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 decade. A few of the companies that are most commonly known for these scandals are Enron, Sunbeam, WorldCom and Cendant. Some of the leading public accounting firms have been accused of negligence in the execution of their duties as auditors to identify and prevent the publication of misrepresentations in the financial statements of the companies that they audited. The most commonly known accounting firm that was involved in the corporate scandals of the past decade is Arthur Andersen. These corporate accounting scandals resulted in costing investors billions of dollars when the share prices of the affected companies collapsed. In response to the public outcry regarding loss of investments through these scandals, Jain and Rezaee (2006) stated that the US federal law known as the Sarbanes-Oxley Act of 2002 was enacted on July 30th, 2002 to strengthen corporate governance and restore investors’ trust in the capital market.
Objective of the study
This paper will define the corporate scandals of the past decade using Enron and their auditors Arthur Andersen as a case study. The paper will focus on the financial statement misrepresentation involving Enron and their auditors. The paper will further define the effects that these scandals had on the reporting of the financial statements for publicly traded companies. The paper will discuss the reason for the formation of Sarbanes-Oxley Act of 2002 and the rules imposed by the legislation to limit or eliminate accounting misrepresentations in US public companies. Summary of the objectives of the study:
a) Based on Enron and Arthur Andersen as case study, the focus of this paper will be on the corporate scandals that triggered the formation of Sarbanes-Oxley Act of 2002. b) The rules created by Sarbanes-Oxley Act of 2002 and the impact that the rules have on company executives, auditors and the reporting of financial statement by the publicly traded businesses.
Scope and the methodology of the project
Firstly the paper will discuss the historical background of Enron and the fraudulent activities that led to the fall of Enron. The paper will further discuss how the fall of Enron led to the dissolution of the auditing firm, Arthur Andersen. The paper will finally define the rules implemented by Sarbanes Oxley Act of 2002 which was formed to assist in monitoring the reporting of financial statements of the public companies.
The Enron story is a well known story in the financial world of the corporate America. The Enron scandal reveals the existence of misleading accounting processes and reporting and what happens when accounting standards and ethics are discarded for personal greed. As narrated by Murray (2007) and Thomas (2002), Enron originated through a merger of two companies named Houston Natural Gas and InterNorth in 1985. Enron’s main product was natural gas which was being distributed to some gas companies and businesses. During the merger, Enron had incurred huge debts and due to changes in regulatory policies and laws that increased competition among suppliers of natural gas, Enron was stripped off its exclusive rights to the pipelines. Because of this change, Enron took a different business route and became...