Investors, Capital Markets Aided by 2002 Law

Article excerpt

Ten years ago, the financial world was a mess.

Scandals at Enron, Tyco International, WorldCom and other companies dominated the headlines. Accounting giant Arthur Andersen, a central player in the Enron scandal, was in a death spiral. The public was wielding pitchforks, and Washington was listening.

What transpired was a legislative package called the Sarbanes- Oxley Act of 2002, designed to end the madness.

President George W. Bush called it the most far-reaching reform of business practices since the Depression and proclaimed the era of "low standards and false profits" at an end. The stock market almost immediately stabilized after a two-year downtrend, and the economy began to mend.

But were the accolades deserved?

That remains an open question one decade since the act's enactment July 29, 2002, after lopsidedly favorable votes in Congress.

Supporters say Sarbanes-Oxley, named after its two chief architects in Congress, has made public-company financial reports more reliable while instilling tougher internal controls and higher standards in the accounting profession. Boards of directors got new powers, especially in terms of overseeing the critical financial- auditing function.

Corporate chief executive officers and chief financial officers now must sign off on financial reports at the risk of being held personally responsible for fraudulent errors.

"It does make people think twice," said F. John Mathis, a professor of economics and finance at the Thunderbird School of Global Management in Glendale, Ariz.

The result has been a "substantial benefit to investors and U.S. capital markets," reads a letter from top executives of accounting firm Ernst & Young as part of a report the firm produced to mark the 10-year anniversary. "SOX was designed to enhance the reliability of financial reporting and to improve audit quality. We believe it has done both."

But the legislation also has raised costs for corporate America and probably has discouraged many private companies from selling shares in the stock market, so as to avoid being subjected to the rules. …