Way back in 2002, you may remember something about a company called Enron, a company called WorldCom, and one of the big 5 (now 4) auditing firms, Arthur Anderson. In a very broad nutshell, Enron and WorldCom intentionally deceived investors into believing that they were making a lot of money when in reality the company was going bankrupt. At the same time, their auditors (Arthur Anderson) was a highly reputable auditing firm, so naturally no one suspected anything suspicious since it was clear that they were being audited by one of the best in the business. Well, the rest is history. Neither company exists anymore, their major executives are in federal prison, and Arthur Anderson has been dissolved into nothing.
Many people are unaware of the provision that made it possible for investors to always be protected from this kind of activity from every happening again. That lovely piece of legislation passed by Congress in 2002 is known as “Sarbanes-Oxley,” and it remains one of the most important market regulations passed since the Great Depression.
Stock market regulation is a sore topic for a lot of people, namely those who are very much pro-capitalism. The problem is that laws are made so easily broken by the wrong people. Good people adhere to the rules anyway, so this legislation has no impact on their work. The more freedom the foxes are given to run the hen house, the worse off we all become. Keep an open mind when you read about market rules and regulations in the news.
However, today I wanted to give you an overview on Sarbanes-Oxley and how it continues to protect investors well beyond 2002.
What IS the Sarbanes-Oxley Act of 2002?
Sarbnes-Oxley (or SOX) is an act passed by U.S. Congress to protect investors from the possibility of fraudulent accounting activities by corporations. The SOX Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. The SOX Act was created in response to accounting malpractice in the early 2000s, when public scandals such as Enron Corporation, Tyco International plc, and WorldCom shook investor confidence in financial statements and demanded an overhaul of regulatory standards.
