Question

Do you think SOX is proactive or reactive? In discussing your answer, incorporate some of the facts from the Enron and WorldCom cases. Is there anything specific in the cases that can be tied directly to SOX?

Answer 1

I think that SOX is reactive. This can be seen from the Enron and the WorldCom debacle. The accounting scandals at both Enron and WorldCom took place before SOX was passed and SOX was largely passed as an act as a response to these scandals. The Enron accounting scandal showed that the compliance standards for public accounting and auditing were weak and companies can get away with fraudulent acts quite easily. Enron’s management and executives were able to report inflated earnings for several years while in reality the company was incurring losses. In case of WorldCom the company’s management was able to cook its books before eventually filing for Chapter 11 bankruptcy.

SOX was a reactive act or legislation that was passed only after such big scandals broke out and highlighted the need to close loopholes in accounting practices, to strengthen corporate governance rules, to increase accountability and disclosure requirements of companies, and increase requirements for corporate transparency.

Thus SOX was not a proactive act and legislation but was a reactive act which was passed only in the aftermath of back to back scandals. The act did not envisage the need to bolster accounting practices at companies in the first place and hence cannot be said to be proactive in nature.