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The Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) was a congressional response to the accounting scandals at a number of major corporations, most infamously, the energy company Enron. By the time the scandal had played out, Enron was out of business, and one of the country's largest and most prestigious accounting firms, Arthur Anderson, was also on the rocks. And Enron was only one of a handful of major firms to be caught up in the scandal. Investors lost billions of dollars and public confidence in the securities industry and in the government's diligence in policing that industry was seriously diminished.
Upon signing the bill into law, President George W. Bush noted that Sarbanes-Oxley would mandate the "most far-reaching reforms of American business practices since the time of Franklin Roosevelt. The era of low standards and false profits is over; no boardroom in America is above or beyond the law."
SOX represented a major transformation in how the securities industry is policed and in how corporations file financial statements with the U.S. Securities and Exchange Commission. The new law established a quasi-governmental Public Accounting Oversight Board to provide greater oversight of the accounting industry. Its mandate extends to the way corporations establish and enforce internal controls and increases transparency in its financial filings.
Sarbanes-Oxley is intended to radically influence corporate culture to prevent the kind of meltdowns that occurred as a result of the disclosure of inaccurate financial statements being filed with the government, data that has a direct bearing on the value of a company's stock. That influence reaches into the corporate boardroom, previously sacrosanct, by increasing oversight of major financial decisions that can affect stock value.
President Bush's statement while signing the Sarbanes-Oxley Act into law illustrated why the legislation, despite passing both chambers of Congress by overwhelming votes, and signed into law by a politically conservative president, struck a raw nerve on the right-side of the political spectrum. By referencing President Franklin Roosevelt, the president was raising the specter of a time many conservatives today oppose: the New Deal and the massive expansion of the government's role in the economy.
By increasing transparency in corporate boardrooms, the Sarbanes-Oxley Act has changed corporate culture. Greater visibility into the internal machinations of a corporation's have influenced how corporate officers discuss and act regarding the fiduciary responsibilities of the board. Accounting firms, in particular, have seen their corporate culture changed by the increased government intrusion into their operations.
Is Sarbanes-Oxley a wise reaction to the scandal? Beauty, it's been said, is in the eye of the beholder. Many Americans believe that the scandal warranted the passage of the new law and that the public interest is indeed served by its implementation. With regard to the increased transparency that the law intends, this educator is reminded of an old adage from the world of physics. The "Copenhagen Interpretation" of quantum physics, also sometimes known as part of the Heisenberg Uncertainty Principle," refers to the phenomenon in which things change simply by virtue of their being observed. That, after all, is the reason for increasing transparency in the first place.
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