Background

• In 2001, executives at Houston, Texas-based energy company Enron partnered with accounting firm Arthur Andersen to hide billions of debt generated from failed projects and deals. Its resulting bankruptcy was one of the largest in U.S. history. Similar accounting fallacies in companies like telecommunications subsidiary MCI and manufacturing conglomerate Tyco further compelled the U.S. government to react with legislation.
  
  

Legislation

• The SOX was named after its sponsors: Paul Sarbanes, a Democratic senator from Maryland, and Michael Oxley, a Republican representative from Ohio. With such a climate of corporate corruption, the bill that the aforementioned congressmen introduced was approved overwhelmingly: in the House by a vote of 423 to 3, and the Senate by a vote of 99 to 0.
  
  

Description

• The SOX comprises 11 titles that set the rules for U.S. financial reporting. Each title is broken into sections, which include the internal procedures for ensuring accurate financial disclosure from corporations, the publishing of accurate financial statements within the company with examination of an external auditor, and the criminal penalties for violation of SOX, which could be up to a 10-year sentence in jail.
  
  The SOX also states that the company's CEO should sign the company tax returns, and senior executives are especially charged with individual responsibility for the accuracy and completeness of their company's financial reports. The law established the Public Company Accounting Oversight Board, or PCAOB, a panel that regulates auditing firms.
  
  

Criticism

• The major criticism of the SOX is that it an expensive and unnecessary undertaking that can erode the U.S.'s global competitiveness. For example, Ron Paul, a Republican representative from Texas, gave a speech before his fellow representatives in April 2005 that turned to surveys from Korn/Ferry International and Foley & Lardner, which reported $5.1 million in compliance expenses for Fortune 500 companies in 2004 and a 130 percent increase in publicly held company costs, respectively. It is such costs, he contended, that could provoke small U.S. and foreign companies to de-register from U.S. stock exchanges, thus damaging the country's capital markets.
  
  

Praise

• The SOX, however, has also received praise for creating a climate of corporate accountability, more accurate and reliable financial reporting, and improved investor confidence. For instance in 2006, the San-Francisco, California-based firm Glass, Lewis & Co. LLC published a report that revealed that in 2005, there were 1,295 restatements of financial earnings from companies listed on U.S. securities markets. This was almost twice the number given for 2004.