Understanding the Sarbanes-Oxley Act and Its Impact

In 2002, U.S. lawmakers quickly passed the Sarbanes-Oxley Act (SOX) in the wake of several high profile bankruptcies and the revelation of accounting irregularities and corporate fraud at several American corporations, such as WorldCom, Adelphia Communications and Enron. Did the main benefits of SOX - gains in shareholder confidence that increased equity market participation and liquidity - justify these costs? Do the benefits of SOX for corporate governance - increased oversight from the board of directors, an increase in the reliability of internal controls, and increased power given to audit committees - help to justify the costs? This note discusses the legislation itself with its costs and benefits.