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Enron situation analysis
Enron situation analysis
Enron case summary
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Introduction
Sarbanes-Oxley act was passed in 2002 in reaction to several scandals and the dot com bubble involving major corporations. Eron, Tyco and Worldcom were the prime scandals. In the light of those scandals, Sarbanes- Oxley was passed with an intention to make corporate governance more rigorous, protect investors from fraudulent activities performed by the corporation by making financial practises more transparent, strengthen corporate oversight and promote/improve internal corporate control. In short it was meant to enhance corporate governance and restore faith in investors.
Sarbanes-Oxley act 2002 was a central piece of security legislation since foundation of SEC (Securities and Exchange Commission) 1934. It is divided into eleven
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Section 802
This section takes into consideration penalties for any violations of the Sarbanes-Oxley act. The section imposes heavy fines or time spent in jail for those who neglect or misuse any of the reforms mentioned in the act.
With section 802 we can clearly see that Sarbanes-Oxley act not only provide directions for corporations on how to ethically run a business but also enforces penalties to prevent any unethical/misconduct.
Pros And Cons Of Sarbanes-Oxley Act 2004
After carefully reading the case provided to us in class, I formulated a question that will be the main focus in determining the pros and cons of Sarbanes-Oxley.
Question
It been 14 years since the act was passed, why are the parties still not used to the effectiveness of the act as its initial intention was meant for the greater good? In other words, why haven’t the corporations/managements been able to see Sarbanes-Oxley as an ally after over a decade?
Pros
Disclosure Of Critical Information To
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For example, Enron will built a power plant and claim a projected profit for it on the books even though no money was made from it. Later when the figure for revenues arrived, they would be less than the projected amount earlier. That loss was taken/recorded on an off-the-books corporation - hiding the initial loss.
By that, Enron tricked shareholder’s in believing that the company was doing better than expected as the bottom-line was unaffected (by the loss occurred) and projected a healthy profit. To avoid this from happening again Sarbanes-Oxley act requires a full disclosure of critical information, assets, liabilities, risk profiles and, other financial and non-financial information that may affect investing decisions of shareholders.
Lay Emphasis On The Need For Internal Control
In order to mitigate management override (such as in the Enron case), Section 404 was put to action in the act. Under the section requirements, management is to quarterly test internal controls. Internal checks should ensure that:
• The transactions are carried out the way they should be
• The checks and balances are the way they r supposed to
The Sarbanes-Oxley Act of 2002 (SOX) was named after Senator Paul Sarbanes and Michael Oxley. The Act has 11 titles and there are about six areas that are considered very important. (Sox, 2006) The Sarbanes-Oxley Act of 2002 made publicly traded United States companies create internal controls. The SOX act is mandatory, all companies must comply. These controls maybe costly, but they have indentified areas within companies that need to be protected. It also showed some companies areas that had unnecessary repeated practices. It has given investors a sense of confidence in companies that have complied with the SOX act.
It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.
A possible flaw of Sarbanes-Oxley is it failed to put up any resistance in thwarting the financial crisis. While the degree to which fraudulent behavior can be traced to the roots of the Great Panic of 2007 will likely be up for eternal debate, it might be telling that Sarbanes-Oxley effectively did nothing. It seems this could indicate that stronger incentives for whistleblowers (such as Dodd-Frank and perhaps other whistleblower protection regimes) are very necessary given the extreme social costs. This conclusion may be hasty, however, given the short time period between the enactment of Sarbanes-Oxley and the crash. Not only is the status of Sarbanes-Oxley still in flux over a decade later, but one has to consider the substantial learning and switching costs associated with a regime with such a substantial ruach. Certainly, this is not to say that additional protections may in fact be necessary given the putative reluctance of lawyers to report fraud, but Sarbanes-Oxley likely needed more time to really crystalize and provide some level of predictability before it can be declared a bust.
CEO Jeffery Skilling and Kenneth Lay, the CEO prior to Skilling, were taken to trial. They were both found guilty of committing multiple types of financial crimes, and sentenced to 24 years in prison. CFO Andrew Fastow was also taken to trial and was found guilty and sentenced to 10 years in federal prison. The collapse of such a large corporation led to changes in financial controls. U.S. Congress passed the Sarbanes-Oxley Act in 2002. The SOX Act protects investors from deceitful accounting actions by companies (4). The Financial Accounting Standards Board increased its ethical behavior. FASB is responsible for generally accepted accounting principles, which provides standards for financial statements of publicly traded companies. These changes brought to life after the Enron scandal have decreased fraud and increased investor confidence. Although the acts that Enron committed were immoral and destroyed thousands of lives, it has lead an increase of controls and compliance, preventing something like this from happening in the
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
...he Sarbanes-Oxley act, which began with companies like Rite Aid abusing the deregulated system, are (1) the required attestation by the CEO and the CFO; and (2) better internal control mandates, procedures and documentation requirements.
SWOT analysis is a necessary tool for business that allows corporations to analyze where their strengths, weaknesses, opportunities and threats lie. The SWOT tool contains paramount information about the industry and helps the executives of the business make decisions that are necessary for the business’s survival and success.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
Sarbanes-Oxley Act of 2002 (SOX), Pub. L. No. 107-204, 116 Stat. 745 (codified as amended in scattered sections of 15 U.S.C.)
Accounting fraud refers to fraud that is committed by a company by maintaining false information about the sales and income in the company books, when overstating the company's assets or profits, when a company is actually undergoing a loss. These fraudulent records are then used to seek investment in the company's bond or security issues. By showing these false entries, the company attempts to apply fraudulent loan applications as a final attempt to save the company by obtaining more money from bankruptcy. Accounting frauds is actually done to hide the company’s actual financial issues.
The SWOT analysis: The study of the firm's Strengths, Weaknesses, Opportunities and Threats called SWOT analysis, a key step in flushing out known performance issues that are important to the growth of the organization addressed in the corporation strategic plan. The issues identified in the SWOT analysis help leadership to come up with a plan and strategy to achieve the overall mission of the company (Strategic Planning, n, d). Target Corporation is one of the largest public retailing company in the US having more than 1700 stores serving guests nationwide. Target group and its brand position are evaluated in the market using SWOT analysis.--
Enron was on the of the most successful and innovative companies throughout the 1990s. In October of 2001, Enron admitted that its income had been vastly overstated; and its equity value was actually a couple of billion dollars less than was stated on its income statement (The Fall of Enron, 2016). Enron was forced to declare bankruptcy on December 2, 2001. The primary reasons behind the scandal at Enron was the negligence of Enron’s auditing group Arthur Andersen who helped the company to continually perpetrate the fraud (The Fall of Enron, 2016). The Enron collapse had a huge effect on present accounting regulations and rules.
It includes an employee or the organization and is deceptive to shareholders and investors. An organization can misrepresent its financial statements by exaggerating its income or resources, not recording costs and under-recording liabilities. A number of categories and sub-categories can be divided up for fraud. Some examples are consumer fraud, management fraud, employee embezzlement, Ponzi schemes and numerous
Through an organizational culture that focused on financial greed for self, illegal accounting practices, conflicts of interest partnerships, illegal business dealings, fraud, negligence, and massive corruption at all levels, the Enron scandal help to create new laws and regulations with stiff penalties if violated (Ferrell, et al, 2013). The federal government implemented the Sarbanes Oxley Act (SOX) (Ferrell, et al, 2013).
The following describes a more detailed description for the SWOT analysis. The first acronym is S for strength. The first strength is brand recognition. The hotel has a competitive edge due to its brand loyalty and aftermarket sales. It also drives the firm toward growth and expansion. This will also benefit the stakeholders with stock in the company Second is social responsibility the Wyndham company works to maintain social responsibility