Why did Congress pass the Sarbanes-Oxley Act of 2002?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The main reason why Congress passed this law was the wave of scandals that had to do with the way that companies kept their books.  The most famous of these scandals was the one involving the Enron company.  Most of these scandals involved companies claiming, in essence, to have more money than they really did.

The problem, as Congress saw it, was that the accounting firms were not being required to keep the books in an accurate way.  There were too many loopholes open that allowed them to provide figures that made the companies look stronger than they actually were.  These figures misled investors and encouraged them to invest in companies that really were not very financially sound.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

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The Sarbanes Oxley Act of 2002, which is officially called the 'Public Company Accounting Reform and Investors Protection Act', was enacted in the USA for the purpose of improving the statutory reporting system for public companies to protect the interest of the investors. This act was formulated and passed as a limitations of the previous statutory provisions were highlighted by major financial scandals such involving major companies such as  as Enron, Tyco international, and WorldCom.

The act covers issues such as auditor independence, corporate governance, internal control assessment and enhanced financial disclosures. Among other provision the act lays down lays down additional responsibilities for the corporate boards and provides for criminal penalties. It requires Securities and Exchange Commission (SEC) to implement rulings to implement the provisions of the act. Accordingly SEC has created a Public Company Accounting Oversight Board (PCAOB) to oversee, regulate, inspect and discipline accounting firms in their role as auditors of public companies.

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