Business Law and Ethics: Impact of Scandals and Sarbanes-Oxley Act

This report delves into the intricacies of business law and ethics, focusing on the Enron and WorldCom scandals of the early 2000s and the subsequent Sarbanes-Oxley Act (SOX) of 2002. The analysis begins with an overview of the Enron scandal, detailing how accounting loopholes, poor financi...Read More

Business Law and Ethics-2

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Issue.................................................................................................................................................3
Rules................................................................................................................................................4
Corporate scandal of 2002...........................................................................................................4
WorldCom scandal 2002..............................................................................................................4
Sarbanes-Oxley (SOX) Act of 2002............................................................................................4
Application.......................................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................1

Issue
Enron scandal resulted in banking fraud of the United state energy because of series of
events that happened in country. After country's new laws in the year1990s related to natural
gas effected on company's exclusive rights to operate its pipelines. Jeffrey who is consultant to
company use his skills and transformed company into a trader which deals energy derivative
contracts, acts as a mediator between natural-gas producers and their consumers (Segal, 2019 ).
Jeffrey use loopholes in accounting and submit poor financial report to auditing firm. It helps
firm to hide millions of dollars in debt and also failed deals and project to stakeholders. CFO
Andrew Fastow and other superior join hand in this scandal and mislead Board of director of
the firm. They pressurized Arthur Andersen for ignore issue associated with accounting details.
Shareholders of firm filed a case against after decrease of share to $1 in November 2001 which
was US$90.75 per share in mid-2000. After the disputes U.S. Securities and Exchange
Commission enter and investigate case and find cause behind it also in the same time
competitor of firm Houston competitor Dynegy offer for purchasing firm from Enron. However,
for various reason deal was not succeeded and in end of December 2, 2001 company filed that
they are bankrupt under chapter 11 of US Bankruptcy code. $63.4 billion in assets bankruptcy
of organization make one of the largest bankrupt company in United states but in next year
another scandal occured which is known as WorldCom scandal. Senior leaders and officials
charged under many sections but only few are sent to prison by the court. Arthur Andersen was
charged for illegal destruction of Information related to the SEC investigation also found
guilty and in later stage close the company for wrong auditing. However, company lost majority
of the customers till case judgement change by Supreme court of United states. Shareholder of
the company lost large amount of money related to pensions and stock price and hence only gain
few amounts from the claimed. Lay and Skilling give resign and fastow fired from the
workstation after the initiation of investigation(Boddy, 2017). There are large number of
lawsuits filed against Anderson by shareholders and hence company is unable to operate in later
stage. Scandal highly impacted laws related to accounting leads to new regulation and legislation
to it.

Rules
Corporate scandal of 2002
In this scandal chairman Dennis Kozlowski and Chief financial officer Mark H. Swartz
were found guilty for fraud of US$150 million from Tyco International. In March 2004, board
of director of the firm were contended by them and pay amount of compensation against their
wrong doings. In the year 2005 Kozlowski and Swartz declare guilty and sent to prison for
25years. Tyco agreed to pay $2.92 billion to a class of defrauder shareholder (Bhagat, and
Bolton, 2019).
WorldCom scandal 2002
It is one of biggest accounting scandal after Enron. CEO Bernard Ebbers orchestrated and
other superior of company were accused of wrong accounting and $3.8 billion of fraudulent
balance sheet entries. Company was forced to accept that it shows $11 billion assets overstated.
It was also one of largest accounting fraud in the history of time during that time (Kaya, 2019.).
Sarbanes-Oxley (SOX) Act of 2002
This act was passed by United stated government in the year 2002 after big scandals that
happen in last two year and it protects investor from misleading financial report by organization.
It is also known as Corporate Responsibility Act and hence government is able to tackle and
monitor financial reports of the firms. New penalties and strict reforms related to financing help
customer and the government from lawbreakers. Big scams like Enron Corporation, Tyco
International plc, and WorldCom loose confidence of investor and hence it increase negative
image of the firm.
Section 302 of the SOX Act of 2002
It states that it is duty of senior level management and director to certify in written that
statements related to finance of the firm cover SEC disclosure requirements and give all details
related to finance and operation of the organization. If signing authorities found misleading then
they are subjected to criminal penalties as well as sent to prison by court (Bhabra, and Rooney,
2019.).
Section 404 of the SOX Act of 2002
Management and auditors are responsible for controlling and reporting method related to
accounting and finance. However, many critic try to repeal the section as it increase expenditure
of the firm.

Section 802 of the SOX Act of 2002
It contains three rules which are associated with record keeping. First rule is to look to
the people who indulge into destruction and falsification of records. Next one defines the time
for which record must store with the firm. Last one deals with specific business record that firm
has to maintain and stores and it also includes electronic communication.
Application
In Enron scandal most of senior management show wrong details to investor and
government for example Jeffery Skilling and CFO Andrew Fastow and other equally
responsible for misleading shareholder and other board of director related to account details .
They also try to pressurized for Arthur Anders to pass the poor accounting report and ignore the
issue which is a serious offence. After the case $ 40 billion lawsuit filed against company and
associated suspects. It can be referred from Corporate scandal of 2002, that these criminals must
be sentenced for almost 25 years with heavy penalty on them and also company has to
compensate with total amount that is taken from investor and shareholder.
They are also responsible for creating confusion and also not following norms of
Securities and Exchange Commission. The stock price of company falls from US$90.75 to $1
and hence large number of investors affected from it. There are two cases that can be filed
against the company one is not submitting or adopting SEC guidelines and another is fraud
investor in share market that is a serious crime. From the WorldCom scandal 2002 Board of
director and company management including victim are found guilty for the treachery and hence
have to pay the amount to shareholders and SEC also sentence to the jail.
Company file for bankruptcy under chapter 11 because of scam and try to pretend that
they are not associated with the crime and unable to pay customers and SEC. Also, Arthur
Andersen were part of conspiracy and not trust worthy so it will be duty of this firm to pay the
debt of shareholders. However, Arthur refuse to pass the accounting report and warn share
holder and government for the conspiracy so that necessary action can be taken on time.To SEC.
Jeffrey and Andrew both are main victims of creating this financial conspiracy and earning
amount from it. Both of this people misuse the power and not controlled by the company and
hence BOD members are responsible for it (Kaya, 2019). Crime can be stopped in the initial
stage if company BOD properly follow the guidelines and cross-checked activities associated
with accpunting. Also, accounting loopholes, special purpose entities, and poor financial

reporting are not properly monitored there is no single law to address and monitor it. As per the
Sarbanes-Oxley (SOX) Act, Under Section 302 company signing authority will be responsible
for crimes and hence they have to punish for the offences and can be sent to the Jail. Section 404,
Management and auditors are responsible for not proper checking and managing details related
to finance and accounts and hence they are also direct victim of the cause. As per the Section
802, company is guilt for not proper recorkeeping. Also company is accused of destruction and
falsification of records that government and SEC needed for cross-checked (Hollow, 2020).
Records are not kept for particular period define by the section.
CONCLUSION
It can be evaluated from the case that Bankruptcy under section 11 become advantage for
many organizations, and they use it in wrong way to declare insolvency. in Enron's scandal most
of the criminals are executive of the firm and senior level authority. Jeffrey and Andrew Fastow
misled the Board of director and plan a conspiracy against company and also associated other
members in their planning which decrease stock rate and planned a conspiracy which affected
large number of investor. Arthur Andersen and the firm are pressurized by conspired group and
they destroy documents related to auditing and hence company reputation affected also in later
stage shut down the business. However, there are various similar cases such as Corporate scandal
of 2002, WorldCom scandal 2002 in which senior officials use their position to do financial
fraud in the organization with the help of wrong details of accounts. In the later stage these
criminals found guilty and has to pay back the amount that are estimated by the government.
However, After Passing of Sarbanes-Oxley (SOX) Act of 2002 reduce chancesof fraud and
government monitor and control auditing and financial report of the companies which helps in
avoiding such big scandals. If this law pass earlier then Enron can be found guilty under Section
302 of the SOX Act of 2002, Section 404 of the SOX Act of 2002, Section 802 of the SOX Act
of 2002 and also governance able to monitor and control financial activities of company.

REFERENCES
Books and Journals
Bhabra, G.S. and Rooney, J., 2019. Sarbanes-Oxley, agency conflicts and the marginal value of
capital expenditure. Managerial Finance.
Bhagat, S. and Bolton, B., 2019. Corporate governance and firm performance: The sequel.
Journal of Corporate Finance.58.pp.142-168.
Boddy, C.R., 2017. Enron Scandal. Encyclopedia of Business and Professional Ethics.pp.1-4.
Hollow, M., 2020. Gavin Benke, Risk and Ruin: Enron and the Culture of American Capitalism
(Philadelphia: University of Pennsylvania Press, 2018, $34.95).Pp. 272. isbn 978 0 8122
5020 6. Journal of American Studies.54.(2).pp.451-452.
Kaya, E., 2019. THE HIsTORICAL AssEssMENT OF FINANCIAL sCANDALs. RECENT
ECONOMIC APPROACHES & FINANCIAL CORPORATE POLICY.p.121.
Segal, T., 2019. Enron scandal: The fall of a wall street darling. Investopedia, updated May, 29.
Online Reference
Enron Scandal: The Fall of a Wall Street Darling. By TROY SEGAL, 2020 Available Through
<https://www.investopedia.com/updates/enron-scandal-summary/>

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