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The Enron scandal that prompted the Sarbanes
Enron and Sarbanes Oxley Act of 2002
Enron and Sarbanes Oxley Act of 2002
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Recommended: The Enron scandal that prompted the Sarbanes
Background George W. Bush called the SOX Act “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt”. It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped. Introduction Sarbanes-Oxley Act, which contains 11 sections, was originally created by Senator Paul Sarbanes and Representative Michael Oxley in response to the several exposed accounting scandals, including WorldCom and Enron as the most prominent examples. As a result of these accounting scandals being exposed one after another, the confidence that investors had put in the capital markets collapsed overnight along with those companies that engaged in huge frauds. Sarbanes-Oxley Act of 2002 had been passed to redeem the reputation of the markets. With its stated purpose, which is “to protect investors by improving the accuracy and reliability of corporate disclosures,” SOX Act came into effect in 2004. However, the deadlines of compliance have been extended several times due to the significant costs incurred by companies’ compliance of the SOX Act. In addition to the dollar amount required to spend, another real cost that cannot be ignored. As stated by Peter Bible, the CAO of General Motors Corp, “having ... ... middle of paper ... ...nd benefits of Sarbanes-Oxley. Retrieved from Forbes: http://www.forbes.com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-benefits-of-sarbanes-oxley/ Hunter, B. (2007, March 7). PUNISHING THE INNOCENT: THE SARBANES-OXLEY ACT. Retrieved from FEE: http://www.fee.org/the_freeman/detail/punishing-the-innocent-the-sarbanes-oxley-act#axzz2t89PTgDu Jagan Krishnan, D. V. (2008, May). Costs to Comply with SOX. Auditing:A Journal of Practice& Theory, pp. 169-186. Miller. (2006, February 20). Cost of Sarbanes-Oxley driving companies into the dark. Philadelphia Business Journal. RITTER, H.-C. C. (2000, June). The Seven Percent Solution. The Journal of Finance, pp. 1106-1131. SEC. (2008, December 16). SEC Survey Regarding Costs and Benefits of Rules Implementing Section 404 of the Sarbanes-Oxley Act. Retrieved from US Securities and Exchange Commission: http://www.sec.gov
Arens, Alvin A., Elder, Randall J., and Beasley, Mark S. (2012). Auditing and Assurance Services:
Most of Scrushy’s alleged misconduct occurred prior to the enactment of Sarbanes-Oxley (SOX). To sum...
The Sarbanes-Oxley Act of 2002 (SOX) was named after Senator Paul Sarbanes and Michael Oxley. The Act has 11 titles and there are about six areas that are considered very important. (Sox, 2006) The Sarbanes-Oxley Act of 2002 made publicly traded United States companies create internal controls. The SOX act is mandatory, all companies must comply. These controls maybe costly, but they have indentified areas within companies that need to be protected. It also showed some companies areas that had unnecessary repeated practices. It has given investors a sense of confidence in companies that have complied with the SOX act.
The requirements of SOX from inception consist of 11 sections, SOX legislated, among others enhanced financial reporting, officer’s individual responsibilities for the accuracy of corporate financial reports, the oversight body, PCAOB, to regulate public accounting companies in their capacity as external auditors. Public companies were given until December 2004 to
During the progressive era, both Roosevelt and Wilson put in great effort to defend smaller businesses. Theodore Roosevelt’s policy of prosecuting monopolies, or “trusts,” that violated federal antitrust laws was known as “Trust-Busting.” This forced industrialists and monopolistic corporations to consider public opinion when making business decisions, which benefited the consumer and helped grow the economy. One way that Wilson and Roosevelt tried protecting these smaller businesses was by removing trusts that were much bigger than they were. Under Wilson’s authority in 1814, the Clayton Anti- Trust Act was passed, which abolished interlocking directorates. This law was passed as an amendment to clarify and supplement the Sherman Antitrust Act of 1890. When Roosevelt became president in 1901, he demanded a “Square Deal” that would address his principal concerns for the era- the three C’s: control of corporations, consum...
Siegel, P. H., Franz, D. P., & O'Shaughnessy, J. (January 01, 2010). The Sarbanes-Oxley Act: A Cost-Benefit Analysis Using The U.S. Banking Industry. Journal of Applied Business Research, 26, 1.)
A possible flaw of Sarbanes-Oxley is it failed to put up any resistance in thwarting the financial crisis. While the degree to which fraudulent behavior can be traced to the roots of the Great Panic of 2007 will likely be up for eternal debate, it might be telling that Sarbanes-Oxley effectively did nothing. It seems this could indicate that stronger incentives for whistleblowers (such as Dodd-Frank and perhaps other whistleblower protection regimes) are very necessary given the extreme social costs. This conclusion may be hasty, however, given the short time period between the enactment of Sarbanes-Oxley and the crash. Not only is the status of Sarbanes-Oxley still in flux over a decade later, but one has to consider the substantial learning and switching costs associated with a regime with such a substantial ruach. Certainly, this is not to say that additional protections may in fact be necessary given the putative reluctance of lawyers to report fraud, but Sarbanes-Oxley likely needed more time to really crystalize and provide some level of predictability before it can be declared a bust.
In 2002, Congress passed the Sarbanes-Oxley Act (SOX) to strengthen corporate governance and restore investor confidence. The act’s most important provision, §404, requires management and independent auditors to evaluate annually a firm’s internal financial-reporting controls. In addition, SOX tightens disclosure rules, requires management to certify the firm’s periodic reports, strengthens boards’ independence and financial-literacy requirements, and raises auditor-independence standards.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
The Act of Sarbanes Oxley of 2002 was enacted in July 30, 2002. This reform is designed to cover all public company boards, management and public accounting firm.
Henning, P. (2013, February 25). The challenge of sentencing white-collar defendants. New York Times. Retrieved from http://dealbook.nytimes.com/2013/02/25/the-challenge-of-sentencing-white-collar-defendants
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Sarbanes-Oxley Act of 2002 (SOX), Pub. L. No. 107-204, 116 Stat. 745 (codified as amended in scattered sections of 15 U.S.C.)
Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA.