Financial Fraud Prevention and Detection: Governance and Effective Practices

CHAPTER THREE

From Treadway to Sarbanes-Oxley

THE SARBANES-OXLEY ACT OF 2002 has been described with any number of breathless accolades. One lawyer described it as “a bombshell.” Fortune magazine called it “the most profound reworking of the nation's securities laws since they were enacted in the early 1930s.” Others have referred to it alternatively as revolutionary, groundbreaking, and unprecedented. President George Bush himself, in signing the act into law, said it contained “the most far-reaching reforms of American business practice since the time of Franklin Delano Roosevelt.”

In many respects, such reactions were understandable. Not since the Great Depression had the federal government undertaken such a broad-based and intense examination of financial reporting systems and how they can go astray. Nor had Congress taken such a giant step to combat perceived problems with financial misreporting and demonstrated such a ferocious intolerance for the deliberate misapplication of generally accepted accounting principles (GAAP).

In two important respects, though, Sarbanes-Oxley is less groundbreaking than it might first seem. One is in the way it came about. True, following on the heels of high-profile accounting debacles such as those at Enron Corporation and WorldCom, Sarbanes-Oxley seemed to burst onto the national scene with breathtaking drama. Still, viewed in context, the act might be viewed as another logical step—albeit a big one—in an ongoing evolution of financial reporting ...