Enron fraud case is widely investigated by the experts in financial sector. The collapse of this company in the end of 2001 is regarded as an important lesson and experience for other organizations on the importance of application of the professional and work ethics (Albeksh, 2016). The beginning of the Enron fraud case was caused with the announcement of the company about the deal with a stream for movies on the internet. Hence, Enron published artificial information about its profit based on the expectations to be gained from successful deal. Besides, by virtue of this action, the leadership of the company decided to hide negative state of affairs in order to keep interest of stakeholders (Albeksh, 2016).
The fallout of the company occurred when it decided to increase online sales of its shares via internet. In this respect, financial statements of the company were used by the managers with the purpose to hide actual problems of the company pertaining to the loss of billion of dollars (Jickling, 2017). Given the fact that the organization hided this information from stakeholders, the loss of the company was significant. In order to avoid appearance of such frauds for the future, the American government passed Sarbanes – Oxley Act. With reference to the case of Enron, the state bodies decided to take measures in order to avoid sustaining of the institutionalized accounting fraud with the relevant regulatory measures. (Khan, 2011)
Revealing of the corruption culture among the managers of Enron company showed to the state bodies of the United States that this case is not a sole practice. Moreover, this case forced relevant state bodies of the country to reconsider compliance legislation in order to remove any exposure of the managers to corruption. With that, Enron case affected the use of energy resources in California resulting in the subsequent energy crisis in the region (Clark, 2012). This implies that Enron scandal has produced several dimensions and effects. Among these consequences, the traders in the western part of Enron company decided to raise the cost of the energy resources. In view of the lack of energy supplies in the region and rising demand for energy, Enron’s managers initiated earning of millions of dollars over fraudulent electricity costs. The deregulation of the sector contributed to the development of the energy crisis in the region (Clark, 2012, p. 7).
Connection between Enron and Sarbanes – Oxley Act
Fraud of Enron company has led to significant changes in the regulatory environment of the United States. In particular, the U.S. Securities and Exchange Commission decided to form disciplinary body in order to facilitate investigations of the fraudulent activity in such companies as Enron. In addition, SEC informs its plan to introduce activity of the new organizations beyond the activity of the American Institute of Certified Public Accountants in order to decrease any risk for fraudulent actions of the auditors of publicly held business units. Finally, the adoption of Sarbanes – Oxley Act, has become the most important step in the accounting reform since 2002. This act served the role of the response of the American government to the corporate scandals and frauds in the financial system of the country (Gore, 2011, p. 7).
There are several pros and cons in the regulatory framework developed by the provisions of Sarbanes – Oxley Act. First of all, adoption of the Sarbanes – Oxley Act became a legislative response of the state bodies of the United States to the fraudulent actions of the managers in the global companies. The positive sides of this legislation are in Section 302 and 401. The first section requires certification of the financial statements on behalf of the corporate management. Accordingly, Section 401 imposed obligation over these managers to share any information about fraudulent activity in order to keep fulfilment of the obligations before stakeholders. To proceed further, it should be noted that this regulation focusses on the importance of the internal controls. Besides, the implementation of this regulation is costly for small companies as it requires same amount of financial resources as global organizations invest. Finally, this regulation results in the increased audit fees (Dey, 2010)
- Albeksh, H. (2016). The Crisis of the Ethics of Audit Profession: Collapse of Enron Company and the Lessons Learned. Oalib, 03(11), 1-18. http://dx.doi.org/10.4236/oalib.1103205
- Clark, W. (2012). US financial regulatory change: The case of the Californian energy crisis. Clarkstrategicpartners.net. Retrieved 5 November 2017, from http://www.clarkstrategicpartners.net/documents/Journals/JournalofBankinRegClarkDemiragN.pdf
- Dey, A. (2010). The chilling effect of Sarbanes–Oxley: A discussion of Sarbanes–Oxley and corporate risk-taking. Journal Of Accounting And Economics, 49(1-2), 53-57. http://dx.doi.org/10.1016/j.jacceco.2009.06.003
- Gore, A. (2011). A CASE OF CORPORATE DECEIT: THE ENRON WAY. Revistanegotium.org.ve. Retrieved 5 November 2017, from http://www.revistanegotium.org.ve/pdf/18/art1.pdf
- Jickling, M. (2017). The Enron Collapse: An Overview of Financial Issues. Royce.house.gov. Retrieved 5 November 2017, from https://royce.house.gov/uploadedfiles/rs21135.pdf
- Khan, M. (2011). The Reasons Behind a Corporate Collapse: A Case Study of Enron. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1923277