1. Krajisnik 1
Aleksandar Krajisnik
Eloise McCain Hassel, J.D.
MGT 330
9 November 2015
The Significance of the Sarbanes-Oxley Act of 2002
Many students and investors alike ponder about the complexity and rationale behind the
thousands of corporate regulations that have come to play over the years. It is to no surprise that
corporate regulations have taken generations to develop to their current level of sophistication
and effectiveness. An easy way to understand why it has taken so much time for certain, rather
obvious, regulations to take effect is by comparing corporations to human beings. In the same
context that most people learn through observation and experience, so do corporations and
regulating bodies. It is not until just over thirteen years ago that some very vital regulations came
to light via the enactment of the Sarbanes-Oxley Act (SOX) of 2002. To gain a further
understanding of the reasoning behind some of the key regulations of the Sarbanes-Oxley Act, it
is not only critical that we understand the regulations themselves, but also the motive for those
regulations. To gain a sharper perspective of the implications the Sarbanes-Oxley Act has had on
modern business, it is important that we analyze the history of the influential events that led up to
the act, identify the current significance and role of the act, and to recognize the precedent it has
set for future laws and regulations.
Soxlaw.com, which serves as a guide to the Sarbanes-Oxley Act, defines the act as the
introduction of major changes to the regulation of financial practice and corporate governance.
The main purpose of the SOX act is to simply serve as a prevention system for future financial

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crisis.1 Of course, like any other law, act, or federal agency, there is a significant historical factor
which ultimately influenced the reasoning and conception of the SOX act. During the 1990s and
early 2000s, many parties played a serious role in contributing to the corporate and accounting
scandals which led to the detailed provisions listed within the SOX act.
The various parties which contributed to the enactment of the SOX act included: Enron,
Arthur Andersen, WorldCom, Adelphia Communications, Global Crossing, and many more. The
most well-known and widely thought throughout most academic institutions is often that of the
Enron and Arthur Andersen scandal. The Enron scandal was subject to the utmost news coverage
and publicity largely because of Enron’s long-lasting persona as one of the nation’s most
innovative companies. Originally, Enron cultivated its national popularity through its vast efforts
and innovations throughout the energy industry. However, Enron quickly became better known
for its unique trading practices, some of which centered on providing commodities such as
broadcast time for advertisers, internet bandwidth, and weather futures. With Enron penetrating
into these particular industries, stockholders began buying more and more of Enron’s shares. The
public ate up what Enron was selling predominately because the ‘90s were highly effected by the
dotcom driven stock market, so if a company the size of Enron was expanding its operations to
accommodate the dotcom boom, the company’s growth potential ultimately seemed limitless.
Due to the attractiveness of Enron’s potential, its peak worth was around $70 billion and each
share of Enron stock sold at approximately $90.
Through simply analyzing Enron’s peak worth and share price, it comes to no surprise
that Enron was not only in the business of selling commodities, but was itself a commodity for
1 "The Sarbanes-Oxley Act 2002." The Sarbanes-Oxley Act 2002. Web. 25 Sept. 2015.
<http://soxlaw.com>.

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the public which invested in the stock market at the time. Although Enron seemed as good as
gold at the time, it didn’t last long. Enron’s value decreased drastically after it admitted to
overstating its income and equity by a couple billion dollars. Along with fraudulent accounting
practices from Enron’s auditing firm, Arthur Andersen LLP, the company was also revealed to
have engaged in money laundering practices via the creation of a dozen or so fake partnerships.
The creation of the partnerships was primarily used as a way to mask the material debts and
losses from Enron’s trading business – which the average investor would deem to be the most
attractive feature of Enron’s value proposition at the time.2
In addition to the misstatements of expenses and losses on Enron’s income statements,
the unethical corporation also gained a valuable advantage over its competitors by implementing
insider trading practices and incorporating mark-to-market accounting. As defined by the Journal
of Accountancy, mark-to-market accounting allowed companies to adjust the price of their assets
or liabilities to their fair market value, which meant booking for unrealized gains or losses on the
income statement.3 This is a fundamentally flawed practice, especially when related to the
energy business, since there are usually no quoted prices for various types of energy to base ‘fair
market’ valuations. Of course, Enron was in favor of this loophole in the accounting valuation of
its assets and liabilities, because it allowed them to develop and use their own assumptions
regarding valuation. This usually meant that Enron would try to overstate the value of its assets,
and understate the value of its liabilities. Ultimately, the mark-to-market valuation method
significantly contributed to the amount of unrealized trading gains reported by Enron; which
2 "The Fall of Enron." NPR. NPR. Web. 13 Oct. 2015.
3 William Thomas, "The Rise and Fall of Enron." Journal of Accountancy. Journal of
Accountancy, 1 Apr. 2002. Web. 13 Oct. 2015.

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accounted for just over half of the company’s $1.41 billion reported pretax profit for the 2000
fiscal year. From an accounting standpoint, having more than half of a company’s annual profits
result from unrealized gains is just unheard of and immediately raises a red flag.
Consequently, Enron went from being ranked number five in the Fortune 500 listing for
2001, to filing for bankruptcy under chapter 11 of title 11 of the US Code on December 2, 2001.
Thousands of employees lost their jobs along with their 401-K plans because they were
encouraged to invest their pension funds in worthless Enron stock, and top management lost their
reputations and wealth. Additionally, Arthur Andersen was forced to close its doors and even
more employees lost their jobs due to Enron’s greed. Although Enron’s collapse brought tragedy
to many of the people and families directly involved, perhaps the most destructive consequence
was that in the lost confidence of the stock market and corporate America.4
In an attempt to restore investor confidence in the stock market and prevent future
accounting scandals, Congress responded by passing the Sarbanes-Oxley Act of 2002. President
at the time, George W. Bush, referred to the Act as “the most far-reaching reforms of American
business practices since the time of Franklin Delano Roosevelt.” This certainly exemplifies just
how large of an impact this legislation has on American business. The SOX Act accomplishes its
objective of preventing future business scandals and providing security to public investors
through the 11 sections (or titles) listed in the Act. These titles are broadly referred to as the
following: Title 1 – Public Company Accounting Oversight Board (PCAOB), Title 2 – Auditor
Independence, Title 3 – Corporate Responsibility, Title 4 – Enhanced Financial Disclosures,
Title 5 – Analyst Conflicts of Interest, Title 6 – Commission Resources and Authority, Title 7 –
4 Harold Bieman, Accounting/Finance Lessons of Enron: A Case Study. (Singapore,
SGP: World Scientific & Imperial College Press, 2008.) ProQuest ebrary. Web. 11 October
2015. 4

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Studies and Reports, Title 8 – Corporate and Criminal Accountability Act of 2002, Title 9 –
White Collar Crime Penalty Enhancement Act of 2002, Title 10 – Corporate Tax Returns, and
Title 11 – Corporate Fraud Accountability Act of 2002.5 Although all of these provisions are
significant, the ones that gain the most publicity are also the ones that are often referred to as the
most important – Title 3, and Title 4.
Perhaps the title that received the most publicity among all others was Title 3. This title
generally refers to corporate responsibility and is divided into eight sections, which range from
public company audit committees (section 301) to fair funds for investors (section 308). Though
all the titles and sections within each title of the SOX Act serve a significant purpose, some have
more influence regarding prevention strategies. This is important to note since prevention is
often the best defense against crimes, whether they be white collar crimes or not. All the
punishment in the world will not stop a criminal from attempting to get away with a crime if it is
of feasible proportions. Section 302 of Title 3 indicates the required responsibility of the CEO
and CFO of a company to sign off on each annual or quarterly financial report submitted by the
company. The signatures of the c-suite executives certify that the officer’s believe their financial
reports contain no untrue statements of material fact or omit any material fact and that none of
the statements made in the report are misleading.6
Section 302 directly relates to the Enron case and some may even believe that Enron is
the main reason behind the requirements listed within the section. Enron’s Chief Executive
5 "Provisions of SOX." Provisions of SOX. Web. 13 Oct. 2015.
<http://www.sox.info/provisions>
6 "Full Text of the Sarbanes-Oxley Act 2002." Full Text of the Sarbanes-Oxley Act 2002.
Web. 13 Oct. 2015.

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Officer Jeffrey Skilling’s biggest defense was his claim of ignorance about the fictitious
partnerships that were only implemented to disguise the company’s real financial situation. He
testified that he was “not aware” of the partnerships, and this simply would not have been a
plausible defense if Section 302 was already in effect. Under the requirements of Section 302,
Mr. Skilling would have been legally obligated to sign Enron’s financial reports, authorizing that
based on his knowledge, the reports were correct and did not omit any material facts. This would
have expedited Mr. Skilling’s trial by a huge margin, since he was originally sentenced in 2006
for his involvement in the scandal that occurred in 2001.7
Title 4, which is of equal importance as Title 3, concerns with enhanced financial
disclosures and consists of nine sections. Among these sections, section 404, 406, and 409 are
most relevant in the Enron case. Section 404 is titled “Management Assessment of Internal
Controls,” and essentially specifies the responsibility that management has to provide proper
internal controls and procedures in regards to financial reporting. Furthermore, it requires that
management complete an assessment of the most recent years internal control effectiveness. This
allows firms to continuously improve their financial reporting procedures and strive to derive the
most accurate and timely financial reports. It’s safe to assume that if Enron were required to
follow Section 404, it would have stricter internal controls and therefore more accurate financial
reports. Additionally, Section 406 provides a code of ethics for senior financial officers. The
code of ethics includes requirements such as the handling of conflicts of interest, proper financial
disclosures, and compliance with certain rules and regulations. This section directly relates to
Enron’s case as it had violated all of the requirements within the section. Particularly, Enron’s
7 William Neikirk, and Flynn McRoberts. "Document Challenges Skilling's Testimony."
Tribunedigital-chicagotribune. Chicago Tribune, 12 Feb. 2002. Web. 13 Oct. 2015.

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Chief Financial Officer, Andrew Fastow, was faced with whether to do what’s best for the
company or to do what’s best for himself. Unfortunately, Fastow’s conflict of interest got the
better of him and he ended up being the person everyone pointed at when Enron collapsed. Mr.
Fastow’s role as CFO gave him the most control over the financial and risk management side of
Enron’s operations. Among his many duties, was the management of the fabricated partnerships
through which he embezzled money from Enron to the reported sum of at least $30 million.8
Again, this would not have been as easy to orchestrate if Fastow was required to follow Section
406 of the SOX Act – which didn’t exist at the time of Fastow’s crimes.
In addition to Section 404 and 406, Section 409, which focused on real time issuer
disclosures, played a vital role in the misrepresentation of Enron’s value approaching its demise.
As stated in the SOX Act, Section 409 demands that each issuer “shall disclose to the public on a
rapid and current basis such additional information concerning material changes in the financial
condition or operations of the issuer.” This is notably important because before Section 409, a
CEO was allowed to wait 10 to 410 days before reporting a transaction, depending on whether or
not the CEO is selling to the public or within the company. In the case of Enron’s former
chairman, Kenneth Lay, selling $20 million worth of Enron stock within six weeks and not
disclosing of it as he convinced the public and his employees to buy the stock at a bargain price
was a very profitable move. In fact, this was perfectly legal at the time because Lay sold the
stock to Enron rather than the open market. This meant that he was required to file a Form 5 with
the Securities and Exchange Commission (SEC), which isn’t due until 45 days after the
company’s fiscal year ends. According to the Washington Post, Lay’s spokesman said that Lay
8 Jeff Leeds. "CFO's Deals Detailed by Enron." Los Angeles Times. Los Angeles Times, 4
Feb. 2002. Web. 13 Oct. 2015.

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didn’t mean to delay the reporting of the sale of millions of dollars of stock; he was just
following the rules. Section 409 directly addresses this nonsensical disclosure rule and helps
investors, creditors, and employees make educated investing decisions as well as reestablish their
trust in the stock market.9
After thoroughly investigating the Enron case and how it would have been different if the
SOX Act had already been enacted, its significance is quite apparent. This strict, yet necessary
piece of legislation could have prevented so much heartache had it been under effect just a year
or two before Enron’s collapse. It’s safe to conclude that The Act would have at least left many
more of Enron’s former employees with their 401-K intact and their reputations would not have
been nearly as ruined. Nonetheless, the Sarbanes-Oxley Act is very prevalent in today’s business
world.
Most frequently in the news, the SOX Act is discussed in conjunction with
whistleblowing. On October 9, 2015 Reuters reported on a whistleblower case regarding
JPMorgan Chase. Former vice president of JPMorgan, Jennifer Sharkey claimed that she was
terminated because she voiced her concern about an Israeli client potentially engaging in fraud
and money laundering. However her case was thrown out by U.S. District Judge Robert Sweet
for the second time. The first time Sweet dismissed Sharkey was in December of 2013 because
her case did not meet the SOX Act standard for whistleblower protection. However, in 2014 the
SOX Act standard for whistleblower protection was lowered and so Sweet had to reconsider
9 Allan Sloan. "One Enron Lesson: Some Insider Trading Falls Outside the Timely-
Reporting Rule." Washington Post. The Washington Post, 5 Mar. 2002. Web. 13 Oct. 2015.

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Sharkey’s case. The second time, Sweet found that JPMorgan had legitimate performance related
reasons for Mrs. Sharkey’s termination.10
Along with the popularity and media attention given to whistleblower cases, perhaps
even more interesting is the cost/benefit issues that are widely debated throughout the business
world. It is no surprise that with all the regulations within the SOX Act, businesses, small and
large, must face the cost to simply comply with those regulations. Under most scrutiny is the cost
of compliance with Section 404, which requires businesses to provide internal controls and
assessments of those controls. In September of 2009, the SEC published an economic analysis of
Section 404 and concluded that smaller companies incur a higher relative cost to comply with the
regulation. Although the SEC already reformed Section 404 to make it cheaper and easier to
comply, small businesses are often still struggling to satisfy the various requirements within the
section.11
After taking into consideration the various reforms that have already occurred to ease the
stress on businesses, including lowering the standard for whistleblower protection and decreasing
the cost of compliance with Section 404, there is not much doubt that many future reforms will
materialize. It is likely that the Sarbanes-Oxley Act will continue to be strict and demanding on
businesses in order to meet its broad objective to prevent future financial scandals and increase
investor confidence. However, even after the attempts the SEC has made to keep the cost of
compliance down, small businesses will be inclined to pursue an even smaller financial burden in
10 Joseph Ax, "JPMorgan Again Wins Dismissal of Whistleblower Lawsuit in U.S."
Reuters. Thomson Reuters, 9 Oct. 2015. Web. 13 Oct. 2015.
11 Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial
Reporting Requirements. n.p.: Office of Economic Analysis, U.S. Securities and Exchange
Commission, Sept. 2009. PDF.

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regards to compliance with the SOX Act. Additionally, with the continuous expansion of
technology, it is likely that new loopholes will be found and thus new regulations will be
established. As new regulations are established, I believe that an extra emphasis will be put on
the financial feasibility of complying with those regulations.12
In conclusion, the Sarbanes-Oxley Act of 2002 has changed the way businesses operate
and prioritize their resources. In no regards does The Act ensure the ethical and even legal
compliance of businesses. However, The Act is a monumental step that reduces the risk of
unethical and illegal actions within the business world. Most importantly, it restores the
confidence of public investors, creditors and employees.
12 Scott Green. “A Look at the Causes, Impact and Future of the Sarbanes-Oxley Act.”
(Journal of International Business and Law: Vol. 3: Iss. 1, Article 2) Print.

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Bibliography
Ax, Joseph. "JPMorgan Again Wins Dismissal of Whistleblower Lawsuit in U.S." Reuters.
Thomson Reuters, 9 Oct. 2015. Web. 13 Oct. 2015.
Bieman, Harold. Accounting/Finance Lessons of Enron: A Case Study. Singapore, SGP: World
Scientific & Imperial College Press, 2008. ProQuest ebrary. Web. 11 October 2015.
"Full Text of the Sarbanes-Oxley Act 2002." Full Text of the Sarbanes-Oxley Act 2002. Web. 13
Oct. 2015.
Green, Scott. “A Look at the Causes, Impact and Future of the Sarbanes-Oxley Act.” Journal of
International Business and Law: Vol. 3: Iss. 1, Article 2. Print.
Leeds, Jeff. "CFO's Deals Detailed by Enron." Los Angeles Times. Los Angeles Times, 4 Feb.
2002. Web. 13 Oct. 2015.
Neikirk, William, and Flynn McRoberts. "Document Challenges Skilling's Testimony."
Tribunedigital-chicagotribune. Chicago Tribune, 12 Feb. 2002. Web. 13 Oct. 2015.
"Provisions of SOX." Provisions of SOX. Web. 13 Oct. 2015.
<http://www.sox.info/provisions.htm>
Sloan, Allan. "One Enron Lesson: Some Insider Trading Falls Outside the Timely-Reporting
Rule." Washington Post. The Washington Post, 5 Mar. 2002. Web. 13 Oct. 2015.
Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting
Requirements. n.p.: Office of Economic Analysis, U.S. Securities and Exchange
Commission, Sept. 2009. PDF.
"The Fall of Enron." NPR. NPR. Web. 13 Oct. 2015.

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"The Sarbanes-Oxley Act 2002." The Sarbanes-Oxley Act 2002. Web. 25 Sept. 2015.
<http://soxlaw.com>
Thomas, William. "The Rise and Fall of Enron." Journal of Accountancy. Journal of
Accountancy, 1 Apr. 2002. Web. 13 Oct. 2015.