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The accounting industry faced a great deal of criticism in 2001 and 2002 following a scandal involving Enron Corporation and its auditors. During the fall of 2001, Enron was the seventh-largest company in the United States. Over the period of a few months, however, the company collapsed due to accounting fraud and other instances of wrongdoing. In the aftermath of the scandal, Arthur Andersen, an accounting firm hired by Enron as an outside auditor, shredded hundreds of documents related to Enron. The firm was later convicted of obstruction of justice.

Prior to these scandals, accountants and accounting firms often engaged in consulting work, earning considerable fees in the process. Critics charged that accountants were reluctant to challenge clients about questionable financial activities because the accountants earned such large fees from these clients. The Enron scandal and other events that followed led to the enactment of the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745, which addressed these concerns.

The Sarbanes-Oxley Act restricts accounting firms from engaging in consulting work that could result in a conflict of interest. The statute also forbids a public accounting firm from performing an audit on a company where the accounting firm previously employed an officer of that company and the officer participated in an audit of the same company.

Inside Accounting