On This Day In Finance: July 30 - The Sarbanes-Oxley Act Is Signed Into Law

By Investopedia Staff | July 29, 2009 AAA

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.)

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