Term Paper on "Sarbanes-Oxley Act Prior to the Enactment"

Term Paper 4 pages (1199 words) Sources: 3 Style: MLA

[EXCERPT] . . . .

Sarbanes-Oxley Act

Prior to the enactment of the Sarbanes-Oxley Act (SOX) several large corporate accounting scandals had plagued corporate America. Of these, the most publicized were Enron, WorldCom and Tyco. These events rocked the financial world to the core, shaking investor confidence, and highlighting several significant problems in the accounting industry. In response, SOX was created to put tighter controls on public corporations, with the creation of the Public Company Accounting Oversight Board (PCAOB) and covering issues including: corporate governance, auditor independence, internal controls, and enhanced financial disclosure.

The Events Leading up to Sarbanes-Oxley:

The Enron Corporation scandal revealed fraudulent accounting procedures that caused the company's stock to plummet and forced the company into bankruptcy. The fallout from this negatively affected everyone from employees to investors to the investment world in general, as confidence in corporate America was damaged.

Yet, as Lucci notes, the damage didn't just end with Enron. "Financial scandals involving WorldCom, Qwest, Global Crossing, Tyco, and Enron ultimately cost shareholders $460 billion."

Because of these scandals, companies were forced to change the way they did business, to restore investor confidence. Organizations found themselves spending additional money on annual financial reviews, as opposed to the previous trend of keeping audit costs low.

Companies desperate to prove their financial worth and integrity began to go beyond the new legal requirements and set internal control standards more stringent than ever before (Lucci).

The accounting profession, as a whole, had suffered a blow to their credibility. With leading auditing firms, like Arthur Andersen, coming to their end thanks to their part in the Enron scandal, it cast a black cloud over the entire industry (Lucci).

With investor trust in corporations at a significant low, and the industry charged with financial reporting, an investor watchdog of sorts, under question, something had to be done.

Congress responded with the enactment of SOX, in 2002.

As Lucci states, SOX "has been called 'the most significant legislation governing U.S. securities markets since the 1930s'." In an uncommon feat of congressional agility, SOX became law a short seven months after Enron's filing for bankruptcy.

Introduced into Congress in July 2002, it was signed into law by the President by the end of the same month.

SOX Overview:

SOX was created to "crack (...) down on all the Enron - WorldCom - Global Crossing chicanery" (qtd. Lucci) and set stiff criminal penalties for violators of its provisions.

Although created to restore investor confidence, SOX also but corporate executives on notice. Penalties for violating SOX include: lengthy prison sentences and significant fines, if there are discrepancies found in their financial records, indicating fraud, following certification ("H.R. 3763").

There were many significant regulatory changes, with the enactment of SOX, for public corporations operating in America. With its passing, SOX now sets corporate governance as partially a function of federal legislation, removing it from the province of state legislatures.

In addition, Lucci surmises that SOX also greatly impacted the accounting and legal professions. Prior to SOX, the accounting profession enjoyed the freedom of self-regulation and the legal profession would now be required to make 'noisy withdrawals' when corporate executives left accounting errors uncorrected, as opposed to their previous life of client privilege.

Provisions of SOX:

There are fifteen major provisions, in SOX, according to Collins. These address a variety of areas. Companies are required to maintain detailed financial records. All audit or review work papers must be kept for five years, with auditors required to keep documentation for seven years. It is a felony should documents be destroyed in a federal or bankruptcy investigation, the penalty being up to… READ MORE

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