Sarbanes-Oxley

In the time spanned from late 2001 to early 2002 significant events were happening here in the United States. Specifically, these events were ones that would impact major business as we know it. The events involved three firms which have now become infamous. The firms are Enron Corporation, WorldCom, and Andersen. What makes these three firms so infamous is there involvement in a series of corporate scandals and fraudulent accounting practices. The scandals of these firms have had drastic effects on shareholders, as we will see further, as well as preventative measures taking by the federal government. One of the largest and most notorious of regulations enacted is the Sarbanes-Oxley (SOX) act. This act is viewed by some as a blessing and others as a curse. The purpose of this paper is to understand the events leading up to the passing of SOX, as well as the effect of those events. Further, we will discuss the passing of SOX and regulations and provisions provided by SOX. One area of significance as regards the act is the provisions for whistleblowers. These provisions will be explained also. Finally, we will discuss the cost/benefits associated with SOX.

As mentioned previously, three firms contributed greatly to the need for an act such as Sarbanes-Oxley. To start off the discussion lets focus on arguably the most notorious, Enron Corporation. Out of the three firms Enron was the first to collapse due to their fraudulent practices. Enron was using tax shelters on their domestic assets as well as keeping about one third of their subsidiaries in offshore accounts. (The Real Enron, 7) This hiding of assets allowed them to avoid taxation and overstate profit. When Enron’s whole scandal came to light, it was revealed that Enron had lost $618 million in the third quarter of 2001 and would reduce their net worth by $1.2 billion. It was by December 2nd of the same year that Enron filed for bankruptcy leading to their ultimate demise. (Glater, C1)

The effects of Enron’s fall hit its employees hard. Many of the employees of Enron had their own retirement money invested in the company. When Enron reduced its net worth in late 2001 the price of the stock hit the floor. Further, all that invested money of the employees was now gone. Employees also were owners of stock, which after the collapse became valueless to them. The case of Enron shows the hardships that arrive out of these corporate scandals. While the executives are twisting around the facts and selling tons of stock, it is in the end the average employees bear the brunt. (The Real Enron, 7)

The second scandal we will discuss involves WorldCom. WorldCom was a firm that got in on the big technology boom of the 90s. They were a telecommunication company worth around $180 billion at the time of their peak. WorldCom unfortunately was also involved in accounting fraud. Such fraud that would boost cash-flows and overstate profit margins. On the outside WorldCom looked as all was going well, while on the inside, the firm was falling apart. The fraud involved over $3.8 billion dollars which when discovered turned their profits around. One interesting statistic is that in 2001 WorldCom reported profit of $1.4 billion dollars yet in the first quarter of 2002 (fraud starts coming to light) profit had dropped $1.27 billion to a measly $130 million. The collapse also included the release of WorldCom’s chief financial officer (CFO) Scott Sullivan, as well as a resignation from the senior vice-president of WorldCom, David Myers. WorldCom was also accused of withholding information from their then auditor, Arthur Andersen, as well as falsely recording operating expenses and capital expenditures. (WorldCon?, 1)

One thing held in common between WorldCom and Enron, besides scandals, is their auditor at the time of crisis, Arthur Andersen. Andersen was involved in multiple cases of fraud and scandal, not only with WorldCom and Enron but as well as Waste Management. Andersen’s main wrongdoing was signing off on financial statements known to be fraudulent. (Satava et al., 272) Andersen was also charged in destroying and distorting documents involved with the audit of Enron. The effects on employees of Andersen are slightly different than that of WorldCom and Enron. Yes, many lost their investments in the company and many lost their retirement packages. Interestingly, many of the former employees of Andersen went on to pursue careers other than accounting and auditing. (Glater, C1) This effect illustrates another problem that comes from these scandals. The former employees most likely feel better off away from the profession, or perhaps the negative press has made re-entry into the profession difficult.

As a response to all the mess that resulted from these multiple corporate scandals, the government took action. The Sarbanes-Oxley Act was passed on July 25, 2002, and five days later on