Week 1 The Sarbanes Oxley Act

Week 1: Lecture

The Sarbanes Oxley Act

In response to corporate scandals involving companies such as Enron, WorldCom, Tyco, and Adelphia, Congress enacted the Download Sarbanes-Oxley Act

in 2002. The Act is intended to strengthen protection against corporate accounting fraud and financial malpractice. Key elements of Sarbanes-Oxley took effect on November 15, 2004. Sarbanes-Oxley contains a number of requirements designed to insure that companies tell the truth in their financial statements

For example, the officers of a public corporation must review and sign the annual report. They must attest that the annual report does not contain false statements or material omissions and also that the financial statements fairly represent the company's financial results. In this way, Sarbanes-Oxley makes management personally responsible for the accuracy of a company's financial statements.

Because of its extensive requirements, compliance with Sarbanes-Oxley can be very costly, which has led to some unintended results. Since its implementation, hundreds of public firms have chosen to "go dark," meaning that their shares would no longer be traded in the major stock markets, in which case Sarbanes-Oxley does not apply. Ironically, in such cases, the law had the effect of eliminating public disclosure instead of improving it.

Sarbanes-Oxley has also probably affected the number of companies going public in the United States. Recently, many U.S.-based companies have chosen to go public on the London Stock Exchange's Alternative Investment Market (AIM) instead. The cost savings can be enormous, especially for small companies. For example, Pronotex Technologies, a fuel cell developer based in Southborough, Massachusetts, estimated that it costs about $1 million per year in compliance costs and mailings to stockholders to be listed on the AIM. In contrast, the annual cost to be listed on the NASDAQ would be about $3 million, with a large part of the increase due to Sarbanes-Oxley compliance costs.