In the wake of major corporate and accounting scandals such as Enron, WorldCom and Tyco, which had cost investors tens of billions of dollars and resulted in declining confidence in US capital markets; on July 30th 2002, US President George W Bush signed into law the Sarbanes-Oxley Act, a milestone for the corporate governance reform in the U.S.
The main provisions of the Act include (Cohen et al, 2004):
- Creation of the Public Company Accounting Oversight Board (PCAOB)
- Requires public companies to evaluate and disclose the effectiveness of their internal controls as they relate to financial reporting
- Certification of financial reports by chief executive officers and chief financial officers
- The company’s Audit committee must pre-certify auditors for audit and non-audit work. The audit committee must be fully independent and its role is overseeing the relationship between the company and its auditor.
- Prohibition on insider trading and accelerated reporting of insider trading
- Tougher criminal and civil penalties for violations of securities law, including longer jail sentences and larger fines for corporate executives who knowingly and intentionally misstate financial statements to mislead investors.
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