What was the name of the company that ultimately caused the passage of the Sarbanes
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An act aimed at protecting investors by making corporate disclosures more accurate Show What is the Sarbanes-Oxley Act?The Sarbanes-Oxley Act (or SOX Act) is a U.S. federal law that aims to protect investors by making corporate disclosures more reliable and accurate. The Act was spurred by major accounting scandals, such as Enron and WorldCom (today called MCI Inc.), that tricked investors and inflated stock prices. Spearheaded by Senator Paul Sarbanes and Representative Michael Oxley, the Act was signed into law by President George W. Bush on July 30, 2002. Major ProvisionsThe SOX Act consists of eleven elements (or sections). The following are the most important sections of the Act: Section 302Financial reports and statements must certify that:
Section 401Financial statements are required to be accurate. Financial statements should also represent any off-balance liabilities, transactions, or obligations. Section 404Companies must publish a detailed statement in their annual reports explaining the structure of internal controls used. The information must also be made available regarding the procedures used for financial reporting. The statement should also assess the effectiveness of the internal controls and reporting procedures. The accounting firm auditing the statements must also assess the internal controls and reporting procedures as part of the audit process. Section 409Companies are required to urgently disclose drastic changes in their financial position or operations, including acquisitions, divestments, and major personnel departures. The changes are to be presented in clear, unambiguous terms. Section 802Section 802 outlines the following penalties:
Benefits to InvestorsAfter the implementation of the Sarbanes-Oxley act, financial crime and accounting fraud became much less widespread than before. Organizations were deterred from attempting to overstate key figures such as revenues and net income. The cost of getting caught by the United States Securities and Exchange Commission (SEC) had exceeded the potential benefit that could result from taking liberties with the way that financial documents were presented. Thus, investors benefited from access to more complete and reliable information and were able to base their investment analyses on more representative numbers. Costs to BusinessesWhile the Sarbanes-Oxley act benefited investors, compliance costs rose for small businesses. According to a 2006 SEC report, smaller businesses with a market cap of less than $100 million faced compliance costs averaging 2.55% of revenues, whereas larger businesses only paid an average of 0.06% of revenue. The increased cost burden was mostly carried by newer companies that had recently gone public. A more granular view of the compliance costs experienced by businesses can be found in the chart below: RepercussionsDue to the additional cash and time costs of complying with the Sarbanes-Oxley Act, many companies tend to put off going public until much later. This leads to a rise in debt financing and venture capital investments for smaller companies who cannot afford to comply with the act. The act faced criticism for stifling the U.S. economy, as the Hong Kong Stock Exchange surpassed the New York Stock Exchange as the world’s leading trading platform for three consecutive years. Additional ResourcesCFI is the official provider of the global Financial Modeling & Valuation Analyst certification program, designed to help anyone become a world-class financial analyst. The following CFI resources will be helpful in furthering your financial education:
What company caused the SarbanesWhy did Congress pass the Sarbanes-Oxley Act? The Sarbanes-Oxley Act of 2002 was passed due to the accounting scandals at Enron, WorldCom, Global Crossing, Tyco and Arthur Andersen, that resulted in billions of dollars in corporate and investor losses.
What was the Enron company?Enron was an energy company that began to trade extensively in energy derivatives markets. The company hid massive trading losses, ultimately leading to one of the largest accounting scandals and bankruptcy in recent history.
Who did the SarbanesLawmakers created the legislation to help protect shareholders, employees and the public from accounting errors and fraudulent financial practices, which were rampant in a post-9/11 economy with several prominent public company accounting scandals including Enron, WorldCom and Cendant.
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