In the aftermath of the accounting scandals of 2000 to 2004, scandals that cost investors billions of dollars and shook investor confidence in public firms, the federal government passed the Sox Act of 2002 in the hopes of restoring investor confidence back to corporate America. This paper focuses on the important Titles in the Sox Act, especially SOX 404 that mandates an internal and external assessment of a firm’s internal controls, to show the effects of the pre-SOX accounting scandals and how, in a reactive response by the SEC, it shaped the SOX Act. The SEC’s vision to restore investor confidence required a tactical move to establish accountability, conformity and transparency in financial reporting. The SOX Act was the tool to implement the SEC’s game plan, consisting of the rules and guidelines that firms must follow: external auditing, internal control parameters, and accounting information system harmonization. Any deviation or drastic moves from these guidelines would be slapped with heavy penalties and legal action. The regulations made it obvious that the SEC was encouraging an accounting-industry move towards continuous assurance by a more centralized and automated financial reporting system. This system promotes a technologically-driven business model of instantaneous business processing that would reduce the latency between decision- making and their consequences, but yet would include the necessary controls of risk assessments.
Between 2000 to 2002, the exposure of prevalent accounting fraud in the powerhouse of Enron soured investor relationships toward corporate America. The federal government rushed to intervene with new laws and regulations to prevent a market crash and to stabilize the financial market due to the trillions of dollars lost overnight in market valuation when Enron fraud surfaced. On July 30, 2002, President George W. Bush signed the Sarbanes-Oxley Act into law, calling it “the most far-reaching reform of American business practices since the time of Franklin D. Roosevelt”. The main goals of the Sox act were to correct serious oversights in accounting practices, brought to light by the corporate scandals, and to restore investor confidence by implementing standardized financial reporting and enforcing ethical business practices. According to Morrison (2010), unethical business practices create loose moral value, which would result in diminished shareholder value.