We’ve all heard of the Enron scandal. The energy and utilities company based in Houston that employed about 20,000 staff members and was the seventh largest corporation in the country had falsely inflated company revenue, which resulted in a quick downward spiral into Chapter 11 bankruptcy in 2001.
The company’s financial status was, in fact, built on systematic, institutionalized, and creatively planned accounting fraud. Enron became an infamous example of purposeful corporate fraud and corruption.
While this differs from most other companies that breach compliance regulations unknowingly and quickly try to correct any problems, Enron did nonetheless become noncompliant, which led to a major shift in business practices nationwide.
Predominantly, the scandal pointed to many flaws within the accounting sector that were addressed soon after the Enron scandal with the 2002 passing of the Sarbanes-Oxley Act (SOX Act). The goal of the act was to protect investors by providing better accuracy and reliability of corporate disclosures.
The methods of achieving this intent were detailed and many. Some included closing loopholes in recent accounting practices; strengthening corporate governance rules; strengthening whistleblower protections and compliance monitoring; increasing requirements for corporate transparency in reporting to shareholders and descriptions of financial transactions; increasing accountability and disclosure requirements of corporations, specifically corporate executives, and corporations’ public accountants; increasing penalties for corporate and executive malfeasance; and authorizing the creation of the Public Company Accounting Oversight board that would watch corporate behavior, specifically in the accounting realm.
Additionally, after seeing such widespread involvement in dishonest behavior among Enron’s accountants, the SOX Act also changed the method that corporate boards interact with financial auditors. Companies are required to provide a year-end report regarding internal controls they have set, plus the effectiveness of those internal controls.
At the core of regulatory compliance, cases like this are why regulations, rules, and guidelines exist, and it’s why they continue to multiply, strengthen, and adapt over time. Most companies want to succeed the right way, but there are the handfuls of others that are willing to overlook “the right way” and do anything for a profit. Regulations uphold the standards of running businesses in several fields in the fairest and best manner possible, protecting consumers, investors, employees, and all other varieties of stakeholders.
The Sarbanes-Oxley Act is credited with reducing corporate fraud and increasing investor protections, and many believe that it would be impossible for another Enron-like scandal to take place again.