The Sarbanes-Oxley Act (SOX) was enacted to protect investors from potential fraudulent accounting by companies, whereas the Dodd-Frank Act was passed to enact significant financial reform to reduce risk in certain areas of the economy. SOX was passed by Congress in response to large corporate accounting scandals at Enron, Tyco International and WorldCom that were uncovered in the early 2000s. Dodd-Frank was enacted in response to the 2008 financial crisis.

The Sarbanes-Oxley Act

SOX mandated a number of reforms relating to increasing corporate responsibility, more transparent financial disclosures, and to protect investors against corporate and accounting fraud. Section 302 of SOX requires that management certify the information contained in financial disclosures. Section 404 requires corporate management and their auditors to maintain internal controls with appropriate reporting methods.

Fraudulent accounting scandals caused large and complex bankruptcies for Enron and Tyco. These scandals put thousands of people out of jobs and cost stockholders billions in share value.

The Dodd-Frank Act

Dodd-Frank required significant reform in areas of regulatory regimes, swaps trading, derivatives valuation and corporate performance pay. Many believe the financial crisis was caused in part by issues with swaps trading in credit default swaps and mortgage-backed securities (MBS). These exotic financial derivatives were traded over the counter, as opposed to on centralized exchanges as stocks and commodities are. Many were unaware of the size of the market for these derivatives and the risk they posed to the greater economy.

Dodd-Frank set up centralized exchanges for swaps trading to reduce the possibility of counterparty default and also required greater disclosure of swaps trading information to the public to increase transparency in those markets.

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