Regulatory & Public Policy Response: The Sarbanes-Oxley Act (aka Sarbox or SOX)
After the wave of scandals that swept through Corporate America following Enron’s collapse, the confidence of both investors and ordinary Americans outside of the markets were shattered. Investors had lost billions of dollars and employees lost their pensions/401k, and they all demanded that Congress take action to prevent future financial disasters. Much like the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act following the 2009 financial collapse, Congress moved quickly and unanimously to pass the Sarbanes-Oxley Act of 2002 (Sarbox or SOX).
The Act created new regulatory agencies and implemented sweeping regulatory changes over its eleven separate sections: 1) Public Company Accounting Oversight Board (PCOAB), 2) Auditor Independence, 3) Corporate Responsibility, 4) Enhanced Financial Disclosures, 5) Analysts Conflicts of Interest, 6) Commission Resources and Authority, 7) Studies and Reports, 8) Corporate and Criminal Fraud Accountability, 9) White Collar Crime Penalty Enhancement, 10) Corporate Tax Returns, 11) and Corporate Fraud Accountability.
Sarbox has improved investor confidence by ensuring the accuracy of financial statements and making sure Executives are held responsible by requiring public company CEOs and CFOs to personally sign off on the company’s financial statement. Auditor conflict of interest was also tackled; prohibiting an auditing firm to play the role of both internal and external auditor of the firm. In addition, the Act created the PCAOB; an independent body that oversees the public accounting firms providing audit services.
In addition to the numerous changes brought about by the Sarbanes-Oxley act, the scandalous demise of Enron also brought about numerous regulatory changes in the fields of bankruptcy law, corporate governance and director and officer liability. Interestingly, these changes were as much a direct response to the personal / individual actions of the Enron executives themselves, as they were a response to the collapse as a whole.