Sarbanes-Oxley Act
Introduction
Sarbanes-Oxley (also known as Public Company Accounting Reform and Investor Protection Act of 2002) is not the first act of its kind. The 1920’s was the first time the general public began to purchase stocks-before then the stock market was a rich person’s game. The average investor was uninformed and uneducated, which lead to wild manipulation of stock prices by speculators. The end result was that $50 billion of new securities issued during that time had become worthless, causing the crash of the stock market and the loss of many people’s life savings, eventually leading to the great depression. This lead to one of the most significant regulatory acts passed in the United States-Securities and Exchange act of 1934 (which first introduced the Securities and Exchange Commission-the SEC-that we know of today).
Leading up to the 1990’s, there was a growing concern on the quality of corporate financial accounting. This concern was fueled during the 1990’s when many accounting irregularities had been occurring, causing many companies to restate their financial statements up to as much as $3.5 billion. Earnings management was a part of this problem. Although the Securities and Exchange act of 1934 required firms to have outside auditors audit their financial statements, these auditors would earn several times in consulting fees what they would for audit fees, causing auditors to look the other way on questionable accounting practices. This is what led to the Enron scandal. Enron set up several off-balance sheet partnerships to hide the debt of the company, and make it look more profitable. It eventually declared bankruptcy in 2001.
Even though it was known action needed to be taken, republicans and democrats were split on t ...