Final Research Paper
SARBANES-OXLEY
ACT
Breetz, Bailey
Professor Ninger
Finance 335
Colorado Mountain College
22 April 2018
Sarbanes-Oxley Act
1
The Sarbanes-Oxley Act of 2002, also known as the “Public Company Accounting
Reform and Investor Protection Act”, and SOX for short, completely altered the way that
corporations regulated their finances and corporate governance. The act was passed in an effort
the protect investors from the possibility of fraudulent and unethical accounting methods by
corporations (Investopia). In the early 2000s, there was no shortage of accounting scandals, one
of the most known scandals involved the company, Enron. These scandals changed the way that
society viewed corporations and lowered investor sentiment. The Sarbanes-Oxley Act introduced
new regulatory measures to prevent future scandals (Investopia). The Sarbanes-Oxley Act of
2002 states, it is an act “To protect investors by improving the accuracy and reliability of
corporate disclosures made pursuant to the securities laws, and for other purposes” (United
States Congress). The Sarbanes-Oxley Act was created to help restore faith in the public eye of
these large corporations. This act has left a major impact on corporate America and to understand
this impact it is important to understand the events that led up to SOX, the key provisions and
modifications of SOX, the many advantages and disadvantages of SOX, and the stance the
government took involving corporate financial fraud.
Since as early as 1866, corporate regulation has been a debated topic. It was in 1866
when it was decided that corporations would have the same rights as people, but lacking the
social responsibility or obligations that typically went along with those rights. It was these
decisions that slowly led to a change in the corporate world. Michael Holt, the author of The
Sarbanes-Oxley Act: Costs, Benefit and Business Impacts, stated, “And so began the change
from people controlling corporations to corporations controlling people” (Holt 3). Now, fast
forward to the start of the 21st century, corporations held more power and control than ever
before. Senior executives were no longer “the product of their shareholders’ wishes”, they were
Sarbanes-Oxley Act
2
solely doing what they thought should be done (Holt 3). These senior executives were now in the
driver’s seat deciding the directions for the company, assuming they were returning a profit for
the company and the shareholders. The problem was when the executives made decisions that
did not return a profit, instead of sharing this information with board members and shareholders,
the executives would hide the data and information. Top executives did not want to risk their
power of decision making. This mindset and logic is what led to many accounting scandals,
including the downfall of corporations such as; Enron, Global Crossing, and World Com (Holt
4).
Let’s dial in on the Enron scandal, as many people believe it is what set the stage for the
Sarbanes-Oxley Act. Deakin and Konzelmann, both researchers’ state, “In many respects,
Sarbanes-Oxley is a mirror image of Enron: the company’s perceived corporate governance
failings are matched virtually point for point in the principal provisions of the act” (Deakin and
Konzelmann 134). The moment Enron stopped working by their code of ethics, the state of their
company began to go downhill. Enron’s demise had begun long before investors and
shareholders knew, due to the company’s accounting method that was in place. At the time,
Enron was using an accounting system known as “mark to market” accounting. This system
would record projected profits in the books before any money was actually made from the asset.
If the company’s profit was less than the recorded value, these assets would be transferred to an
off-the books’ corporation, which meant Enron’s losses were going unreported and they
appeared to be more profitable than they truly were. Before this scandal, investors and
stakeholders were somewhat naïve to what went on behind the closed doors of these major
corporations, because in there was no reason to question them.
Sarbanes-Oxley Act
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The Enron scandal and other scandals alike were a genuine wakeup call to corporate
America, which directly lead to increased corporate regulation enforced by the Sarbanes Oxley
Act. When President Bush signed this act into law in 2002, he had the following comments:
….and now with a tough new law we will act against those who have shaken confidence
in our markets, using the full authority of the government to expose corruption, punish
wrongdoers and defend the rights and interests of American workers and investors. …..
And this law says to every American: there will not be a different ethical standard for
corporate America than the standard that applies to everyone else. The honesty you
expect in your small business, or in your workplaces, in your community or in your
home, will be expected and enforced in every corporate suite in this country. (Holt 5)
