Enron’s bankruptcy marked a period of large public company failures that were all linking to financial reporting and accounting areas that included Tyco International, WorldCom, Xerox, the accounting firm of Arthur Anderson, and others (Patsuris, 2002). The reason why Enron stands above the other corporate scandals is the magnitude as well as the scope of Enron’s misconduct, and financial fallout that rocked the United States financial markets with the brazenness of running up of the stock price through deals, and reporting measures that were either non-existent or fraudulent (Longnecker, 2004). The preceding was further compounded by the company’s accounting firm, Arthur Andersen, essentially turning a blind eye to the events, and reporting measures through failing to perform its fiduciary duties in a manner consistent with good accounting, and auditing practices (Longnecker, 2004).The fallout did not just end with American based companies. The Italian food giant Parmalat became the subject of an investigation by authorities in Italy “…after discrepancies were revealed in its accounting practices to the tune of more than $5,000,000,000”, one of which represented the fact that money being held in a Cayman Island subsidiary was indeed false (Longnecker, 2004). These events led to the passage in the United States of the Sarbanes-Oxley Act of 2002 that represented the United States Congress introduction of “…a series of corporate governance initiatives into the federal securities laws …” (Romano, 2003). The Act is also known as SOX as well as the Public Company Accounting Reform and Investor Protection Act of 2002 (McCauley-Parles et al, 2007). It, the Sarbanes-Oxley Act, was enacted to restore public trust in accounting as well as corporate reporting practices after the public company scandals and “…has been described as the most sweeping and significant change in securities law since the 1930s.” (McCauley-Parles et al, 2007). The fall of Enron represented the event that pushed the creation and passage of the Sarbanes-Oxley Act, even though prior scandals of corporate reporting and misdoings had occurred.
The Enron Scandal and a Look at the Accounting Practices that Permitted it to Happen