Sarbanes-Oxley Act: An Overview

In 2001 and 2002, an increase of corporate financial scandals shocked the public and resulted in a deep examination of how business in the US was being conducted. Enron became the largest bankruptcy in US history, and the meltdown resulted in the loss of over 21,000 jobs and the disappearance of over $1.2 billion in employee savings. Enron’s financial scandal also brought down one of the world’s oldest and most prestigious audit firms, Arthur Andersen, which was found to have aided the Enron fraud. Even more shocking, Enron held the title of largest bankruptcy in US history for less than 8 months. WorldCom, a communications firm, filed for bankruptcy after a series of financial scandals of its own were uncovered. Investor safeguards that had been taken for granted, like the independence of auditors and the loyalty of top executives suddenly came under serious question. The never-ending restatements of financial reports, the fall of large companies, and the loss of trillions of dollars in shareholder value caused a widespread lack of faith among investors. In order to restore investor confidence, Congress moved quickly to pass legislation that sought to address the reasons why the public no longer trusted businesses. The Sarbanes-Oxley Act of 2002 was created as a direct reaction to these scandals. This law attempts to ensure that the wrongdoing of the last several years will not recur. It represents the most comprehensive changes to how companies govern themselves since the Great Depression.