Events after Enron Scandal

I. Birth of 'Sarbanes-Oxley Act Of 2002 - SOX'

1. What is Sarbanes-Oxley Act of 2002?
The Sarbanes-Oxley Act of 2002 (SOX) is an act passed by U.S. Congress in 2002
to protect investors from the possibility of fraudulent accounting activities by
corporations. The SOX Act mandated strict reforms to improve financial disclosures from
corporations and prevent accounting fraud. The SOX Act was created in response to
accounting malpractice in the early 2000s, when public scandals such as Enron
Corporation, Tyco International plc, and WorldCom shook investor confidence
in financial statements and demanded an overhaul of regulatory standards.

2. Who is behind Sarbanes-Oxley Act?

Between December 2001 and April 2002, the Senate Committee on Banking,
Housing and Urban Affairs and House Committee on Financial Services collaborated to
enact Sarbanes-Oxley Act with Senator Paul Sarbanes and Representative Michael Oxley
being the main architect.

3. Provisions/Objectives of SOX

The intent of the SOX Act was to protect investors by improving the accuracy and reliability of
corporate disclosures by

 closing loopholes in recent accounting practices

 strengthening corporate governance rules
 increasing accountability and disclosure requirements of corporations, especially
corporate executives, and corporation's public accountants
 increasing requirements for corporate transparency in reporting to shareholders and
descriptions of financial transactions
 strengthening whistle-blower protections and compliance monitoring
 increasing penalties for corporate and executive malfeasance
 authorizes the creation of the Public Company Accounting Oversight board to further
monitor corporate behavior, especially in the area of accounting

https://www.investopedia.com/terms/s/sarbanesoxleyact.asp
 II. After the Fall of Enron

Shareholders

Shareholders lost $ 74 billion in the 4 years before the company’s bankruptcy ($ 40

billion to $ 45 billion was attributed to fraud). The next year, investors received another
settlement from several banks of $ 4.2 billion. In Septer 2008, a $ 7.2 bilion settlement from $
40 billion lawsuit was reached on behalf of the shareholders. The settlement was distributed
among the main plaintiff, UC, and 1.5 million individual groups.

Creditors

Had nearly $ 67 billion that it owed, and paid limited only. To pay creditors, Enron held
auctions to sell assets including art, photographs, logo signs, and its pipelines.

Employees

In may 2004, more than 20 000 of Enron’s former employees won a suit of $ 85 million
for compensation of $ 2 billion that was lost from their pensions. (each received about $ 3100)

Others

UC’S law firm Coughlin Stoia Geller Rudman and Robbins received $ 688 M in fees, the
highest in a U.S securities fraud case.

III. Lessons Learned

1. Concern over conflict of interest between auditing and consulting raises the need for
accounting firms to separate their consulting activities from their auditing businesses.

2. Securitization and other legitimate structured finance deals have to be disclosed with
sufficient depth and detail to adequately inform sophisticated investors.

3. Management has to be free of material conflicts of interest because private investors

rely on their business judgment

4. There should be a method or basis that distinguishes between structured finance

transactions that should be allowed from those that should be restricted. This requires
regulatory re-examining of structured financing transactions. However, a long-term
perspective must be taken that excessive safeguards can stifle business innovation
 5. The importance of taking corporate codes of conduct seriously and carefully thinking
through their implementation

6. There is a move considering forcing firms to routinely change auditors and for
accounting firms to separate their consulting from their auditing businesses in an
attempt to prevent Enron-style collapses. However, accountants are opposing the move
because they fear they could lose contracts with clients dating back decades, which
established cozy and dependant relationships. For example last year FTSE 100
companies paid their auditors £216 million in audit bills and £675 million in advisory
fees. They also argue that the change would increase the audit costs.

IV. Effect on Society

1) Economic Setbacks

 From 2000-2002, publicly traded companies lost value of around $7 trillion

 Investors of Enron lost $60 billion in market value
 Partners of Enron lost billions of dollars
 Led to fall of many other high-profile companies charged with fraud

2) Employees

More than 20,000 employees lost their jobs

$2 billion lost in pension money

401(k) loss retirees and long-standing employees lost all of their money many families lost of all
their money

3) Change in the Auditing World

Arthur Andersen

 company who audited Enron, charged of obstruction of justice after fall of Enron for
shredding documents of Enron's financial woes
 surrendered CPA licenses, lost billions of dollars and jobs
 The following year, publicly traded companies spent an average of $2.3 million more on
auditing than previously
3a) Sarbanes-Oxley (Sarbox)

 SEC created new law called the Sarbanes-Oxley law requiring a company's executives to
certify financial information, set up audits of internal accounting by the SEC
 largest modification of securities law since Great Depression
 creation of Public Company Accounting Oversight Board