By: Michael E. Martinez

In the past few years, many corporations have gone bankrupt or collapsed due to accounting irregularities. New rules and laws have been adopted to help avoid these situations again. The question is can these problems ever be solved? Enron was a trading and energy company based in Houston, Texas. By 2001, Enron had about 21,000 employees working for them. Enron was one of the world's leading electricity, natural gas and communications company. In 2000, the company had revenues of $101 billion. The company serviced customers around the world in the fields of commodities, financial and risk management. Fortune Magazine named Enron "America's most innovative Company" for six years in a row.

Questionable accounting practices allowed the company to be listed as the seventh largest company in the United States when in reality it became the world's largest corporate failure in history. When you heard the word Enron, it became associated with corporate fraud. On November 30, 2001, the European operations of Enron filed for bankruptcy. There were rumors of bribery and political pressure to secure contracts in Central and South America. A series of scandals involving irregular accounting procedures involving Enron and its accounting firm, Arthur Anderson. On January 9, 2002, the United States department of Justice announced it was going to pursue a criminal investigation of Enron. Congressional hearings began on January 24th. Enron shares fell from $90.00 to 30 cents a share during the span of 2001.

Many of the losses that Enron suffered were not reported in their financial statements. Thousands of Enron employees lost their life savings after the collapse. In January of 2006, Kenneth Lay and Jeffery Skilling who were both former Enron CEOs will go on trial for their part of the scandal. Former Chief Accounting Officer, Richard Causey, will be on trial along side of Lay and Skilling. The indictment will cover financial crimes including bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering and insider trading. The trail of Arthur Anderson, who was the accounting firm, helped to expose its accounting fraud at WorldCom. Enron's collapse led to the creation of the Sarbanes-Oxley Act.

WorldCom was the United States' second largest long distance phone company. AT&T was the largest, for the record. WorldCom grew largely by acquiring other telecommunications companies, one was MCI Communications. MCI dates back to 1963, in 1985, Bernard Ebbers was to be its CEO. The company went public in August of 1989 when it merged with Advantage Companies Inc. The company name was changed to WorldCom in 1995. October 5, 1999, Sprint and MCI WorldCom were about to make a $129 billion merger. The merger would have put AT&T in the number two spot for the first time in history, the deal did not go through however, because of pressure from the U.S. Department of Justice on concerns of creating a monopoly. In June of 2002, an internal audit discovered that $3.8 billion had been miscounted.

The U.S. Securities and Exchange Commission launched an investigation into these matters. In 2002, WorldCom filed for Chapter 11 bankruptcy. An additional $3.3 billion in improper accounting since 1999 was announced. It was estimated that the company's assets had been inflated by about $12 billion. Before that in May 2003, they were given a no bid contract by the United States Department of Defense to build a cellular telephone network in Iraq. After a Chapter 11 bankruptcy in 2004, the company went with the new name of just MCI. At that time, they were $5.7 billion in debt and $6 billion in cash.

The previous stockholder's stock was worthless. Under the bankruptcy agreement, the company paid $750 million in cash and stock, which was intended to be paid to the wronged investors. On February 14, 2005, Verizon agreed to acquire MCI. SBC Communications agreed to acquire AT&T just a few weeks earlier. On March 15, 2005, Bernard Ebbers was found guilty of all charges and was convicted on fraud, conspiracy, and filing false statements with regulators. Ebbers was sentenced to 25 years in prison.

In 2002, new legislation was passed to protect investors against the inaccuracies and the unreliability of corporate disclosures. The U.S. Federal Sarbanes-Oxley Act covers issues such as establishing a public company accounting oversight board, auditor independence, corporate responsibility and enhanced financial disclosure. This law was signed into effect on July 30, 2002 by President George W. Bush. The Sarbanes-Oxley Act is considered to be the most significant change to the United States Securities Laws since The New Deal in the 1930. Because of corporate financial scandals such as Enron, Tyco International and WorldCom, the law came into effect. This law was named after sponsors, Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH). It was approved by the House by a vote of 423-3 and in the Senate 99-0.

Three years after passing the Sarbanes-Oxley Act, a poll was conducted by The Wall Street Journal, 55 percent of U.S. Investors believe that financial and accounting regulations are too lenient. According to the survey, only a quarter of the investors feel that the Sarbanes-Oxley Act has made the communication of financial information by companies much more transparent. 41 percent say that they are still not sure what effect this act has had on companies. The Wall Street Journal believes that this suggests that many investors don't understand the legislature and its impact on businesses.

Some of the major provisions of the Sarbanes-Oxley Act include certification of financial reports by CEOs and CFOs. There is a ban on personal loans to any executive officer or director. There is to be accelerated reporting of trades by insiders. Public reporting of CEO and CFO compensation and profits are required. There are criminal and civil penalties for violations of security laws which would produce longer jail sentences and larger fines for CEOs who knowingly misstate financial statements. There is a requirement that publicly traded companies furnish independent annual audit reports on the existence and condition of internal controls as they relate to financial reporting.

These requirements are designed to prevent or detect fraud including who performs and controls the regulated dispersal of duties. This law puts controls over the period-end financial reporting process. It gives information about how transactions are initiated, authorized, supported, processed and reported. There should be enough information about transactions to identify where misstatements due to error or fraud could occur. It would also give control over safe guarding of a company's assets. CIOs are responsible for the security, accuracy, and reliability of the systems that manage and report financial data. Today's businesses' when reporting on financial processes, most companies use information technology systems (IT). Few companies today manage their data manually, and most companies are using electronic management of data, documents and key operational processes.

So, information technology plays a major role in internal control. IT systems need to be assessed along with other important processes for compliance with the Sarbanes-Oxley Act. This will show a fundamental change in business operations and financial reporting. It will place responsibility in corporate financial reporting on the Chief Executive Officer, the Chief Financial Officer and the Chief Information Officer.

I believe the Sarbanes-Oxley Act had to be implemented to bring this problem to the public. I don't think that regulations adequately resolved all the issues. I believe that this law was necessary but I'm not sure how effective the provisions of the law are. The Sarbanes-Oxley Act passed in 2002 was necessary but was far from perfect. Refco is a New York based financial services company. They announced on October 10, 2005 that it's CEO and Chairman; Phillip R. Bennett had hidden $430 million in bad debts from the company's auditors and investors, and had agreed to take a leave of absence. Refco said that through a review it had discovered a receivable owned to the company by an unnamed entity that turned out to be controlled by Mr. Bennett in the amount of approximately $430 million.

Bennett had been buying bad debts from Refco in order to prevent the company from needing to write them off. He was paying for the bad loans borrowed from Refco itself. At the end of every quarter, he arranged for a Refco subsidiary to lend money to a hedge fund called Liberty Corner Capital Strategy. The hedge fund then lent the money to Refco Group Holdings. Bennett's company paid the money back to Refco which left Liberty as the apparent borrower. It isn't clear at the moment if Liberty knew it was hiding sham transactions.

Management of the fund claims they believed it was borrowing from one Refco subsidiary and lending it to another subsidiary. On October 20, 2005, Liberty Corner Capital Strategy planned to sue Refco. The law requires that such financial connections between corporations and its own top officers be shown as what is known as a related party transaction. On October 12, Bennett was arrested and charged with one count of securities fraud for using U.S mail, interstate commerce and security exchanges to lie to the company's investors.

By October 19th, the shares of Refco were trading in the pink sheets to $0.80 per share from its high of $28 a share. Through Refco was a smaller sized company, the impact of the scandal will be just as large as any other corporate failure except for Enron. Refco sold shares to the public only two months before revealing the apparent fraud. On October 27th, the shareholders of Refco filed class action lawsuits against the company, their auditors and the investment banks who were the underwriters.

It's quite obvious by this recent scandal that Bennett has not heard about the Sarbanes-Oxley Act. I don't know what could be done to prevent this from happening again as its obvious some people still think they can get away with messing over the average stockholder. Because of the Sarbanes-Oxley Act of 2002, the Pubic Company Accounting Oversight Board was created. Its main job is to provide internal examinations and help ensure the efficiency, effectiveness and integrity of publicly traded firms. It is similar to that of an inspector general in a government agency. The main job of the PCAOB is to report performance and financial information in a fair, complete, reliable manner to the pubic, congress and the SEC.

It conducts it programs and operations to protect and promote the pubic interest and the integrity of audits. The five member board sets audit standards, investigates and sanctions accounting firms that certify the books of publicly traded firms. An internal review of Refco itself discovered the discrepancy. I wonder how many people internally knew about Enron and WorldCom problems and did nothing in fear for their jobs. We're not talking about small amounts of money; billions of dollars were lost in all three of these cases. Unfortunately, the common stockholder is usually the one to really suffer in these cases.