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The Sarbanese Oxley Act And Its Importance In Business

1261 words - 6 pages

If corporate America learned anything in 2001, it was that looks can be deceiving- and also financial statements. In early 2001, Enron was highly regarded as one of the most competitive energy companies in its sector. By December of 2001, Enron collapsed; filing for bankruptcy and eventually losing it’s investors over sixty-three billion dollars, and not to mention the loss of thousands of employee pensions and/or 401 K. This gigantic fallout of Enron was a result of a series of fraudulent transactions stemming to falsifying financial documentation. Unfortunately for the US public and investors, Enron was not acting alone; many companies were found to taking part in similar ...view middle of the document...

History of the Act
When President Bush signed Sarbanes-Oxley into law in 2002, he was quoted saying “it is one of the most far reaching reforms of American business practices since Franklin Roosevelt was president” Moreover, Bush went on to conclude that “free markets are not a jungle in which only the unscrupulous survive, nor a financial free for all guided by only greed” (New York Times). The above quotes by President Bush essentially highlight the problems of corporate business in America in the early 2000s; businesses were more concerned with making fast profits, than with ethics, responsibility and integrity. In a nutshell, the early 2000’s corporate business environment was plagued with unethical business practices fueled by greed.
According to, the Intent of Sarbanes-Oxley act was to “protect investors by improving the accuracy and reliability of corporate disclosures to securities laws, and other purposes”. Sarbanes-Oxley created a new set of accountability requirements and new harsh penalties for failing to comply with SOX. Essentially, Sarbanes-Oxley forces top company executives to interact one-on-one with corporate auditors. As a result, top-level executives no longer can cry “negligence” when being faced with financial scandals. outlines the SOX requirements for public companies to comply with; provides 6 objectives in which Sarbanes-Oxley seeks attend to: 1. To ensure that auditors remain independent; 2. Corporations and auditors are accountable to the public for the numbers they publish; 3. An independent body governs financial reporting processes; 4. Sufficient measures are in place to deter fraudulent activity; 5. Financial activities are transparent enough to allow fraud detection to occur; 6. If fraud is detected, someone is held responsible.
Without question, the need for implementing Sarbanes-Oxley is a result of a market failure, which defined by Dr. Jasso is “a circumstance in which the pursuit of private interest does not lead to an efficient use of society’s resources/distribution of society’s goods…Enron embodies a market failure under” (3, Jasso). The quote by Dr. Jasso immensely describes the market failure through Enron- in which the company did not efficiently use their resources. The result of the market failure preceding Sarbanes-Oxley was a devastating blow to the American economy- including severe stakeholder losses and a shaken investor confidence. Dr. Jasso states again that “when the market fails, society looks to government for its ability to create laws and allocate resources” (4, Jasso). In the case of Sarbanes-Oxley, I believe that it was the consumer investor confidence in which the government sought to restore, by taking action to eliminate unethical behavior in the corporate world.
If any statistic can shed light on the drastic...

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