Major reason for Sarbanes Oxley act of 2002

Sarbanes Oxley Act of 2002 created because several reasons, below the major reason this list taken from from Wharton Financial Institutions Center, an independently managed site at the Wharton School of the University of Pennsylvania.

The environment triggering corporate scandals

• Take over movement, equity compensation linked executives’ interest to the share price.
• Motivations to meet market expectations among concerns.
• Long term bull market effect (1994-2000),
• Specifically, the reasons for failure of gatekeepers’ e.g. Auditors, lawyers, analyst… in the scandals. (deterrence, bubble)
• Investors` position in that environment is also considered.

Enron Case, as a main model to enlighten the objectives of the SOA the short timeline of Enron’s fall and the comments about the role of participants provided.

• Enron when its stock price was $90 in August 2000, was America’s 7th largest company,
• It went to chapter 11 (bankruptcy) on December 2, 2001, promptly after restating their financial reports, as largest bankruptcy reorganization in American history, the stock price at that time was 60 cents.
• The most highlighted event at the collapse of the Enron is its relations with limited partnerships (Special Purpose Entity- SPEs),
• Executives got personal gains being on both sides (Fastow -CFO-more than $ 30 million)
• Enron failed to disclose the extent of these relations (off-balance sheet and related party transaction)
• Special Committee founded to investigate the events, noted failures all levels of monitoring within the company including board.
• The gatekeepers such as lawyers (Vinson & Elkins), rating agencies severely criticized.
• Some investment banks after the event alleged aiding and abetting the securities fraud.
• Enron’s both internal and outside auditor Arthur Andersen, indicted to obstruction of justice, shredding of Enron-related documents,
• The whistle-blower, vice president of Enron until resigned, Sharon Watkins, letter to the top of Enron highly emphasized by media.

Other Scandals way through legislation:

• March 2002- Enron demise followed by over 30 Enron inspired bills and several regulatory responses from the SEC and SRO ’s.
• June 25 2002, WorldCom confessed that it had overstated its income by $3.8 billion, the announcement staggered financial world because of the size and simplicity of overstatement,
• On July 25 2002, SOA passed the Senate, President signed into Law on July 30 2002.