The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 (SOX) into law, stating the legislation would be “The most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt,” (Process, 2012). The Act was designed to mandate many reforms in order to require greater corporate responsibility, disclosure, transparency, and to combat against accounting fraud. In response to several corporate and accounting scandals happening at that time, such as Enron, WorldCom, and Peregrine Systems, which cost investors billions of dollars when stock prices plummeted and the affected companies went out of business, the Sarbanes-Oxley Act was signed into law, (Kimmel, 2011, p.8). The Act was passed in order to incorporate government legislation which would combat against the misrepresentation and false financial statures such companies presented to their investors, causing public scrutiny and a loss of confidence in the United States’ securities markets, (Sarbanes, 2012). Prior to the enactment of SOX, auditing firms were self-regulated, (Hollingsworth, 2012). Investors depended upon the auditing firms to provide accurate financial information regarding the financial stability of publicly traded companies in order to determine where to buy stock and otherwise invest their money. Often the same auditing firms who provided accounting audits also provided consulting and other work for the same companies they were auditing.
This conflict of interest should have at the least caused concern within organizations regarding the possible perception of wrongdoing, but nonetheless was found to be a standard practice. Prior to the enactment of Sarbanes-Oxley, companies like Enron, an American energy company based in Houston, Texas, were able to use their accounting audit firms (in Enron’s case, the Arthur Andersen LLP) to mislead the Board of Directors by falsifying financial information. Chief Financial Officer, Andrew Fastow, and other company executives, pressured the Arthur Anderson firm into withholding information that the Enron shareholder’s had lost nearly eleven billion dollars when Enron’s stock price plummeted in November 2001, (Called, 2012).
Due to public outcry against large corporate greed and distrust, culminating primarily from the Enron, WorldCom, and Tyco corporate scandals, and in an effort to improve the economy, Congress decided to take action. Senator Paul Sarbanes and Representative Michael Oxley drafted the Sarbanes-Oxley Act of 2002, with the intent of protecting investors by improving accounting measures of organizations, (Corporation, 2012). Improving the accuracy and reliability of corporate disclosures, including those provided based on securities laws, was the primary focus. The authors were determined to make sure the law would be passed and would quickly have a powerful and positive impact on accounting processes for all corporations. The legislation was enacted on July 29, 2002, and is also known in the Senate as the “Public Company Accounting Reform and Investor Protection Act” or as “Corporate and Auditing Accountability and Responsibility Act” in the House of Representatives, (Sarbanes, 2012).
The Sarbanes-Oxley Act of 2002 comprised of eleven sections. The most important sections included Sec. 201, which prohibited certain activities for auditors, including providing services such as bookkeeping (other than related to the accounting requirements of financial statements for auditing purposes); Sec. 302, which placed corporate responsibility for financial reports on the signing officers; Sec. 404, which required management assessment of internal controls; and Sec. 802, which placed criminal penalties for altering documentation, (Sarbanes, 2012). The Sec. 802 explicitly directs that anyone who knowingly alters, destroys, conceals, falsifies or covers up records or financial documents