Question

A brief summary of a financial scandal that took place prior to the Sarbanes-Oxley Act (SOX) of 2002 Be sure to identify specific accounting issues and who was involved ex. management, auditors, etc

Answer 1

The 2002 Sarbanes-Oxley Act aims at publicly held corporations their financial reporting audit procedures .The act was passed in response to a number of corporate accounting scandals that occurred in the 2000–2002 period. This act, put into place in response to fraud at Enron which set a new standards for public accounting firms, corporate management, and corporate boards of directors.

Enron was one of the biggest, and most financially sound companies in the U.S.Enron, located in Houston, Texas. It was considered as one of a new breed of American companies that participated in a variety of ventures related to energy. It bought and sold gas and oil futures, built oil refineries and power plants.Its one of the world's largest gas, electricity, and communications companies before it filed for bankruptcy in 2001.Before Enron’s bankruptcy, the government had deregulated the oil and gas industry to allow more competition, but deregulation also made it easier for companies to act fraudulently.

Enron's officers and employees committed several crimes and misdeeds which includes inflated earnings reports for shareholders.Many other instances of dishonesty and fraud also occurred, including embezzlement of corporate funds by Enron executives and illegal manipulations of the energy market.

They used accounting loopholes for special purpose entities to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives misled Enron's Board of Directors and Audit Committee .

Enron shareholders filed a $40 billion lawsuit after the company's stock price has reduced to dollar 1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history .

As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies.Sarbanes–Oxley Act, increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.

The intent of SOX was to protect investors by improving the accuracy and reliability of corporate disclosures in financial statements