Academic journal article The University of Memphis Law Review

The Sarbanes-Oxley Act of 2002: A New Ballgame for Accountants

Academic journal article The University of Memphis Law Review

The Sarbanes-Oxley Act of 2002: A New Ballgame for Accountants

Article excerpt


On July 30, 2002, President Bush signed the most important piece of federal accounting legislation since the Great Depression.1 This legislation, known as the Sarbanes-Oxley Act of 2002 (Act),2 sailed through Congress, with only three dissenting votes in the House of Representatives, as a direct response to a growing trend of questionable accounting practices, audit failures, and corporate bankruptcies.3

Enron's bankruptcy filing in December 2001 was the largest such filing in U.S. history, though it was soon surpassed by WorldCom's filing less than six months later.4 Both of these bankruptcy filings followed restatements of prior year financial statements resulting from accounting irregularities, audit failures, management fraud, and a breakdown of corporate governance by boards of directors. Unfortunately, Enron and WorldCom were not the only public firms forced to reveal accounting irregularities and fraud; others included Global Crossing, Adelphia, Xerox, and Tyco.5 As a result, shareholders in these firms saw the value of their shares drop and often evaporate. Moreover, the capital markets, as a whole, suffered tremendous declines and stock markets around the world plummeted during 2002. Investor confidence was severely shaken as corporate financial disclosures were no longer seen as reliable and trustworthy.6 In direct response to this scenario, Congress acted by creating the Act to "fix the system" and restore investor confidence in U.S. capital markets.7 The President, during the signing ceremony, analogized the accounting scandals to the terrorist attacks on September 11, 2001, by stating, '"In the aftermath of September 1 lth, we refuse to allow fear to undermine our economy. And we will not allow fraud to undermine it either.'"8

The Act was signed merely one month after WorldCom's bankruptcy filing and Arthur Andersen's guilty verdict for obstruction of justice in the Enron collapse, and less than eight months after Enron's collapse. Whether the Act will succeed in reforming public accounting and restoring investor confidence remains to be seen. However, the Act will significantly change corporate financial reporting and public company audits for years to come.

The Act imposes substantial changes on public accounting," financial reporting,"1 and corporate governance." In addition, provisions are included in the legislation that impact attorneys, financial analysts, and others.12 Major provisions include the creation of a new Public Company Accounting Oversight Board,13 stricter auditor independence rules,14 new audit committee requirements,15 expanded management disclosure responsibilities,16 and greater criminal penalties for document destruction and securities fraud.17 The last section of the Act provides federal whistleblower protection not only for securities law violations, but also for all violations and alleged violations of federal law.18 This article examines and analyzes provisions of the Act creating the Public Company Accounting Oversight Board,19 authorizing the adoption of Generally Accepted Accounting Principles,20 strengthening auditor independence,21 increasing corporate governance,22 providing for regulation of participating attorneys,23 and establishing whistleblower protection.24 In addition, the article considers the potential impact that the Act will have on the affected professions.25


Section 101 (a) of the Act creates a new five-member Public Company Accounting Oversight Board (PCAOB) to regulate and oversee audits of public companies.26 The five members are appointed by the securities and Exchange Commission (SEC) in consultation with the Federal Reserve and the Treasury Department, and must consist of two current or former Certified Public Accountants (CPA) and three non-CPAs with financial expertise.27 While the Chair of the PCAOB may be a CPA, he or she must not have been practicing as a CPA within the past five years. …

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