Legal enforcement of ethical behaviour and veracious financial reporting: the Sarbanes-Oxley Act
With the increase of value of the stock exchange and internationalization of markets profits have increased, and with them incentives for fraud. Gordon Gekko's1 motto "greed is good" seemed to have been adopted by the large corporations. However, whereas Gekko predicted that greed would save the U.S.A., it has turned out that the fraud resulting from greed can cause great damage to companies and even go so far as to destroy them. An example of this is the Enron scandal and the damage it did to the accounting office Arthur Andersen. It was the design of complicated financial structures to maintain the profits and keep investors happy, combined with the overestimation of the underlying values of long-term contracts, that started the complications in the books of Enron. Furthermore, Enron manipulated its leverage ratios by using Special Purpose Entities2 which also served to cover up risky assets. In order to compensate for this risk Enron issued shares of stock. However, due to this issuance the value of the shares decreased. Eventually the scheme started to unravel when the Enron 2000 financial statements were criticized by several parties, which in consequence led to Enron filing for bankruptcy on 2 December 2000 (Thomas, 2002). During the entire setup of the financial scheme and the increase in complexity of the structure, along with the dubious role of the Special Purpose Entities, Arthur Andersen issued an unqualified opinion for the financial statements which indicated that the financial statements were prepared in a correct manner. It was the subsequent confession that employees at Arthur Andersen had destroyed perhaps thousands of documents regarding the Enron audit, thus destroying important evidence, that led to a decline in the reputation of Arthur Andersen. The result of this decline in reputation was a difficulty in attracting new clients, which led to the bankruptcy of Arthur Andersen (Chaney and Philipich, 2002). A current problem in the accountancy world is a lack of trust from the general public in the Certified Public Accountant (CPA) on the one hand, whereas on the other hand lack of ethical behaviour from the CPA when confronted with error of fraud in a company's financial statements is an issue. 
As a result of reviewing the problems at, amongst others, Enron, in order to motivate CPAs to behave ethically and according to the law, the U.S.A. have enforced the Sarbanes-Oxley Act. The object of this Act is to "fix auditing of U.S. companies"(Coates IV, 2007, p. 91), that is, to enforce ethical behaviour by law. Moreover, an object of the Sarbanes-Oxley Act was to provide a law to make it easier to convict perpetrators of fraud. The description in the Act itself is this: "To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes." (Sarbanes Oxley, 2002, in Streng, 2011, p. 32). 
The Sarbanes-Oxley Act consists of several titles, each addressing one of the objects or problems for which the Act was designed. Title 1 discusses the establishment of the Public Company Accounting Oversight Board, an independent board to oversee the audit, make sure the audit is conducted according to the established criteria and rules, and protect the interests of investors and users of financial statements in preparation of the audit. Titles 2 and 4 discuss rules regarding the performance of an audit, stating respectively requirements and enforcement of auditor independence and requirements to transparency and disclosures. Titles 3, 10 and 11 discuss responsibilities of the company towards investors and financial statement users in terms of disclosure and accountability. Titles 5 and 6 deal with recovering investor confidence in financial statements. Title 7 deals with necessary research to be conducted in order to assess the effects of several factors that may play a role in fraud, such as consolidation of financial statements and the role of credit-rating agencies. Titles 8 and 9 discuss the penalties for fraud (Streng, 2011) (Sarbanes-Oxley Act, 2002). It is the combination of these several goals and objects which are discussed in the different titles of the Act that makes it a specific mixture of necessary rules to solve the problems mentioned above.
Now, ten years after the acceptance of the Act, the added value of the additional regulation to financial markets and the accounting profession can be observed. A point of critique has been that the Act is a "costly regulatory overreaction" (Coates IV, 2007, p. 91). Another criticism mentioned by Coates IV (2007) is that the legal enforcement for which the Act was formed already existed in other laws. However, as there is evidence of audit failures despite the already existing rules and laws, he concludes that they were not strong enough to enforce correct behaviour. Aaronson (2002) recognizes that the purpose of the Sarbanes-Oxley is to change the "nature and scope of regulating America's stock markets, the audit firms, and other professionals serving public companies" (Aaronson, 2002, p. 132). However, Aaronson is concerned that the Act focuses merely on investors, whereas he believes that the quality of the assurance system should be improved as well.  Perino (2002) adds two important comments to these points of critique. The first is that "haste makes waste" (Perino, 2002, p. 627); he notes that since the whole process of passing the law happened very quickly, it resulted in an unorganized law, which shows in the scattering of solutions over several titles (as mentioned above). The second is that the timing was wrong; since the law was passed in an election year, it is probable that politicians paid more attention to solutions that would look good for their campaign instead of to long-term solutions that would suit the problem. 
From the above, the conclusion can be drawn that of the three goals set for the Sarbanes-Oxley Act, being the improvement of quality of the assurance system, the implementation of proper penalties for frauds, and the clear stating of rules and requirements to financial statements and the responsibilities of accountants and companies, only the first two have been achieved. However, the true value of the Act can only be observed when looking at accounting scandals which have been prevented by the Act.

References
Aaronson (2002) Preventing Future Enrons: Implementing the Sarbanes-Oxley Act of 2002, Stanford Journal of Law, Business and Finance, Vol. X3, No. 1, p. 127-153
Chaney, Philipich (2002) Shredded Reputation: The Cost of Audit Failure, Journal of Accounting Research, Vol. 40, No. 4, p. 1221-1245
Coates IV (2007) The Goals and Promise of the Sarbanes-Oxley Act, The Journal of Economic Perspectives, Vol. 21, No. 1, p. 91-116
Perino (2002) Enron's Legislative Aftermath: Some Reflections on the Deterrance Aspects of the Sarbanes-Oxley Act of 2002, St. John's Law Review, Vol. 76, No. 4, p. 671-698
Streng (2011) Corporate Governance, Internal Control and Risk Management, 2nd edition, Bertius Publishers, Veenendaal
Sarbanes-Oxley Act (2002) One Hundred Seventh Congress of the United States of America
Thomas (2002) The Rise and Fall of Enron, Journal of Accountancy, April 2002, p. 41-45, 47-48
1 Gordon Gekko is a fictional character from the movie "Wall Street". 
2 Special Purpose Entities are "firms created by a public company that usually serve to isolate some particular financial risk" (Coates IV, 2007, p. 97), used by Enron to cover up risky assets and to keep risks and losses out of the books. 
3 The volume of this edition is not indicated with this text, nor with another version of this text.