Corporations that have been involved in scandals
Over the last few years, the financial world has been rocked by high-profile accounting scandals at companies many thought could do no wrong. The two most infamous examples are Enron and WorldCom, which collapsed after it was discovered that they had “cooked their books,” or manipulated accounting to make them appear more profitable and stable than they actually were. Top executives from each corporation have been prosecuted, and steps have been taken to reduce the risk of such disasters happening again.
In 2002, Congress passed the Sarbanes-Oxley reforms, which tie corporations to strict financial reporting rules. Key to this new law is what’s known as Section 404, which says that companies have to include a review of their internal procedures for financial reporting with their annual report. Perhaps most important, Section 404 makes members of a corporation’s board liable for any creative accounting. Though some smaller corporations have complained that the reforms are too costly to implement and excessive in their demands, Sarbanes-Oxley is now a fact of doing business in corporate America.
As a result, “the companies themselves are taking these responsibilities more seriously,” says Herb Schulken, a partner with PricewaterhouseCoopers U.S. Corporate Governance Practice. “There can be criminal repercussions if [finances] were misstated.” In addition, he says, people within the company who suspect that something is wrong can report their concerns to an independent audit committee of outside directors.
With all these safeguards, could an Enron-size scandal happen again? “I wouldn’t say it’s impossible, even with these controls,” says Tony Miller, executive vice president at LRN, which educates businesses on legal and ethnics issues. “If you have a rogue employee trying to commit fraud, they can find weaknesses in the process. But if you do have a cultural ethic, they won’t be able to operate in complicity with a broader community.”