Effect of Sarbanes-Oxley Act

Chapter One - Context of the Problem

The Sarbanes-Oxley Act is also known as the "Public Company Accounting Reform and Investor Protection Act" in the Senate and the "Corporate and Auditing Accounting and Responsibility Act" in the House. It is commonly called Sarbanes-Oxley, Sarbox or SOX and will be referred to as SOX for the purposes of this research paper. Senator Paul Sarbanes and Representative Michael Oxley drafted the Act hence the name. It was enacted on July 30, 2002 by Congress and created new standards of corporate accountability as well as new penalties if wrongdoings were found. It creates accountability for CEO's and CFO's who can no longer state that they were not aware of what was going on. There are requirements for internal controls and audit firms have to attest to this requirement after examining company policies, controls and procedures. There are also rules in place requiring auditor independence and regarding other services provided by external audit firms. Prior to the Act being passed, companies did not have control, audit or reporting functions that would have complied with SOX.

The goal of the Act was to reform public company accounting rules to avoid scandals such as Enron and WorldCom. The impact of scandals such as these was world-wide and cost investors billions of dollars when the share prices of affected companies collapsed badly destroying public confidence. The demand by investors for some sort of reform was high and the Act was a way of improving confidence. The Act applies to all public companies in the United States and to any foreign companies that have listed debt or equity securities with the Securities and Exchange Commission. Many companies were biased towards listing their company on other stock exchanges after the Act was introduced and this creates its economic problems for the United States.