The early years of the 21st century witnessed a number of huge accounting scandals and frauds in the United States. Whilst Enron and WorldCom received enormous local and worldwide publicity, other well known companies like Tyco International, Peregrine Systems, and Adelphia were also tainted by financial wrongdoing; it was a collective phenomenon that led to the collapse of once huge companies, the losses of thousands of jobs, and the write down of millions of dollars of shareholders wealth (Smith and Walter, 2006, 27).
The shares of Enron, for example crashed from a high of around a hundred dollars to a few cents, causing the destruction of shareholder fortunes (Reccine, 2002, 36). Investigations into the conduct of these corporations led to sordid tales of accounting malfeasance by company executives, jigging of books of account and outright negligence and even possibly collusion by auditors (Reccine, 2002, 37).
Among other things it also led to the collapse of Arthur Anderson, then the biggest accounting and auditing firm in the world, who were charged with gross neglect in the conduct of their duties and responsibilities (Reccine, 2002, P 37). With outraged media and public opinion clamoring for action, law makers in the United States passed the Sarbanes Oxley Act (Sox) in 2002, named after its sponsors, Paul Sarbanes and Michael Oxley, to tighten accounting loopholes in existing federal and state regulations, and thereby prevent fraud and protect shareholders of public companies.
Journalists like Labaton, (2006), commented as follows: The goal was to shore up confidence in Wall Street, particularly among individual investors who had been pushed more than ever into the stock and bond markets by the decline of company pension and health-insurance plans, along with soaring college costs. Tales from thousands of investors who lost their life savings were a powerful indictment of lax government oversight.
The law was signed by George Bush, the President of the United States, into law in July, 2002, who then referred to it as being “”the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt” (Carpenter and Others, 2004, 6). It is an elaborate and complex piece of legislation that “aims to enhance corporate governance through measures that will strengthen internal checks and balances and, ultimately, strengthen corporate accountability” (Carpenter and Others, 2004, 6).
Kelcher (2002) in a guide to the act states that the act specifically provides for the following changes: It establishes an independent auditing oversight board under the SEC It beefs up penalties for corporate wrongdoers It requires faster and more extensive financial disclosure It creates avenues of recourse for aggrieved shareholders Apart from the above, the act also involved the creation of an independent Public Company Accounting Oversight Board, a non-profit corporation, funded by public companies and supervised by the SEC (Kelcher, 2002).