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What is the Sarbanes-Oxley Act of 2002?

Mary McMahon
Updated May 17, 2024
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The Sarbanes-Oxley Act of 2002 was a landmark piece of financial legislation in the United States, designed to overhaul the regulatory framework pertaining to publicly traded companies. This legislation was passed in response to a series of high-profile cases of accounting fraud that rocked headlines in the early 2000s, including scandals at energy company Enron and telecommunications company Worldcom. The legislation was designed to limit the possibility for accounting fraud on this level in the future.

The bill was spearheaded by a bipartisan team led by Sen. Paul Sarbanes (D-Md.) and Rep. Michael G. Oxley (R-Ohio). It includes a number of sections, each designed to address specific regulatory shortcomings the authors felt had contributed to sloppy accounting practices at public companies. Applying to all companies traded publicly, the act also included provisions for the Securities and Exchange Commission (SEC) to make new rules, and established the Public Company Accounting Oversight Board to monitor many of the reforms in the act.

Several provisions of the Sarbanes-Oxley Act of 2002 were important. All were intended to increase accountability and transparency, making it harder for companies to commit acts of accounting fraud. One section, 404, proved to be contentious, as it required companies to establish better internal controls and report on the effectiveness of those controls. Critics of the Sarbanes-Oxley Act of 2002 argued that this section would disproportionately impact small companies, due to the high cost involved in implementing such controls.

Another section of interest, 303, mandates that members of senior management must verify and certify the accuracy of accounting reports. This holds management accountable for false or questionable financial reporting. Section 802 established criminal penalties for violating the law, stressing that instead of simply being a civil wrong, some forms of accounting fraud could be considered criminal under the Sarbanes-Oxley Act of 2002.

Also known as the SOX Law, the Sarbanes-Oxley Act of 2002 was almost unanimously approved by Congress, with a few holdout representatives voting against it. After signing it into law, President George W. Bush indicated he felt it was one of the most important pieces of financial regulation in the United States since the 1930s, when significant overhauls were passed to address the failures that led to the Great Depression. While the Sarbanes-Oxley Act of 2002 certainly closed numerous regulatory loopholes and tightened oversight, critics argued that companies interested in fraudulent practices would find new ways to circumvent the law, staying one step ahead of legislation.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments

By Logicfest — On Nov 11, 2014

@Soulfox -- If lawmakers had a crystal ball, wouldn't that be awesome? The thing about Sarbanes-Oxley is that it is hard for lawmakers to figure out if a company or an industry is engaged in bogus practices. This is a capitalist economy and, as such, people are allowed to innovate.

How, then, was it possible to tell whether Enron was an innovative company or a crooked one when a company operates in that kind of environment? I'd be willing to bet that figuring that out would be just about impossible. The only way to prevent another Enron is to clamp down so hard on companies and financial types that innovation is just about impossible. You'd root out the fraud, but you'd get rid of innovation, too.

And I rather doubt that anyone wants that!

By Soulfox — On Nov 10, 2014

There's something sad about Sarbanes-Oxley. There were signs all over the place that Enron was too good to be true, but no one complained as long as it appeared that people were making money.

People got hot and bothered when Enron officials were exposed as the frauds they were, and thus Sarbanes-Oxley came into being. By that time, a lot of people lost a lot of money and lives were ruined. Where was the outrage that led to Sarbanes-Oxley when Enron was fully in "too good to be true" mode and questionable accounting practices were all over the place?

Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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