On July 30, 2002, the Public Company Accounting Reform and Investor Protection Act of 2002, better known as the Sarbanes-Oxley Act, or SOX, was signed into law by then U.S. President George W. Bush. The act was implemented in reaction to a series of corporate accounting scandals seen in the U.S. during that time, including the WorldCom, Enron and Adelphia scandals.

SOX mandated strict reforms to accounting standards to improve financial disclosures from corporations and protect American investors and citizens alike from accounting fraud and corporate scandals. Prior to the passing of SOX, a myriad of issues existed in the marketplace which led to numerous scandals and bankruptcies, including the issues of: executive compensation, banking regulations, boardroom dishonesty, inappropriate regulation of auditors and analysts and the overall ineffectiveness of the Securities and Exchange Commission (SEC) due to lack of funding. By focusing on these major issues, U.S. law-makers were able to draft an act which would protect the rights of investors, corporate employees and the overall business market as a whole.

The policies which, were outlined in the Sarbanes-Oxley Act, were meant to amend and/or supplement existing legislations which dealt with securities regulation. The basic outline was as follows:

1. Establishment of a public company accounting oversight board, where public companies must now be registered
2. Strict auditor regulation and control by means of auditing committees and inspecting accounting firms
3. Heightened corporate responsibility for any fraudulent actions taken
4. Stricter disclosure within company financial statements and ethical guidelines, to which senior financial officers must adhere
5. Guidelines for analyst conflicts of interest
6. Authorities available to the Commission and the Federal Court, as well as required broker and dealer qualifications
7. Enforcement methods available for punishment of activities deemed criminal by the Act

Although securities regulation is an ongoing process that must be adapted to suit the business environment of the time, the Sarbanes-Oxley Act went a long way in ensuring the credibility of financial reporting while protecting the interests of investors and citizens alike. (To learn more, see Policing The Securities Market: An Overview Of The SEC.)

Related Articles
  1. Personal Finance

    How the Green Card Lottery Really Works

    Here's how the popular green card lottery, run by the U.S. State Department, operates, including some tips on improving your odds of winning.
  2. Fundamental Analysis

    Quantitative Easing Report Card in 2016

    Find out why quantitative easing has not worked, despite the best efforts of the Federal Reserve, and how it has fueled the national debt problem.
  3. Economics

    Economist Guide: 3 Lessons Karl Marx Teaches Us

    Read about three lessons that modern economic thinkers can learn from German philosopher Karl Marx, the founding father of communism.
  4. Economics

    How Bernie Sanders Has Avoided Big Money (Mostly)

    Bernie Sanders hasn't entirely avoided PACs with his fundraising, but he has gotten a lot of bang for the buck
  5. Investing News

    Obama Wants to Double Wall Street Regulation

    President Obama wants to double the budgets of the SEC and the CFTC over the next five years.
  6. Economics

    Does Big Money Hurt or Help Clinton and Rubio?

    Marco Rubio and Hillary Clinton lead their parties in raising money from Wall Street. Is that a help or a hindrance?
  7. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  8. Economics

    The History of Stock Exchanges

    Stock exchanges began with countries who sailed east in the 1600s, braving pirates and bad weather to find goods they could trade back home.
  9. Economics

    How Warren Buffett Made Berkshire A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  10. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
RELATED FAQS
  1. What are the differences between Levels I, II, and III American Depository Receipts ...

    Mutual funds and exchange-traded funds offer American investors opportunities to diversify a portfolio through investing ... Read Full Answer >>
  2. What is the Writ of Mandamus?

    A writ of mandamus is a court order issued by a judge at a petitioner’s request compelling someone to execute a duty he is ... Read Full Answer >>
  3. Can FHA loans be used for condos?

    A borrower can obtain Federal Housing Administration (FHA) loans to finance the purchase of a condominium as long as the ... Read Full Answer >>
  4. Can I get dental insurance with Medicare?

    Medicare does not offer dental insurance that will cover dental care and medical supplies, such as cleanings, sealants, extractions, ... Read Full Answer >>
  5. Who can make catch-up contributions to a Health Savings Account (HSA)?

    An eligible individual who is 55 years or older at the end of his tax year can make additional catch-up contributions to ... Read Full Answer >>
  6. Do banks offer FHA loans?

    Many major U.S. banks, including Well Fargo & Company, U.S. Bancorp, Bank of America and Flagstar Bancorp, offer Federal ... Read Full Answer >>
Trading Center