Sarbanes Oxley Case Study

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Sarbanes Oxley:
Which Aspect Has Been Most Effective in Restoring Investor Confidence?
Since its passage on July 30, 2002, Sarbanes-Oxley has been one of the most controversial, debated legislations in American history. As a response to a plague of financial crises and fraudulent accounting such as Enron and WorldCom, SOX was implemented to restore the public’s shaken confidence in financial reporting and capital markets by implementing extensive changes in the business sector. Almost 12 years later, individuals are still analyzing, questioning and criticizing its effectiveness. Has SOX really increased investor confidence and in particular, which aspects have been most instrumental in doing so?
Enactment of Sarbanes-Oxley
We have all heard of Enron and WorldCom- two of the biggest accounting scandals known to date. Enron’s use of off-balance-sheet financing allowed them to keep risky investments off of their balance sheet, misleading investors as to their true financial health, or lack thereof. Chris Seabury, a writer at Investopedia, describes the nature of Enron’s off-balance-sheet financing:
The company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though it hadn’t made one dime from it. If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer these assets to an off-the-books corporation, where the loss would go unreported. This type of accounting created the attitude that the company did not need profits, and that, by using the mark-to-market method, Enron could basically write off any loss without hurting the company’s bottom line (Seabury).
WorldCom’s preferred methods of fraud were to c...

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... that every auditor and audit firm is corrupt- far from it- but SOX and the PCAOB have begun the process of sifting through the ones that are and putting a stop to them. The profession needed to be put in check and reminded of what they are here for- not for their clients, not for themselves, but for the public, for the investors who make decisions based on their attestation and assurance services.
Investors and the general public lost their life savings, their jobs, and confidence in capital markets because some auditors and firms lost their way. This can and should not happen, especially when the purpose of an audit is to protect the public, not harm it. It is not fair to them and should not be tolerated. Auditors and firms should get back to the roots and values of the profession- honesty, integrity and the public trust. SOX and the PCAOB will help us get there.

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