The Successes and Shortfalls of the Sarbanes-Oxley Act of 2002

The collapse of Enron and its auditor, Arthur Andersen, in 2001 marked the greatest financial scare since the Great Depression. Enron, along with several other scandals, such as WorldCom and Waste Management, sent a financial shockwave throughout the United States. As a result, the public was no longer confident in the United States’ financial markets and the work being done by independent auditors. In order to satisfy the public and ensure that a case, such as Enron, would not happen again, Congress proposed and passed the Sarbanes-Oxley Act of 2002. This paper presents an analysis of the Sarbanes-Oxley Act of 2002, specifically regarding its successes, shortfalls, and overall effectiveness. We find that the Sarbanes-Oxley Act had mixed effects. Specifically, we found an overall decrease in abnormal accruals and financial restatements. However, we also found that the Sarbanes-Oxley Act has incentivized stagnation in smaller public firms, as well as harmed the audit quality of smaller audit firms