Enron and the Sarbanes-Oxley Act

Sarbanes-Oxley Act was implemented in 2002 in the wake of major corporate scandals such as Enron and WorldCom. The act, which contains eleven sections, creates additional responsibilities for the corporate boards, as well as criminal penalties for corporate irresponsibility. It also has required the SEC to implement rulings on the requirements of complying with SOX. Many believe that this legislation is critical for promoting continued public trust of accounting practices within the United States. However, the real affect of SOX has yet to be determined due to the heavy burden that it has placed on companies in order to comply with the transparency within accounting. A more crucial understanding of SOX can be learned by understanding how the legislation and its implications would have affected the Enron scandal.

SOX would have had a major impact upon Enron because it provides many filters in which to catch corporate finance disclosure and duplicity. The creation of a public company accounting oversight board was the first major step of SOX. This board is designed to preventing auditing abuses. The board registers, oversees, investigates and disciplines all accounting firms that auditing public companies. As a result, it provided a level of supervision on accounting firms that was not there at the outset. In addition auditing standards were established across the board which put much more accountability in the hand of auditors and held them accountable to be checked by a national level committee. One of the key reasons that the Enron scandal occurred is because the accounting firm, Arthur Anderson, earned more from Enron in consulting services than in auditing. Therefore they were willing to compromise their integrity in order to preserve their consulting business. The new policy prohibits auditors from "contemporaneously" providing companies with both auditing and specific types of consulting services. If this policy was in place at the time of the Enron scandal, Anderson may not have had any incentive to lie on behalf of Enron. Another extremely important rule that would have had an impact upon Enron is the rotation rule. The lead and concurrent audit partners cannot stay on a particular public company for more than five years, they must continually rotate. Had this rule been in place, Arthur Anderson himself who sat twenty years on Enron would not have had the opportunity to conduct deceit and destroy documentation.