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The Sarbanes-Oxley Act of 2002 - Essay Example

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A series of highly publicized accounting scandals, such as those involving Enron and WorldCom, generated such a fierce backlash that Congress felt compelled to draft legislation to prevent such scandals from recurring. This legislation is now known as the Sarbanes-Oxley Act of 2002 or the Public Company Accounting Reform and Investor Protection Act of 2002 (hereinafter referred to as the "Act")…
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The Sarbanes-Oxley Act of 2002
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Download file to see previous pages Some scholars have argued that this legislative framework is too intrusive, that corporate fraud ought to be managed through market mechanisms rather than intrusive governmental agencies, and that the Act is more political than helpful (Ribstein, 2005). Other scholars concede the intrusive effects of the Act, but argue instead that the main policy objectives, such as curtailing corporate fraud and improving transparency, are enhanced by the Act (Cunningham, 2003). This essay will argue that, given the nature and the scale of the scandals that have occurred in the absence of such legislation, corporations ought to be compelled to comply with the Act; in order to more fully develop this thesis, this essay will present the type of abuse which led to the legislation, an overview of the main provisions of the Act, and an analysis of the conflicting opinions regarding the efficacy of the Act.
In the Enron case, a major employer that was deemed financially stable and a model of sound business practices collapsed suddenly and dramatically. This was a company with billions in annual revenues, well-respected by a broad spectrum of the public, and politically well-connected. Its collapse was subsequently described as the result of deliberate and conscious decisions, by both Enron's management and by its outside accounting firm, to engage in accounting fraud (Fox, 2003). In short, corporate liabilities were understated or hidden and corporate assets were inflated or misrepresented. The public had been lied to, the investors had been lied to, and a great many people were injured when the company was finally forced into bankruptcy. A similar case involved WorldCom, at one time the second most significant long-distance telephone service provider in the United States, which engaged in fraudulent accounting practices in order to misrepresent its true financial condition to banks, creditors, and other investors (Jeter, 2003). This didn't merely involve creative accounting; quite the contrary, WorldCom entered fictional transactions into its accounting records. When the weakened financial structure could no longer be hidden, the company filed for one of the largest bankruptcy cases in America history. In the final analysis, both of these cases illustrate the types of problems that the Act was designed to minimize.
1.2 An Overview of the Sarbanes-Oxley Act of 2002
As a preliminary matter, the most significant feature of the Act was its creation of a governmental agency to oversee corporate accounting and financial practices. This agency is now known as the Public Company Accounting Oversight Board. The focus is on publicly traded companies, rather than privately held forms of business organization, and the scope of the agency's power is broad. It is vested with rulemaking authority, with disciplinary powers, and with enforcement authority. In short, this agency is possessed of the same powers as the United States government-legislative, judicial, and executive-with respect to the accounting practices of public companies. Thus, it can be argued that the legislation has created a private government for public companies.
An examination of the particular provisions of the Act further demonstrates the ...Download file to see next pagesRead More
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