In 2002, the Sarbanes-Oxley Act of 2002 was signed into law, which require accounting reforms to increase corporate responsibility, financial disclosures and dissolve corporate accounting fraud. The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB), which regulates the auditing of public companies and the effectiveness of those audits. The Sarbanes-Oxley Act (SOX) contains requirements affecting the corporate control, auditing, and financial reporting of public companies, including requirements meant to deter and punish accounting fraud and dishonesty. For example, chief financial officers (CFOs) and auditors are now responsible for the accuracy of financial statements, public company internal controls are to be audited, changes in financial conditions and operations are to be disclosed, and public companies are required to annually report to the Securities and Exchange Commission. (Commission, 2006)
The Securities and Exchange Commission (SEC) requires that public companies file accurate information, but the SEC does not assure that financial records are complete, accurate, or that the securities offered by public companies have any value. The SOX is an extension of The Securities Act of 1933, which has two requirements: 1) investors must receive financial information relating to securities offered for public sale, and 2) securities must not be fraudulent or misleading to investors. (Securities Act of 1933, 2012) In addition to The Securities Act of 1933, SOX requires an independent certified public accountant (CPA) prepare comprehensive financial statements publically traded companies. In addition, SOX prohibits fraud and misrepresentation in the sale of publically traded securities.
In order to verify regulations and public company compliance, the SEC created rules, which every publically traded company must comply. For instance, all public companies must register with the SEC by filling out a 10-K form, which includes company’s information such as organizational structure, equities, and subsidiaries. In addition, publically traded companies must file an annual report with the SEC to ensure up-to-date information is provided on company financial and managerial conditions. (Securities Act of 1933, 2012)
After Enron and WorldCom, faith in public accounting and investing was...