Posted: August 12th, 2013








Corporate Governance after the early 2000’s scandal








Corporate Governance after the early 2000’s scandal

(Date of submission)

By: Student Terrance Hayward

To: Professor Soucy

Paper: BUS 32



November 10, 2012


Professor Soucy

Santa Monica College

Santa Monica,


Dear Professor Soucy


As requested, I hereby submit the report on, on corporate scandals in the early 2000s on the date November 11, 2012.


During the early 2000’s Corporate America encountered a scandal that shaped the accounting and auditing profession for the years that followed. Enrons scandal caused the government to step in and impose stringent requirements for compliance by corporations. The purpose of this study is to examine the Enron scandal that taken place in the early 2000’s and show its effects on corporations not only operating in the US but also in foreign countries. This report finding will provide detailed information on how accounting educationalists should educate and train accountants on the do’s and don’ts when working for a corporation as an accountant or auditor. In this report, the information pertains to


  1.               I.      What laws were passed to shape the accounting profession during this time?
    1. What major changes occurred?


  1.            II.      How do corporations implement policies that abide to the set standards?


  1.          III.      What lessons can accountant educators derive from the scandals to prevent future accountants from breaking the rules?


  1.         IV.      Has the set of rules and laws that govern corporations lived up to the expectations of the accounting professionals?


  1.            V.      What conclusions can be drawn from the findings?


Thank you for this opportunity to assess the corporate scandal and recommend effective strategies. Please contact me for further assistance.




Terrance Hayward



Table of Contents

  1. Executive summary………………………………………………………………..5
    1. Early 2000s scandals. Laws that helped shape (reform) the accounting profession.
    2. Implementation of abiding by accounting and auditing standards.
    3.  What can accountant educators take from the scandals?
    4. Recommendations made to accounting educators on training accountants.
  2. Introduction………………………………………………………………………6


  1. Laws passed to shape the auditing profession …………………………………….6
  1. History of Laws passed that shaped Accounting Profession
    1. Title 1: Public company accounting oversight board………………7
    2. Title 2: Auditor Independence
    3. Title 3: Corporate Responsibility
    4. Title 4: Enhanced financial disclosure
    5. Title 8: Corporate and Criminal Fraud Accountability
    6. Section 404: Management assessment internal controls



  1. Implement structure of abiding by governed regulations …………………………8
  1. Understand the threat of fraud
  2. Appreciating Respective Roles …………………………………………9
  3. Embracing sound ethics
  4. Recognizing red flags…………………………………………………….10
  5. Mastering suitable controls


  1. Conclusion and recommendations for training accountants……………………….11


  1. Work Cited ………………………………………………………………………..12








Executive Summary


In this report, I have studied and analyzed a corporate scandal of the early 2000s and the effects that caused the Government to impose stricter quarterly and yearly requirements.


Early 2000’s scandals

In 1985 two merging gas companies created Enron. Early August 2000 Enron share reached an all-time high. A year later October 2001 Enron reports first quarter results of a loss of 618 million and overstated owners’ equity by 1 billion. November 2001 the scandal went public and Enron announces falsifying reports. Early December 2001 Enron filed for bankruptcy, one of the largest in the US at the time. Jeffrey Skilling and Kenneth Lay was held responsible and found guilty of about 25 accounts of fraud. Jeffrey Skilling was sentenced to 24 years in prison.


Laws that helped shape (reform) the accounting profession.

As a direct result of the Enron scandal many stakeholders of the company lost all their money that was invested into Enron. US authorities now impose stricter requirements and guidelines for corporations to abide by. The Sarbanes Oxley Act was established in 2002 after the Enron scandal. The goal of the act is get accurate information to investors as soon as possible and maintain internal control.

Another thing Government authorities altered was changes to the securities exchange commission and the public accounting oversight board.


Implementation of abiding by accounting and auditing standards

Company’s implement abiding by these standards that were set by having a company flowchart to distinguish who is responsible for what task in the company. Companies should also have audit trails of the company’s lifetime file; they should also know how long they should keep company records and the due date for all proper financial documentation.


What can accountant educators take from the scandals?

An Accountant can learn a lot from the Enron scandal. The Enron scandal goes to show that there are smart people out there that will take shortcuts when beneficial to them for financial gain. You can also take from this scandal the new laws that are required for corporations to abide by.


Recommendations made to accounting educators on training accountants

To train an accountant educator, you must make them aware of the potential risk of fraudulent activity. To ensure that they aware of possible fraudulent activities, an educator must:


  1.                                              i.       Understand the threat of fraud
  2.                                            ii.       Appreciate their role in fighting fraud
  3.                                           iii.       Embrace a sound of moral compass
  4.                                          iv.       Recognize red flags that suggest fraud may be happening
  5.                                            v.       Is part of process for ensuring that sound control is in place to guard against the risk of fraud?




                This report seeks to highlight one of the major scandals in corporate America and the implications it had on the accounting profession. The gas company Enron had committed fraud and falsified reports. This bred into a scandal in corporate America that elicited numerous reactions. The scandal therefore provided an opportunity for corporate to review their accounts and methodologies in financial management. Reforms in accountancy became necessary and laws and policies were formulated. These reforms shaped the accounting profession coupled with the implementation process. New laws were incorporated with older laws in order to regulate corrupt activities. In addition, accounting educators are tasked with the responsibility of teaching students the laws, regulations, policies and skills that will aid them in averting more scandals in the future. This report contains effective recommendations that can improve finance and accounting. The scandals in there 2000 became one of the most significant and influential events in corporate governance.





Figure 1. Show the stock sales at Enron.







Laws that shaped the accounting profession

History of Laws passed that shaped Accounting Profession


Due to the Enron scandal and several other fraudulent acts committed in the early 2000’s, the Sarbanes Oxley Act of 2002 was established and the Securities Exchange Commission was altered to implement structure in the auditing and accounting profession. The Sarbanes Oxley Act of 2002 was created to hold management responsible for what went on in their companies and close gaps that make illegal transgression possible. The Sarbanes Oxley Act provides strict guidelines that should be used by all corporations to ensure they are complying with the law. The act was signed into law on July 24, 2002. “The Sarbanes Oxley Act of 2002 is comprised of 66 sections; The Act is broken into 11 main parts called Titles. Each of the titles is broken into sub categories called Sections.


According to Mr. Hanako Myers, a corporate lawyer, the cases that are recorded in court in recent times follow these set of laws. The laws have seen offenders either pay hefty fines or be jailed. Courts are also recording increase in corporate cases involving accounting and auditing. Small and medium companies are among the most common auditing firms that are being sued. Hiring of independent auditors and following the set laws can go a long way in saving an individual or organization from the long court process (Myers, personal interview).


The most important are:


Title 1: Public company accounting oversight board       

To oversee the audited

In order to protect the interest of investors and further push for investment from the public stakeholders


Title 2: Auditor Independence


This law ensures the auditor is independent from external forces. The auditor is therefore free to undertake the auditing process without fear or pressure to act in favor of powerful individuals. The auditor therefore holds ultimate control over the auditing process in any firm.


Title 3: Corporate Responsibility

Officers of a corporation must sign off on and certify in each quarterly and financial statement that it is to their knowledge that all material is accurate and does not contain any untrue information.


Title 4: Enhanced financial disclosure


Companies that do not have a transparent method in financial recording and analysis tend to have the highest level of corrupt activities. Therefore it is important for companies to conduct transparent auditing and make the information public to prevent distrust among shareholders.


Section 404: Management assessment internal controls

This is an internal report, which states the responsibility for establishing and maintaining adequate internal control structure and procedures for financial reporting.


The report contains an assessment of the effectiveness of the internal control procedure and procedures of the issuer for financial reporting.


Title 8: Corporate and Criminal Fraud Accountability

These are some of the direct results of the scandals that took place in the early 2000s.

One goal of the The Sarbanes Oxley Act is to should act as strict guidelines.




Implement structure of abiding by governed regulations











Figure 2: Elements of training an accountant educator

Understand the threat of fraud


To train an employee, a company must make employees aware of all the potential threats of being fraudulent. All organizations have financial statements that are at risk if the company is not implementing a fraud smart toolkit. It is vital that everyone is made aware of the effects of not safeguarding financial information, or knowing what can happen if this information is not protected. An example of things employees should know is not to accept bribes, how to recognize misrepresentation of financial statements, and not only can fraud happen with external factors but with people internally working for the company as well. Being able to identify these elements is one key contribution to becoming educated in fraud prevention own have a lot at risk


Appreciating Respective Roles


Every company has roles that employees partake in when joining a company. It is important to assign clear responsibilities to the employee upon hiring so that an employee can be better capable of responding to fraudulent acts. Employees should also have knowledge of not only the positions they work with on a regular basis but of horizontal and vertical positions on the hierarchy chain in relation to their position such as Board members, management and especially the companies specialist of the code of conduct.


Employees should understand the policy to be capable of preventing fraudulent acts before they happen or get too big that the company endures a hire punishment.

Employees should be comfortable with company procedures and should act honestly with the work they perform

The hierarchy chain should be established so that roles are established. When assigning positions their role should be explained in fraud prevention.




Figure 3. Shows the guidelines for training an accountant educator


Embracing sound ethics


Ethics is very important in any organization. Ethics has become a significant aspect in the corporate world. Traditionally, companies focused on profits and lowering costs. However, in the contemporary world, people are creating awareness on the need for ethics within organizations. Ethics can be integrated in to the organization as a formality by some firms. Moreover companies are always aiming at reaching the set standards by government and society at large.


Companies should not set ethical guidelines as a matter of formality but should incorporate ethics in the implementations process of policies and objectives. Sound ethical principles boost a company and avert corrupt activities in relation to employees, employers, clients and the general public. It is the work of educators to provide organizations and learners the proper ethical approach. Companies that are targeted are those that do not have sound ethical guidelines.


Recognizing red flags


Red flags help investors identify the signs that a company is engaged in fraudulent activities. Red flags are a key element in any company that is having unclear and unethical procedures especially in the finance department. Identification and analysis of red flags can prevent a company from failure. To minimize potential fraud everyone must understand potential acts that can hurt the company. After the identification of red flags the investors and management must take immediate action to prevent a potential crisis.

Personal gain will cause employees to be dishonest and unethical.



Mastering suitable controls


Suitable controls are necessary for any organization. These controls maintain the professional standards. Controls can include the firm’s rules and regulations incorporated with the laws that govern the accounting profession.  If the company had established suitable controls the price of stock at Enron could have been an indicator that something was not right.





Figure 3 shows the price of stock at Enron













Conclusion and Recommendations


In conclusion, scandals are common in corporate America. Some scandals are the result of lack of ethical conduct, pressure to perform, threats from competition and overambitious management. Scandals can also destroy the image of any company. The recovery process of an organization that has a negative image among the public can be long and tiresome.


To prevent scandals from occurring, one must involve everyone in the corporation to potential risks that could affect the company as a whole.


Ethics plays a vital role in the contribution operation and management of a successful business. Ethical principles guide the internal and external relations in a company. Without ethics most organizations fail to carry out procedures that are considered ethical. Most companies


The goal of the act is to get accurate information to investors as soon as possible and maintain internal control. Internal control helps curb corrupt and scandalous activities. It also provides opportunities for transparent and ethical financial processes.


Sarbanes Oxley of 2002

It is apart of US federal law. The act was named after Senator Paul Sarbanes


It was enacted after one of the biggest corporate and accounting scandals.

The legislation changed the life and career of many corporate officers and auditors in companies listed in the United States. The act is only for public companies but numerous companies held privately or foreign and on-profit volunteer to comply, to prove that they meet international standards. President George W. Bush signed the act into legislation.


Develop fraud awareness seminars. Train them to be able to identify the main groups who commit fraudulent activities.

















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