The Sarbanes Oxley Act Of 2002

2042 Words9 Pages
Introduction
The Sarbanes-Oxley Act of 2002 (SOX) was enacted on July 30, 2002 as a result of a series of corporate fraud scandals that shook the world and devastated investor confidence.
Expand

History of the Act The Sarbanes-Oxley Act was enacted primarily to address a multitude of corporate scandals. The largest and most infamous scandal was from an energy company named Enron. Enron was the 7th largest company in 2001 and by the end of 2002 it was bankrupt. The company was found to be falsifying the books in order to appear to generate profit. The company fabricated partnerships with multiple non-existent companies to hide their losses and generate fictitious revenue. Enron, however, could not keep the façade from the public eyes.
…show more content…
The agencies not only discovered the complex web of fictitious partnerships that hid Enron’s massive debt but also that the company’s external accounting firm, Arthur Anderson, was creating materially false and misleading audit reports. . The true nature of Enron’s massive financial losses was shown to the public and the stock price plunged, causing investors to lose billions of dollars. Enron, however, was just the first and largest scandal to become public. Numerous companies including Tyco, WorldCom, and Kmart were found to have inflated earnings (Martin & Combs, 2010, 103). Investors had been manipulated to invest into companies that followed unethical business practice thereby shattering future investor confidence. The widespread losses and blatant disregard for the public prompted politician to step in and enact the Sarbanes-Oxley Act in June of 2002 to help address this market failure. “In the domain of economics and public policy, Enron represents a market failure under the theory of information asymmetry” in a free market (Jasso, 2009, 4). The government was forced to create mandatory regulations to help prevent future fraud because the market, under its own free will, failed to promote a healthy and competitive market. The act’s purpose has three specific principal objectives to address. The first objective was to create corporate
Get Access