During the period of 1990s, the economy grew fast in the United States. Because of the deregulation of the financial markets, the stock market was booming. However, this prosperous economy did not last long. In the late 1990s, a series of accounting scandals happened, including the large companies like Enron and Worldcom. The atmosphere of corporate scandals contributed largely to the early 2000s recession. The stock market began to fall because people lost trust in the public traded companies.
Because of the economic growth in 1990s, companies became aggressive and wanted to earn more money. One way is to increase their stock price and in order to do that, some of the companies began to utilize accounting loopholes to make their financial statements look better. For example, Enron and Worldcom were two large companies that finally filed bankruptcy ...view middle of the document...
This $3.8 billion in fraud was detected by the company’s internal auditing department. Both the companies and audit firms have their own issues. The companies have earnings pressure, unregulated internal control and lack of oversight of accounting procedure. The audit firms lack of the knowledge of the companies’ internal control and professional skepticisms.
After the series of accounting scandals, in 2002, Congress passed the Sarbanes-Oxley Act with the intention to reregulate the public traded companies in the United States. However, the effectiveness of SOX is arguable. On the one side, SOX rebuilt investors’ confidence in publicly trade corporates as the information asymmetry between investors and the companies reduced. Managers are required to improve firm’s internal control and improve the quality and accuracy of financial reporting. As a result, investors are able to know what is exactly happening in the companies that they invest in. At the same time, auditors are required to make sure that the company’s financial reports are in accordance with GAAP, so that investors can trust the information provided by those financial reports. On the flip side, some people claim that the Act is too punitive to become effective and the Act also added too much costs to the companies which put more pressure on them. However, the regulation of SOX Act is not too much. The health of the economy relies on the relationship between companies and investors. Under the restrict regulation, auditors make sure that the financial reports are accurate and in accordance to GAAP, investors trust the financial data provided by the companies and the companies follow the regulation strictly.