Why the Sarbanes-Oxley Act Was Created?

Why the Sarbanes-Oxley was created

In response to several companies fraudulent activities which included publishing false or deceptive financial records that jacked up their stock prices. Sad to note that it was not just one company but several, such as Enron, Global Crossing and Xerox which are larger companies. Not long after over a thousand companies restated their financial statements, costing over 6 trillion in stock market value disappearing. Investors became wary of whom to invest with, in that would their money be secure? These illegal operations had a very strong effect on the investing and marketing of stocks.

There are several theories of the Enron collapse, main factor was Arthur Anderson. Some will say it was the lack of regulations during the Bush administration, human greed or that the company just did not understand what was being done? Others say that Enron had to be the best of the best, so when the company was not performing well, they started to tamper with their accounting books so that the company on books looked financially stable. The directors are said not to have been doing their job by auditing the books just signing off on them. No one thought to protect the employees or investors. And who was going to question when a company's profits are increasing and investors are getting rich?

The public and investors are more hesitant over the last several years to believe what analysts are selling. This will probably be a factor until the trust is earned back. Some are unsure of the interests the analysts may have in what stocks they are selling. The more bullish an analyst tends to come across as to the public, the less likely they would be believed for their recommendations.

Many recommendations have been made that consulting and auditing services should not be owned within the same company. This can keep many from practicing illegal accounting methods. That regulations should be stricter and that for whistleblowers to have protection for the information they provide. These companies must know they are being watched and turned in for not practicing ethical accounting methods.

The stock option system was not the cause of Enron's collapse; however the excessive stock options and corporate compensation were major factors in the demise of Enron. This allowed corporate executives to manipulate the financial records and the prices of their stock. From all the illegal activity has done damage to the United States economy, it is still believed though that will not hold up the recession the economy is in. Though it may still depress some companies stock prices for a while, however in time that too will recovery with the behavior of these other companies to maintain ethical standards.

Overall the Sarbanes-Oxley has had a positive effect, companies now there are tougher regulations to follow. Not that this will stop all the illegal activity, but