Lasting Effects of the Enron Scandal

In my previous blog I discussed how Enron managed to pull off its enormous scandal. Let’s look more closely at some of the more significant effects of this scandal.

First, this scandal caused one of the “Big Five” accounting firms to be dissolved. This scandal should have been discovered much earlier on. However, the accounting firm responsible for auditing Enron, Arthur Andersen, did not fulfill their duties as auditors. To make matters even worse, the firm was convicted of obstruction of justice, because some of their partners had order several relevant documents to be shredded. Although this conviction was over turned 3 years later, the damage had already been done, and Arthur Andersen’s reputation was ruined.

One of the most beneficial side effects of the Enron Scandal was the passing of the Sarbanes-Oxley Act. Named after its sponsors, Paul Sarbanes and Michael Oxley, the Sarbanes-Oxley Act set new or enhanced standards for the boards and management of publically owned companies. These new standards also apply to public accounting firms. The bill passed through the Senate and the House only receiving 3 opposing votes in the process.

The Sarbanes-Oxley Act included 11 titles. These titles covered a wide range of ideas and punishments that would help clean up business in America. The first title in the Act established the Public Company Accounting Oversight Board. The whole goal of this board was to oversee public accounting firms that were providing auditing services. This is one of the most important titles in the Act, because it created an independent group of people that could look at the situation from a less biased perspective to ensure that the new standards were being followed.

Other titles in the Sarbanes-Oxley Act helped to make sure that the people responsible for auditing a company do not have a conflict of interest. One issue that occurred during many of the financial scandals was that the people auditing the companies might benefit in some way based on auditing decisions they made. Conflicts of interest can cause problems by giving people a reason to act unethically. The unethical decision is usually in the best interest of themselves and/or their company. Although people want to believe that they will make the ethical decision, past history has shown that there are plenty of people that ignore the ethical choice and make the one that will benefit themselves and/or their company.

The Enron Scandal and the other scandals that occurred around that same time were low points in American business. However, the business world used these events to fix loophole that existed in the current system. Although you can never have a perfect system, the changes that were made after the scandals will help keep the dirty business practices at a minimum. What else can you ask for? The business world is learning and improving to make sure that we are better today than we were yesterday.