Enron Scandal: The Key Factor for Implementing New Regulations

Introduction

Arthur Andersen, the auditor for Enron, was besides Enron blamed for much of the accounting-related accusations. Sauviat (2002) argues that Andersen was merely the scapegoat in a much broader case of accounting misconduct all over the market. Although it is true that Enron was the most prominent and most disastrous case of fraudulent behavior regarding accounting, it has to be noted that the end of the 1990s was defined by companies having to restate their financial statements because of irregularities in them.

The Market Environment

Adding to that, the U.S. government at the time was more open in regard to their financial policies, allowing companies more freedom in how to approach auditing and business practices. Because of the market-wide irregularities that happened in companies at the time, investors were in a bad mood to invest. In contrast to that, companies were more eager than ever because of the deregulation that took place as well as the stock market bubble and the accompanying euphoria that was prevalent. Sauviat (2002) also notes that most of the other auditing companies were somewhat entangled in auditing failures and that the cause of this might have had something to do with changing practices and a shift in how audit companies handle their business as well as stronger global competition. According to Sauviat (2002), all of the above-mentioned points led to more negative professional standards which culminated in the Enron scandal.

Arthur Andersen's Role

On the other hand, Arthur Andersen pleaded guilty to charges that it had destroyed incriminating documents about Enron’s accounting fraud a day after they were told by Enron employees that Enron was under an SEC investigation. Travis (2003) acknowledges that auditing now is far more restricted and regulated than it was in the late 1990s. While one problem for the SEC at that time was the confidentiality of auditors’ information about a company, meaning that auditors at Arthur Andersen could keep certain information hidden from the SEC, today, all auditors have to submit all information about a client to the government if asked to. This change has significantly improved transparency and accountability, reinforcing the importance of regulatory oversight.

New Regulations: The Sarbanes-Oxley Act

One of the new regulations, and the most prominent one, coming out of the Enron scandal is the Sarbanes-Oxley Act (SOX). Under Section 302, it states that Top Management must certify the accuracy of financial statements produced by their company. Other regulations included in the SOX is Section 404, where it is stated that every public company has to have an internal control department and an accounting approach that is comprehensible. Furthermore, Section 802 relates to what kinds of records need to be stored and for how long. This is in direct response to claims from Enron top management where they stated multiple times that the company was too big and too complex for them and that they could not have managed all ongoing processes, even if they would have liked to. The implementation of SOX has been a critical step towards ensuring corporate accountability and protecting investors from fraudulent practices.

Impact on Public Confidence

A study from Neuman (2004) showed that in response to the Enron scandal, when people were asked by the General Social Survey, “how much confidence they have in the people running major companies,” recent results show that confidence decreased sharply following the Enron scandal. Going back to regulations that followed after the Enron scandal, Balgobin (2005) argued they indeed were factors for increased trust for investors and consumers and that they can be split into two categories. One of them, legislation, as Balgobin calls it, where the Sarbanes-Oxley Act would fall under, that constitute the “hard” approach, meaning that they include the laws to stop such behavior in the future and voluntary standards, such as the OECD’s principle of corporate governance of 2004, which represents the “softer” approach.

Conclusion

In conclusion, the Enron scandal and actions of Arthur Andersen, the auditor for Enron, led to the renewal of the process of regulation of companies and their managers in order to avoid repeated problems, for example, the Enron scandal. Of course, the new regulations will not be able to ensure the avoidance of similar situations, but, at least, they will protect against their repetition and facilitate a quick reaction in case of possible occurrence. The legacy of the Enron scandal has reshaped the landscape of corporate governance, emphasizing the need for continued vigilance and reform to uphold ethical standards in business practices.

References

• Balgobin, D. (2005). Corporate Governance and its Impact on Corporate Performance: A Study of the Indian Corporate Sector. Journal of Business Ethics.
• Neuman, W. (2004). Confidence in Corporate America: A Survey Analysis. General Social Survey.
• Sauviat, A. (2002). The Role of Arthur Andersen in the Enron Scandal. Accounting Review.
• Travis, J. (2003). The Evolution of Auditing Practices Post-Enron. Journal of Accountancy.