On Tuesday, July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (SOA), one of the most extensive revisions of the federal securities laws in the last 60 years. The Act, which applies in general to publicly held companies and their audit firms, dramatically affects the accounting profession. It impacts not just the largest accounting firms, but also any CPA actively working as an auditor of, or for, a publicly traded company. The SOA was passed in response to the epidemic of corporate scandals (most resulting in bankruptcies) and accounting abuses at public companies. It has been designed to crack down on securities fraud, "boardroom scandals" and tighten the regulation of accounting rules. This newly endorsed ruling includes stiff penalties for improper company reporting, corporate disclosure and auditing practices, including record keeping.
The dynamics of the need for such legislation will be talked and written about for years to come. On December 2, 2001, less than a month after it acknowledged accounting errors that inflated their earnings (by almost $600 million since 1994), the Houston-based energy trading company, Enron Corporation, filed for bankruptcy protection. At the time, it was the 7th largest corporation in the United States; it became the largest bankruptcy case in U.S. history. The day Enron filed for bankruptcy, its stock closed at 72 cents, down from more than $75 less than a year earlier. Many employees lost their life savings and tens of thousands of investors lost billions.
After doing the research necessary for this paper, I am confident that the collapse of Enron was the initial event that led to passage of the Sarbanes-Oxley Act of 2002. Several parties may have contributed to this catastrophe - Enron top management and audit committee, the auditors at Arthur Andersen, and various investment advisors. But will placing the blame on any one entity really solve anything? The Sarbanes-Oxley Act was designed to combat corporate demoralization.