Content area
Full text
The financial collapses of Enron had substantial and far-reaching ramifications throughout the financial investment field, tax compliance professions and the accounting profession. Intense Congressional scrutiny resulted in a new era of transparency in financial reporting, stricter reporting standards as provided in Sarbanes-Oxley and substantial penalties for failure to comply with new financial reporting and tax compliance standards in the Internal Revenue Code.
In late 2001, Enron Corporation, a Texas-based publicly held company, filed for bankruptcy protection. For the several years prior to this filing Enron employed over twenty thousand people and was one of the world's leading utility, paper and communications companies with reported revenues of over one hundred billion dollars in 2000. There had been a series of allegations throughout the 1990's involving Enron and its accounting firm, Arthur Andersen, involving irregular accounting procedures bordering on fraud. These allegations, of course, proved true; the scandal caused the price of Enron shares to drop from over $90 per share to just pennies, and the scandal caused the dissolution of Arthur Andersen which at that time was one of the largest accounting firms in the world.
It was revealed that much of Enron's revenue was the result of transactions with entities which Enron controlled and that many of its debts and losses were not reported in its financial statements. Offshore entities were used which provided Enron's management with the ability to shift losses that the company was suffering. This, of course, made Enron appear more profitable than it actually was and the effect over time was cumulative. In each reporting period management would need to step up its manipulation to continue to create the illusion of profits while in actuality losses were being suffered. Financial reports during this period contained no indication of this serious financial threat or of the on-going accounting irregularities. During this period the price of Enron stock increased dramatically leading to insider trading and criminal prosecutions which were well publicized.
In the initial and almost immediate response to this monumental financial collapse and underlying fraud, the Sarbanes-Oxley Act was signed into law on July 30, 2002 by President Bush and was approved by the House by a vote of 423 to 3 and by the Senate by a vote of 99...