Editing Sarbanes–Oxley Act (section)

==History and context==

A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between 2000 and 2002. The spectacular, highly publicized frauds at [[Enron]], [[WorldCom]], and [[The Tyco Guide to Ethical Conduct|Tyco]] exposed significant problems with conflicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of SOX in 2002.<ref>Farrell, Greg. ''"America Robbed Blind."'' Wizard Academy Press: 2005</ref> In a 2004 interview, Senator Paul Sarbanes stated:

{{quote|The Senate Banking Committee undertook a series of hearings on the problems in the markets that had led to a loss of hundreds and hundreds of billions, indeed trillions of dollars in market value. The hearings set out to lay the foundation for legislation. We scheduled 10 hearings over a six-week period, during which we brought in some of the best people in the country to testify ... The hearings produced remarkable consensus on the nature of the problems: inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts' conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities and Exchange Commission.<ref>{{cite news|url=http://findarticles.com/p/articles/mi_m0NXD/is_1_11/ai_n25101748/print?tag=artBody;col1|archive-url=https://web.archive.org/web/20080922224201/http://findarticles.com/p/articles/mi_m0NXD/is_1_11/ai_n25101748/print?tag=artBody;col1|archive-date=2008-09-22|title=Sarbanes Interview|publisher=Findarticles.com|access-date=August 27, 2010|first=Nance|last=Lucas|year=2004}}</ref>}}

*'''Auditor conflicts of interest''': Prior to SOX, auditing firms, the primary financial "watchdogs" for investors, were self-regulated. They also performed significant non-audit or consulting work for the companies they audited. Many of these consulting agreements were far more lucrative than the auditing engagement. This presented at least the appearance of a conflict of interest. For example, challenging the company's accounting approach might damage a client relationship, conceivably placing a significant consulting arrangement at risk, damaging the auditing firm's bottom line.
*'''Boardroom failures''': Boards of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for financial reporting in U.S. corporations on the behalf of investors. These scandals identified Board members who either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management.
*'''Securities analysts' conflicts of interest''': The roles of securities analysts, who make buy and sell recommendations on company stocks and bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conflicts. Similar to the auditor conflict, issuing a buy or sell recommendation on a stock while providing lucrative investment banking services creates at least the appearance of a conflict of interest.
*'''Inadequate funding of the SEC''': The SEC budget has steadily increased to nearly double the pre-SOX level.<ref>{{cite web|url=https://www.sec.gov/foia/docs/budgetact.htm|title=SEC Annual Budget|publisher=Sec.gov|date=2009-06-23|access-date=August 27, 2010}}</ref> In the interview cited above, Sarbanes indicated that enforcement and rule-making are more effective post-SOX.
*'''Banking practices''': Lending to a firm sends signals to investors regarding the firm's risk. In the case of Enron, several major banks provided large loans to the company without understanding, or while ignoring, the risks of the company. Investors of these banks and their clients were hurt by such bad loans, resulting in large settlement payments by the banks. Others interpreted the willingness of banks to lend money to the company as an indication of its health and integrity, and were led to invest in Enron as a result. These investors were hurt as well.
*'''[[Internet bubble]]''': Investors had been stung in 2000 by the sharp declines in technology stocks and to a lesser extent, by declines in the overall market. Certain [[mutual fund]] managers were alleged to have advocated the purchasing of particular technology stocks, while quietly selling them. The losses sustained also helped create a general anger among investors.
*'''Executive compensation''': Stock option and bonus practices, combined with volatility in stock prices for even small earnings "misses," resulted in pressures to manage earnings.<ref>{{cite web|url=https://www.sec.gov/news/speech/speecharchive/1998/spch220.txt|title=SEC Levitt Speech The Numbers Game|access-date=August 27, 2010}}</ref> Stock options were not treated as compensation expense by companies, encouraging this form of compensation. With a large stock-based bonus at risk, managers were pressured to meet their targets.

===Timeline and passage===
[[File:President George W. Bush meets with Senator Paul Sarbanes and Secretary of Labor Elaine Chao.jpg|thumb|Before the signing ceremony of the Sarbanes–Oxley Act, President [[George W. Bush]] met with Senator [[Paul Sarbanes]], [[U.S. Secretary of Labor|Secretary of Labor]] [[Elaine Chao]] and other dignitaries in the [[Blue Room (White House)|Blue Room]] at the [[White House]] on July 30, 2002.]]

The House passed Rep. Oxley's bill (H.R. 3763) on April 24, 2002, by a vote of 334 to 90. The House then referred the "Corporate and Auditing Accountability, Responsibility, and Transparency Act" or "CAARTA" to the [[United States Senate|Senate]] [[U.S. Senate Committee on Banking, Housing, and Urban Affairs|Banking Committee]] with the support of President [[George W. Bush]] and the SEC. At the time, however, the Chairman of that Committee, Senator [[Paul Sarbanes]] (D-MD), was preparing his own proposal, Senate Bill 2673.

Senator Sarbanes's bill passed the Senate Banking Committee on June 18, 2002, by a vote of 17 to 4. On June 25, 2002, [[MCI WorldCom|WorldCom]] revealed it had overstated its earnings by more than $3.8 billion during the past five [[Fiscal year|quarters]] (15 months), primarily by improperly accounting for its operating costs. Senator Sarbanes introduced Senate Bill 2673 to the full Senate that same day, and it passed 97–0 less than three weeks later on July 15, 2002.

The House and the Senate formed a [[United States Congress Conference committee|Conference Committee]] to reconcile the differences between Sen. Sarbanes's bill (S. 2673) and Rep. Oxley's bill (H.R. 3763). The conference committee relied heavily on S. 2673 and "most changes made by the conference committee strengthened the prescriptions of S. 2673 or added new prescriptions."<ref>Bostelman, John T. (date unknown). The Sarbanes–Oxley Deskbook § 2–31.</ref>

The Committee approved the final conference bill on July 24, 2002, and gave it the name "the Sarbanes–Oxley Act of 2002". The next day, both houses of [[United States Congress|Congress]] voted on it without change, producing an overwhelming margin of victory: 423 to 3 in the House;<ref>{{cite web|url=http://clerk.house.gov/cgi-bin/vote.asp?year=2002&rollnumber=348|title=Data|publisher=clerk.house.gov|date=2002|access-date=2019-11-27}}</ref> and 99 to 0 in the Senate.<ref>{{cite web|url=https://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=107&session=2&vote=00192|title=U.S. Senate: U.S. Senate Roll Call Votes 107th Congress – 2nd Session|website=senate.gov}}</ref>

On July 30, 2002, President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of [[Franklin D. Roosevelt]]".<ref name="Bumiller2002" />