act Online).
In conclusion, accounting ethics should be always be exercised by companies at all times regardless of any existing political ties. The ethics provides discipline to staff members in relation to the day-to-day running of company activities. Everyone is held accountable for breach of any act regardless of their financial position in the business, even the conspiring individuals are not left out on that. Internal control system should be checked out regularly to ensure every procedure is not omitted. It’s also important for accountants and auditors to know that the financial reports are publics investments not private interest.
Works Cited
- BBC News. 2002. Enron Scandal at-a-glance. Web.
- Perry, Sam. Bush and Kenny Lay:Slip Slidin’ Away. Consortiumnews, 2002. Web.
- Sarbanes-Oxley Act. 2002. Web.