The needs and implications of the Sarbanes-Oxley Act of 2002

Essay by KrezayUniversity, Bachelor's February 2004

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The needs and implications of the



The Enrons and Worldcoms made it clear that the financial markets cannot be left under the tutelage of corporate directors and officers, without oversight authority. The corporate abuses and fraud that Enron exemplified, while not a first in the financial markets, they were certainly a first in terms of the magnitude of the losses to stockholders and the confidence the public reposed in the financial sector (Bequai 2003).

The allegation against Enron was that it "used special purpose vehicles for $8.5 billion of deals to hide real level of debt" (Student Accountant 2002, p.9). WorldCom was alleged to have "treated over £3.8 billion revenue costs - network maintenance - as capital expenditure to inflate profits". Also, "Loans of $2.5 billion were misreported" (Student Accountant 2002, p.9).

Both companies came under criminal investigation, went bankrupt - WorldCom being the biggest ever bankruptcy - and the auditor for both companies (Anderson) was convicted for obstruction of justice.

The Sarbanes Oxley Act of 2002 was instigated as a direct result of the Enron, WorldCom and other accounting scandals in the US. It does not affect UK companies unless they are subsidiaries of US firms or are listed on US stock exchanges.

The act combines bills originally drafted by US senator Paul Sarbanes and Congressman Michael Oxley. It is designed to enforce corporate accountability through new requirements, backed by stiff penalties. Under the Act, Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) must personally certify the accuracy of financial statements, with a maximum penalty of 20 years in jail and a $5m fine for false statements (It Week 2003)

President George W. Bush signed the Act on 30 July 2002 (the Enactment Date). This landmark legislation and the resulting regulations, will...