| What is the Sarbanes-Oxley Act? | | | | Enron began in 1985 selling natural gas to gas |
| The Sarbanes-Oxley Act of 2002 is a United | | | | companies and businesses. In 1996, energy |
| States federal law passed in response to the | | | | markets were changed so that the price of |
| recent major corporate and accounting scandals | | | | energy could now be decided by competition |
| including those at Enron, Tyco International, and | | | | among energy companies instead of being fixed |
| WorldCom (now MCI). These scandals resulted in | | | | by government regulations. With this change, |
| a decline of public trust in accounting and reporting | | | | Enron began to function more as a middleman |
| practices. Named after sponsors Senator Paul | | | | than a traditional energy supplier, trading in energy |
| Sarbanes (D-Md.) and Representative Michael G. | | | | contracts instead of buying and selling natural gas. |
| Oxley (R-Oh.), the Act was approved by the | | | | Enron's rapid growth created excitement among |
| House by a vote of 423-3 and by the Senate | | | | investors and drove the stock price up. As Enron |
| 99-0. | | | | grew, it expanded into other industries such as |
| The legislation is wide-ranging and establishes new | | | | Internet services, and its financial contracts |
| or enhanced standards for all U.S. public company | | | | became more complicated. |
| Boards, Management, and public accounting firms. | | | | In order to keep growing at this rate, Enron |
| The first and most important part of the Act | | | | began to borrow money to invest in new |
| establishes a new quasi-public agency, the Public | | | | projects. However, because this debt would make |
| Company Accounting Oversight Board, which is | | | | their earnings look less impressive, Enron began to |
| charged with overseeing and disciplining accounting | | | | create partnerships that would allow it to keep |
| firms in their roles as auditors of public companies. | | | | debt off of its books. One partnership created by |
| Some of the major provisions of the | | | | Enron, Chewco Investments (named after the |
| Sarbanes-Oxley Act's include;a) Certification of | | | | Star Wars character Chewbacca) allowed Enron |
| financial reports by chief executive officers and | | | | to keep $600 million in debt off of the books it |
| chief financial officers. Auditor independence, | | | | showed to the government and to people who |
| including outright bans on certain types of work | | | | own Enron stock. When this debt did not show up |
| for audit clients and pre-certification by the | | | | in Enron's reports, it made Enron seem much |
| company's Audit Committee of all other non-audit | | | | more successful than it actually was. In December |
| work.b) A requirement that companies listed on | | | | 2000, Enron claimed to have tripled its profits in |
| stock exchanges have fully independent audit | | | | two years. |
| committees that oversee the relationship | | | | In August 2001, Enron vice president Sherron |
| between the company and its auditor.c) | | | | Watkins sent an anonymous letter to the CEO of |
| Significantly longer maximum jail sentences and | | | | Enron, Kenneth Lay, describing accounting |
| larger fines for corporate executives who | | | | methods that she felt could lead Enron to "implode |
| knowingly and willfully misstate financial | | | | in a wave of accounting scandals." Also in August, |
| statements, although maximum sentences are | | | | CEO Kenneth Lay sent e-mails to his employees |
| largely irrelevant because judges generally follow | | | | saying that he expected Enron stock prices to go |
| the Federal Sentencing Guidelines in setting actual | | | | up. Meanwhile, he sold off his own stock in Enron. |
| sentences.d) Employee protections allowing those | | | | On October 22nd, the Securities and Exchange |
| corporate fraud whistleblowers who file complaints | | | | Commission (SEC) announced that Enron was |
| with OSHA within 90 days, to win reinstatement, | | | | under investigation. On November 8th, Enron said |
| back pay and benefits, compensatory damages, | | | | that it has overstated earnings for the past four |
| abatement orders, and reasonable attorney fees | | | | years by $586 million and that it owed over $6 |
| and costs. | | | | billion in debt by next year. |
| What happened at Enron? | | | | With these announcements, Enron's stock price |
| Everyone knows at least a little about the Enron | | | | took a dive. This drop triggered certain |
| story and the devastation it created in the lives | | | | agreements with investors that made it |
| of is employees. It's a story that belongs in any | | | | necessary for Enron to repay their money |
| discussion of ethical accounting processes and | | | | immediately. When Enron could not come up with |
| what happens when accounting standards and | | | | the cash to repay its creditors, it declared for |
| ethics are discarded for personal greed. | | | | Chapter 11 bankruptcy. |