Sarbanes-Oxley Act of 2002

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Ibrahim 1

Policy Paper on the Sarbanes-Oxley Act of 2002 Randy Ibrahim [SID: 860866350] Business 102 December 09, 2010 Dr. Sean D. Jasso

Ibrahim 2 Table of Contents Introduction………………………………………………………………………………3 History of the Act………………………………………………………………………...4 Corporate Scandals……………………………………………………………….4 Loss of Investor Confidence……………………………………………………..4 Market Failure and Government Intervention…………………….……………..5 Why Sarbanes-Oxley was Necessary…………………………………………….5 Implementing Sarbanes-Oxley…………………………………………………………...6 Title I-XI……………………………………………………………………....6-11 Impact on Business and Society………………………………………………………...11 Impact on Business……………………………………………………………...11 Impact on Society……………………………………………………………….12 Policy Analysis………………………………………………………………………….12 Did It Work?........................................................................................................12 Strengths and Weaknesses ……………………………………………………..13 Recommendations for Future Policy Makers..…………………………………14 Conclusion……………………………………………………………………...14

Ibrahim 3 Introduction The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002, is a federal law enacted in response to corporate and accounting scandals that led to bankruptcies and severe stock losses. Corrupt corporations, particularly Enron, WorldCom and Tyco, were acting unethical by committing accounting errors and fraudulent practices by management which led to scandals in 2001. The scandals impacted investors, who lost billions of dollars when the stock prices plummeted, and the public lost confidence in the capital markets. The main supporters of the law are Representative Michael Oxley and Senator Paul Sarbanes, both who combined their respective law to form the Sarbanes-Oxley Act of 2002. The goal was to improve the accuracy and reliability of corporate disclosures. The law was quickly passed to correct the corporate scandals involving companies such as Tyco, WorldCom and Enron. The effect of the scandal weakened the stock markets which resulted in investors having low certainty and confidence. The Sarbanes-Oxley Act requires corporations to follow a strict guideline in disclosure of financial information. The law aspires for companies to conduct accounting practices with a high degree of integrity. The law contains eleven titles, which aim to strengthen financial disclosures, enhance corporate responsibility and accountability, and increases punishment for criminal fraud offenses. These eleven titles are the foundation in eliminating corporate scandals and in raising the confidence of the public. SOX is necessary in order to reform corporate ethical behavior and the main objective of this project is to chronicle the effectiveness of the policy by looking at the history of the law, trace its implementation, grasp the impact on business and society, and analyze the results.

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History of the Act
Corporate Scandals Corporations, such as WorldCom and Enron, were very successful enterprises that provided many jobs for people and had very high share prices. Enron was one of the most profitable electric companies in the world. However, Enron, as well as other corporations, had dishonest executives who lacked ethics in financial audits. The ambition for profitability was attained at the expense of the firm’s ethical values. Enron is a situation where the system failed at every step. “The executives misled everyone, the board did not catch it, and the auditing firm neglected to do their duty adequately.” (“Accounting reform and investor protection,” 2003) These poor business ethics landed high executives of Enron and Enron’s accounting firm Arthur Anderson to be charged with criminal offenses, such as financial fraud for concealing the firm’s debt and loses in accounting and financial statements. Enron and other corrupt corporations had caused enormous job losses and shareholders were affected by the decline of the share...
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