Sarbox Effect On Accounting Litigation Essay

1873 words - 7 pages

The corporate scandals of 2001 and 2002 have been referred to as the "perfect storm". (Green, 2004) One of the biggest and most publicized scandals during this time was an American energy group based out of Texas named Enron. Before its bankruptcy in late 2001, Enron employed around 22,000 people and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies. From 1998 to 2000, Enron stockholders annual return was $40, $57.7 and $88.6 percent respectively, compared to the S&P 500 and S&P energy market indexes. (Unhappy Returns, n.d)In October of 2001, Enron reported a $638 million third quarter loss, and disclose $1.2 billion reduction in the value of shareholders' stake in the company. This scandal gave the U.S market a black eye. In other words, stockowners of Enron saw their stock drop from $84.87 in December of 2000 to less than a $1 in November of 2001. Enron had been considered a "blue chip stock" which was the nickname for a stock that is thought to be safe, in excellent financial shape and firmly entrenched as a leader in its field. (Kennon, n.d) As a result, this was considered a disaster in the financial world. Moreover, Enron was the biggest Chapter 11bankruptcy in U.S history and investors suffered more than $ 50 billion in total losses. (Summary of Enron Scandal, n.d)Likewise, WorldCom, who at time was America's second largest long distance and data provider, was found guilty for falsify its cash flow statement had increased by $3.8 billion dollars. After restating its financial statement, it was shown that WorldCom had a net loss in 2001 and for the first quarter of 2002. (Patsuris, 2002) WorldCom also announced that it would write off $50 billion in goodwill and other assets that have dropped in value since they were purchased. (WorldCom accounting scandal grows, 2002)When there are financial statement scandals, there comes accounting scandals. Arthur Andersen, who at the time of these scandals was one the "Big Five" accounting firms, was convicted of obstruction of justice after shredding documents related to audit client Enron, after the Securities and Exchange Commission launched an inquiry into Enron. (Patsuris, 2002) Andersen indictment also put a spotlight on other companies' financial statements under their guidance such as Waste Management, Sun Beam, and WorldCom. Along with Arthur Andersen, Price Waterhouse, and Ernst & Young had there problems with auditing scandals in the early 2000's. (Oppel, Eichenwald, 2002)The scandals by corporations and accounting firms of the early decade called for a change. A change that would increase the responsibility of the management for a company's financial statement enhances internal controls management productivity, and increase investor confidence in the U.S market securities. (Pro Business System, 2005) This change resulted in the creation of the Sarbanes-Oxley Act of 2002 or (Sarbox), which is considered the most significant...

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