How Harsh Should the Legislation Be to Prevent Financial Crimes?

Abstract

The collapse of Enron and its auditor Arthur Andersen was one of the biggest events in US corporate history and it had long-lasting repercussions in the corporate world. Following the Enron – Arthur Andersen scandal, the US Congress passed the Sarbanes Oxley Act (SOX). The legislation was designed to strengthen existing securities regulations and enacted harsh penalties on lawbreakers. SOX was one of the first and heavy responses to corporate fraud. Since the passage of SOX, debates revolving around the costs and benefits of it have prevailed and several studies investigated its effectiveness to prevent future financial crimes. This study first reviews the chronology of the events leading to SOX, followed by a brief discussion of the rules and regulations established by SOX. The empirical evidence presented by previous studies on the effectiveness of legislation and the harsh penalty Enron's auditor had received are assessed and evaluated.