Question

Provide an in-dept overview of the history that led to the formation of SOX, Who were the persons instrumental in its formation, and what is the act?

Answer 1

ANSWER:

History that led to the formation of SARBENES-OXLEY ACT

1.The act was passed in response to a number of corporate accounting scandals that occurred in the 2000–2002 period. This act, put into place in response to widespread fraud at ENRON and other companies, set new standards for public accounting firms, corporate management, and corporate boards of directors.

2.The ENRON case:

Enron, located in Houston, (Texas), was considered one of a new breed of American companies that participated in a variety of ventures related to energy.

It bought and sold gas and oil futures, built oil refineries and power plants, and became one of the world's largest pulp and paper, gas, electricity, and communications companies before it filed for bankruptcy in 2001.

Several years before Enron’s bankruptcy, the government had deregulated the oil and gas industry to allow more competition, but deregulation also made it easier for companies to act fraudulently.

Enron, among other companies, took advantage of this situation.The various misdeeds and crimes that Enron's officers and employees committed were extensive and ongoing. Particularly damaging misrepresentations produced inflated earnings reports for shareholders, many of whom eventually suffered devastating losses when the company failed.

Many other instances of dishonesty and fraud also occurred, including embezzlement of corporate funds by Enron executives and illegal manipulations of the energy market.

3. Drafting the ACT

Persons instrumental in its formation : U.S. Senator Paul Sarbenes and U.S. Representative Michael Oxley.

The intent of SOX was to protect investors by improving the accuracy and reliability of corporate disclosures in financial statements and other documents by:

• Closing loopholes in accounting practices
• Strengthening corporate governance rules
• Increasing accountability and disclosure requirements of corporations, especially corporate executives, and corporations’ public accountants and auditors
• Increasing requirements for corporate transparency in reporting to shareholders and descriptions of financial transactions
• Strengthening whistle-blower protections and compliance monitoring
• Increasing penalties for corporate and executive malfeasance
• Authorizing the creation of the Public Company Accounting Oversight Board (PCAOB) to monitor corporate behavior further, especially in the area of accounting.

4.Critics:

Although the Sarbanes-Oxley Act of 2002 is generally credited with having reduced corporate fraud and increasing investor protections, it also has its critics.

Some analysts have negative views about the degree to which Congress has weakened the act over time by withholding funding necessary to put these reforms into motion and by passing bills that effectively counter the intent of the act.

Other critics have opposed the act because, it increases corporate costs and reduces corporate competitiveness.

THANK YOU.