Corporate Scandals and the Sarbanes-Oxley Act of 2002

3268 WordsJan 16, 200914 Pages
INTRODUCTION Corporate Scandals also known as Accounting Scandals are business scandals that originate from the misstatement of financial reporting by the executives of public companies who are trusted to run these organizations. These misrepresentations happen through overstating revenues, understating expenses, Overstating assets or understating liabilities, use of fictitious and fraudulent transactions and direct falsification of financial statements to give a misleading impression of the companies' financial status. These misrepresentations are sometimes done with the cooperation of officials in other organizations or affiliates. The accounting profession has been ridiculed by the corporate scandals that took place in the last…show more content…
As the management of Enron continued with their fake growth, Enron’s financial contracts started to became more and more complicated. By August 2001, the financial statement fraud became obvious and by October Enron management announced that the company was worth $1.2 billion less than what was previously recorded. The difference was due to inflated estimates of income and failure to include all the debt in the financial reports that were sent out to investors. The Securities and Exchange Commission (SEC) started investigating Enron. By November 2001 Enron admitted to overstating its past four year earnings by $586 million and admitted to owing over $6 billion in debt. After this admission the price of Enron stock dropped incredibly. Investors and creditors requested immediate repayments from Enron. However, since Enron could not come up with any cash to repay its creditors, it filed for bankruptcy in December of 2001. Thousands of Enron employees and investors lost their savings, their children’s college funds and pension when Enron collapsed due to financial statement misrepresentation by its management. A lawsuit on behalf of a group of Enron’s shareholders was filed against Enron’s executives and directors whereby 29 of them were accused of insider trading and misleading the public. Arthur Andersen Arthur Andersen LLP was an accounting firm that was hired by Enron for both consultancy and auditing work. It was one of the big five accounting

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