Sarbanes-Oxley Act of 2002 and Regulatory Environment

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Sarbanes-Oxley Act of 2002 and Regulatory Environment

Comparative and Ratio Analysis

Accounting (ACC) 561

March 15, 2016

Sarbanes-Oxley Act of 2002 and Regulatory Environment

Today we continue to witness manycorporate accounting scandals, some examples include: Waste Management (1998), Enron (2001), WorldCom (2002), Freddie Mac (2003), and AIG (2005) and the list goes on. The scandals includetop executives conducting massive fraud that led to financially destroyinginvestors as well as thefirm’s hard working employees. In order to counter thesedeceptive practices, the government introduced regulatory initiatives to ensure corporate integrity and practices.The Securities Exchange Commission (SEC) and Sarbanes-Oxley (SOX) Act of 2002 are the two main government regulatory systemswhich I will further discuss.  Additionally, I will describes the main regulatory environment aspects which will protect the public from fraud within corporations and evaluate whether SOX will be effective in avoiding future frauds.

The US Securities Exchange Commission (SEC)

The primary “mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public’s trust (US Securities and Exchange Commission, 2016).”The SEC was first established in 1934 and former President Franklin D. Roosevelt appointed John P. Kennedy (JFK’s Father) as the first SEC chairman.SEC establishment was critical following the 1929 market crash and the great depression to restore investor confidence as well as order in the US markets. In recent years SEC was effective intervening in many corporate scandals. For example, before Enron’s (large energy company) downfall in 2001, Enron waslisted in the Fortune 500’s top ten and was ranked the world’s sixth largest energy firm. Following the SEC investigation, “top Enron executives were tried (later found guilty) for fraud after it was revealed in November 2001 that Enron’s earnings had been overstated by several hundred million dollars (CNN Library, 2015). Below is the chart depicting the key time from Enron scandal.

Without the SEC existence and involvement, I assess that the Enron situation and other corporate scandals would have been much worse. However, learning from the Enron and other similar cases, we can see that the companies continue to conduct fraudulent activities despite having SEC. Following Enron disaster, I believe the government was influenced to establish the Sarbanes-Oxley Act of 2002. Next I will discuss Sarbanes-Oxley Act of 2002 andmeasure whether SOX will be effective in avoiding future frauds.

Sarbanes-Oxley (SOX) Act of 2002

The Sarbanes-Oxley Act is named after Senator Sarbanes and Representative Oxley and was implemented in 2002 to introduce significant alterations to the financial regulation practice and corporate operations. “The Sarbanes-Oxley Act is mandatory. All organizations large or small, must comply (The Sarbanes-Oxley Act 2002, 2006). According to multiple sources, SOX well known for targeting twokey investor protection areas such as: “(1) CEO and CFO responsibility and accountability for all financial disclosures and related controls; (2) increased professionalism and engagement on the part of corporate audit committees. Yet some continue to question its overall value, citing, as an example, its failure to prevent the situations that led to the financial crisis of 2008 (Verschoor, Curtis C.,2012).” Following the SOX implementation, many top corporate executives became alarmed that they pushed for examining their company’s weakness to ensure SOX compliance.As each business and audit isdissimilar, a universal checklist for SOX compliance may not be practical, but below is a sample checklist from Black Stratus that they use to ensure compliance (Murphey, 2015):

Next I will discuss if SOX implementation was effective in in avoiding future frauds.

Initially, government created the SOX Act with a good intention of protecting investors, enhancing corporate financial reporting transparency and to have internal financial audit process. However, I think the SOX Act is not meeting the intended expectations. A question we have to consider: Was there additional corporate accounting scandals following Enron incident and SOX Act implementation in July 30, 2002? According to “Accounting Degree,” there were at least eight events similar to Enron. These episodes include Health South (2003), Freddie Mac (2003),AIG (2005), and Lehman Brothers (2008) just to name the few.See below for a brief overview chart for each scandal from Accounting Degree:

Despite SOX Act establishment as well as having SEC in place, these scandals continue indicating SOX Act was not effective as intended. When researching these scandals, we continue to see corporate fraud and greed “helping give birth to global recession and movement to occupy the Wall Street (Accounting, 2016). US Vermont Senator Bernie Sanders warned and stated in 2002 that “There is a cancer eating away at the heart of corporate America and its name is “greed.” It is becoming increasingly apparent that many large corporations will do anything, legal or otherwise, to fatten the already huge compensation packages of their CEOs (Sanders, 2002).” Today many people will argue that Bernie Sanders was right and having multiple security regulatory in the US, the trend indicates corporate accounting scandals will continue, I assess this is largely due to corporate’s and the greed of executives, and failure to change.

John D. Rockefeller (Oil Tycoon and American billionaire) once quoted when asked by a reporter “How much money is enough?” He responded, “Just a little bit more (Starwinar, 2016).”

Despite having SEC and the implantation of SOX Act in 2002, corporate accounting scandals, list of corporate scandals continues that’s financially crumbling investors as well as thecompany’s hard working Americanemployees. In addition, the recent trends suggest that we will continue to experience corporate fraud and scandals due to greed. Therefore, I think it is fair to question if the US government can do more to end or significantly limit these corporate accounting scandals. I believe we need a significant improvement or additional regulatory to ensure we protect the investors and the American people.


Accounting Degree (2016).The 10 Worst Corporate Accounting Scandals. Retrieved from:

CNN Library (2015). Enron Fast Facts. Retrieved from:

Kimmel (2010-2016). Accounting. 4th Edition. Wiley Plus. Retrieved from:

Murphey, Rich (2015). SOX Compliance: Comprehensive Overview. Retrieved from:

Sanders, Bernie (2002).Sanders Scoop Newsletter.Greed, Greed, and More Greed. Retrieved from:

Starwinar, (2016).Just a Little Bit More. Retrieved from:

The Sarbanes-Oxley Act 2002 (2006). Retrieved from:

US Securities and Exchange Commission (2016). Retrieved from:

Verschoor, Curtis C., (2012). Has SOX Been Successful?. Retrieved from:

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