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May 01, 2023


The Sarbanes-Oxley Act of 2002 also referred to as the Corporate Responsibility Act of 2002 and SOX Act of 2002 it was passed on July 30. The law was passed by the US congress as a law that would act as a protection for the investors from the fraudulent financial reporting that can be carried out by the corporations (Kenton, 2020). The act is mandated strict reforms to the US securities regulations that existed and imposed more tough penalties on lawbreakers.

Corporate scandals led to the enactment of the law. The SOX Act of 2002 was enacted in response to financial scandals that happened in the early 2000s.  The financial scandals in the 2000s involved WorldCom, Tyco International Plc., and Enron Corporation scandals (Kenton, 2020). The Enron corporation scandal resulted in the enactment of the law where the company tricked the investors. The company used accounting loopholes where it used in hiding billions of bad debts at the same time it was inflating the company’s earnings. The scandal had devastating effects where it led to the shareholders losing over $74 billion while its share price collapsed from $90 to $1 in one year (CFI, 2022). Besides, World Com had inflated their assets by an amount of almost $11 billion by underreporting costs by capitalizing method and using false entries inflating their revenues. Further, the Tyco company scandal was similar where the company inflated its earnings by an amount of over $500 million in their reports through siphoning money from their stock sales and unapproved loans.

If SOX was in place during these scandals, it would have been avoided. With the Enron scandal, SOX would have stopped the collision that was seen between the public accounting firm by Andersen & Co and the company. Where the SOX act could have changed how the corporate board was to deal with financial auditors (Carlson, 2019). With the act, it is considered as a fraudulent behavior on how the two parties cooperated causing the scandal. Further with the WorldCom and Tyco scandals, they could be thwarted where the act requires the need for corporate transparency in reporting financial transactions descriptions to the shareholders.

The SOX act has not been able to act as a deterrent in some of the recent scandals. Some of the scandals include the Madoff scandal. The Madoff scandal has been pointed to by criticizers as one of the scandals that the SOX act was not able to deter (Law Info, 2022). The Sox act could not deter the scandal since it led to the stifling of new business development where it is not able to ensure honest financial recordkeeping and disclosure. Bernard Madoff used a gap in the regulatory hole to run a Ponzi scheme of $50 billion (Moyer, 2009).  It led to duping of thousands of investors. Further, the other scandal is the Peregrine financial scandal where it collapsed despite the existence of the Sox act (Drawbaugh & Aubin, 2012). The act was not able to deter the scandal since the authority by PCAOB did not apply to Veraja-Snelling Co accounting firm. It was corrected later by Wall Street reforms which extended the authority of PCAOB, but it was too late.

Considering the recent scandals, it is unfair to blame sox scandal as an act that was supposed to deal with the scandal. The factors that led to the scandals are just beyond the purview of the SOX Act. These scandals are not comparable to WorldCom, Enron, or any other accounting scandal that was happening in 2002 and past years (Drawbaugh &Aubin, 2012). The challenges focus on the cost burden that corporations are to bear to implement or maintain SOX compliance(Carlson, 2019). The challenge has led to few companies going public. In conclusion, the SOX act has been able to restore investors’ confidence over the years despite facing some challenges which have been resolved and can be resolved even further.

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