Sarbanes-Oxley Act of 2002
SE584: Forensic and Business Investigations Techniques
February 22, 2009
The passage of the Sarbanes-Oxley Act of 2002 (SOX) changed how accounting is practiced and how corporations handle their accounting departments, to include auditing and internal controls. Some of these changes are for better accountability and some are for governing the application of stricter rules. The accounting profession was dramatically affected by the events leading up to and after the passing of this law. In the days before SOX, there were many high valued fraudulent activities. The news was flooded with employees, managers, and executives who were committing fraud against ...view middle of the document...
Stock fraud was a standard practice during the 1920’s by these corporations making the outlandish claims they did regarding their stocks’ value. Executives inflated their company’s financial position by “cooking the books” just to achieve that optimal earning potential.
Congress took action due to these occurrences and the Depression that followed. “The Securities Act of 1933 spelled out…a list of conditions a company had to meet in order to…sell shares of its stock to the public” (Farrell, 2006, pg 67). This new law also made provisions for the company to file accurate financial statements on a quarterly basis to assure the consistency of the reported figures. The law also instructed these companies to hire auditors once a year to go over their financial statements to check that the numbers stated were correct. The other law that Congress enacted, “…the Securities and Exchange Act of 1934, established a set of rules regarding how stocks could be sold to the public” (Farrell, 2006, pg 67). This act also created the governing body that regulates and enforces these laws, the Securities and Exchange Commission (SEC). The accounting profession took off from the needs proliferated by the new laws of 1933-1934. In the past, auditors were hired on a voluntary basis and just to give the financial statements a seal of approval. Once these laws went into effect, the need for accounting firms increased, along with the services they provided. Of course, even with these new laws, there were instances of fraud and sometimes the accounting firms hired to audit the financial statements often became party to these frauds.
When Arthur Andersen started his firm in 1913, he wanted to provide the necessary services to corporations but not at a conflict with his values. This was proven when, in 1914, the head of the railway company came to him to sign off on some fudged numbers in his financial statements. Andersen refused to sign the report even after the railway head threatened to fire him. Andersen lost that job but his stand against crooked corporate heads, granted him strength and his firm grew to be one of the largest accounting firms (donning the position among the “Big 5” firms until its demise in 2002). Arthur Andersen understood what the organizations needed and he provided those services, becoming a leader in the accounting profession. As time passed, the views of Andersen’s way of doing things – an accounting firm providing more than just auditing needs – prompted other firms to follow suit. His concept of giving the companies increased services grew even after his death in 1947 (Chicago Tribune, 2009).
As Arthur Andersen continued to bring innovation to the accounting profession, other types of advancements were being developed in the San Francisco Bay area in Northern California, referred to as Silicon Valley. The building of Silicon Valley started before it acquired its unique name. Stanford University was known for their “nerdy”...