Sarbanes-Oxley Act

The Sarbanes-Oxley Act

In July of 2002, Congress passed a new law which very well may revolutionize the way businesses control their finances and accounts. This law is known as the Sarbanes-Oxley Act (SOX) or the Public Company Accounting Reform and Investor Protection Act of 2002. Named for Senator Paul Sarbanes and Representative Michael G. Oxley, the act was a result of numerous corporate and accounting scandals affecting the trust of millions of investors worldwide in any future investments. The act contains 11 sections which cite different corporate board responsibilities, criminal penalties and how each company must comply with the regulations. Though it is still too early to tell, many consider the Sarbanes-Oxley Act to be one of the most significant changes to U.S. securities laws since President Roosevelt’s New Deal program.

The companies that played a part in the drawing up of the Sarbanes-Oxley Act with their corporate scandals were some of the most successful and well known businesses in the United States. These companies include but are not limited to Tyco International, Peregrine Systems, WorldCom and most famously Enron.

The largest culprit of the above mentioned companies, leading to the formation of the Sarbanes-Oxley Act was Enron, which made headlines from 2001-2002. Enron, one of the countries leading companies in energy production employed about 21,000 people and generated around $111 billion in revenue annually before declaring for bankruptcy in early December of 2001. It had even been named America’s Most Innovative Company by Fortune Magazine for six consecutive years, unknowing of the train wreck that was about to unfold.

Enron had created offshore entities, providing the company with full freedom of currency movement anonymously, allowing them to hide the fact that they were actually losing money. Because of this, Enron was made to look more profitable than it actually was and accountants would have to constantly doctor financial information so that the company still appeared to be generating billions in profits even though it actually was not. Enron’s stock price then soared to new levels, prompting top executives to inside trade millions of dollars worth of Enron stock.

In August of 2000, Enron's stock price hit its highest value at $90 per share. This is the point when Enron executives began to sell their shares all the while encouraging the general public to buy more shares of Enron’s stock. They were told that the stock would continue to rise to possibly $130 or $140, which of course never happened. When the executives started selling their shares, the price soon began to plummet. Even as the stock price was steadily declining, investors were encouraged to keep their shares because the stock price would soon bounce back.

By August of 2001, even though Enron's stock price had fallen to $42, shareholders held on because Kenneth Lay, CEO of Enron kept assuring them that the company was headed in the right direction. As October rolled around, the stock had fallen to $15. Due to the cheap price, many saw this as a great opportunity to buy stock in Enron because of what Kenneth Lay had been feeding the media.

On November 30, 2001, Enron's European branches filed for bankruptcy. Two days later, on December 2, 2001, Enron filed for Chapter 11 bankruptcy in the United States. This became the biggest bankruptcy in U.S. history, and more than 4,000 Enron workers found themselves unemployed.

Lay has been accused of selling over $70 million worth of stock at this time, which he used to repay cash advances on lines of credit. He sold another $20 million worth of stock in the open market. Soon, Enron’s stock price would fall to about 30 cents per share (Swartz).

After several top executives were put on trial for the Enron scandal, more cases of accounting scandals and insider trading were exposed. One such example is the collapse of WorldCom.

Bernard Ebbers, the CEO and founder of WorldCom, became very successful by running the second largest long distance phone company in the United States. However, he soon faced hard luck when a proposed merger with Sprint fell through in 2000. When WorldCom’s stock began to decline, it became increasingly difficult to finance his other businesses which relied heavily on WorldCom. In 2001, Ebbers was able to persuade WorldCom’s board of directors to loan him over $400 million to cover his margin calls. When his strategy failed, he was removed from his position and replaced by John Sidgmore.

From 1999 until May of 2002, the company had been using fraudulent accounting practices to cover up its declining financial status by making it appear as if it were in a period of financial growth in hopes of increasing the price of WorldCom’s stock. They were able to do this by underreporting