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. Investing Basics

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  2. Professionals

    10 Must Watch Documentaries For Finance Professionals

    Find out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
  3. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  4. Investing

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  5. Stock Analysis

    The Biggest Risks of Investing in Berkshire Hathaway Stock

    Learn about the risks of investing in Berkshire Hathaway. Understand how issues of succession, credit downgrade risk and increased regulation could hurt it.
  6. Economics

    The 5 Countries That Produce the Most Carbon Dioxide (CO2)

    Learn about the top five countries, China, the United States, India, Russia and Japan, that are the largest contributors to carbon dioxide emissions.
  7. Investing News

    Germany Tech Startups: Keep Them On Your Radar

    Many German companies, which are eager to catch up with the rest of the world by entering the digital age, are investing in tech startups.
  8. Economics

    Benefits of China Changing It's One Child Policy

    China's one-child policy is changing, and investors are looking for ways to cash in. The reform might not have the effects that many anticipate, however.
  9. Taxes

    Countries With The Highest & Lowest Corporate Tax Rates

    The United States is No. 2 in the world for its high corporate tax rate. There are ways around paying it, and many nations with lower rates are worse off.
  10. Entrepreneurship

    START-UP NY: How a Tax-Free Zone Would Work

    START-UP NY is an initiative designed to attract companies to New York State by giving them 10 years of tax breaks. Sounds good, but is it a success?
  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. How often do mutual funds report their holdings?

    The Securities and Exchange Commission (SEC) requires mutual funds to report complete lists of their holdings on a quarterly ... Read Full Answer >>
  3. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  4. Where are the Social Security administration headquarters?

    The U.S. Social Security Administration, or SSA, is headquartered in Woodlawn, Maryland, a suburb just outside of Baltimore. ... Read Full Answer >>
  5. Is the Social Security administration a government corporation?

    The U.S. Social Security Administration (SSA) is a government agency, not a government corporation. President Franklin Roosevelt ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!