Sarbanes-Oxley Act of 2002

• Author: Jeffrey Lehman, Shirelle Phelps

Page 1

The Sarbanes-Oxley Act of 2002 (Public Company Accounting Reform and Investor Protection Act, Pub.L. 107-204, July 30, 2002, 116 Stat. 745, July 30, 2002) was enacted by Congress in the wake of corporate and accounting scandals that led to bankruptcies, severe stock losses, and a loss of confidence in the STOCK MARKET. The act imposes new responsibilities on corporate management and criminal sanctions on those managers who flout the law. It makes SECURITIES fraud a serious federal crime and also increases the penalties for WHITE-COLLAR CRIMES. In addition, it creates a new oversight board for the accounting profession.

During the 1990s, the stock market rose dramatically in value, fueled by the promise of the INTERNET revolution as well as large corporate MERGERS AND ACQUISITIONS. Several of that decade's changes produced severe consequences during the first years of the new century. The five major U.S. accounting firms developed consulting divisions that advised corporations on ways to maximize their profits. Their advice often clashed with the traditional auditing functions and standards of these accounting firms. At worst, the accounting firms forfeited their traditional oversight function and allowed or encouraged financial reporting practices that misled investors. On the corporate side, managers were expected to produce short-term gains on a quarterly basis to satisfy investment analysts who worked for stock brokerages. These analysts were sometimes encouraged and directed by management to tout the value of questionable stocks. Some corporate managers, who skirted or broke laws that mandated honest financial reporting, transformed the drive for profitability into a lust for personal fortune. The bubble burst when the Enron Corporation filed for BANKRUPTCY in December 2001 and the accounting firm of Arthur Andersen was convicted of OBSTRUCTION OF JUSTICE for its actions in shredding Enron-related documents. As the stock market plummeted and investor confidence waned, Congress responded. Senator Paul S. Sarbanes (D-Md.) and Representative Michael Oxley (R-Ohio) worked to enact a set of provisions that would prevent future debacles such as those that ruined Enron and Arthur Andersen. President GEORGE W. BUSH, after initially downplaying the need for reform, signed the bill into law on July 30, 2002.

Under the act, the SECURITIES AND EXCHANGE COMMISSION (SEC) has the authority to...