Submitted by: Submitted by intymn
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Category: Societal Issues
Date Submitted: 10/03/2011 11:36 AM
Sarbanes-Oxley Act of 2002
Enron was a very successful natural gas company that began in 1932, then known as the Northern Natural Gas Company. In 1993, Enron began establishing special purpose entities. These offshore entities helped to hide a lot of Enron’s debts and losses. Through accounting loopholes, Enron was able to hide billions of dollars in debt. This helped to raise stock prices to $83.13 a share by the end of 2000. In October 2001, the Securities and Exchange Commission began investigating Enron and found that the company was guilty of fraudulent accounting. The company filed bankruptcy in December 2001. Along with Enron’s downfall, their auditing firm, Arthur Andersen LLP, was investigated and admitted to destroying many of Enron’s auditing documents. Their assistance in the Enron scandal destroyed the firm’s very credible reputation, which had held strong since the formation of the company in 1913.
Another of Arthur Andersen’s clients, WorldCom, was also using loopholes to hide debt. The cause of WorldCom’s debt was declining stock due to the slowdown of the telecommunications industry in 1998. The company then began to show false growth and profit to increase stock prices. Two of the main ways this was done was first; they “underreported 'line costs' (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company inflated revenues with bogus accounting entries from 'corporate unallocated revenue accounts'.” (3) After this activity was found and reported by its own internal audit department, an investigation was done by the Securities and Exchange Commission. It was found that WorldCom had inflated its assets by $11 billion. WorldCom filed Chapter 11 bankruptcy in July 2002. This was the largest bankruptcy in U.S. history.
These large scandals, along with others, were the cause of the implementation of the Sarbanes-Oxley Act of 2002, also...