 Welcome to the subunit on the Sarbanes-Oxley Act, also known colloquially as SOX. We'll start by reviewing the background of the act. As we review the background, I want to ask yourself some questions. What caused the problems? What caused the problems here? Not only that, but what are the potential solutions involved? Think about that as we go along. We'll start way back in 2000 when we were seeing the emergence of what became known as the dot-com bubble. Basically, in the late 90s and to the beginning of 2000, there were profusion of internet-based companies. This led to excessively high prices for their stock. After the bubble burst in 2000, in March of 2000, massive amounts of investment capital were lost on Wall Street. There was already in the air a big loss of confidence. In 2001 to 2002, we see even more corporate scandals emerging. Let's take a look at some of the corporate scandals that emerged during this time. Late 2001, we see the emergence of a major scandal with the Enron Corporation, a large energy corporation out of Texas. It was discovered that Enron Corp had used complex accounting in order to hide excessive debt and losses. They were hiding debt and losses and they were artificially keeping the company's stock price high. The result was that senior executives of Enron were able to benefit by selling their stock while it was high. By November 2001, prices of Enron stock had gone from a high of $90 to a low of $1. Leading executives of the company were indicted and convicted, including the man seen here, CEO, Chief Executive Officer Kenneth Lay. That wasn't the only fallout from the Enron scandal. As a result of the Enron scandal, criminal charges were also bought against Arthur Anderson, one of the big five accounting firms at the time in the United States. Arthur Anderson handled audits for Enron Corporation. They were accused of aiding Enron executives and hiding the extent of debts and losses from Enron's audit board, to whom they were reporting. If the audit board is not aware of what's going on, that creates a difficulty in assessing the accuracy of audits. In mid-2002, we see another major scandal with the American telecommunications company, WorldCom, a major American telecommunications company, and filed the largest bankruptcy protection action ever up to that point. What was found was that leading executives of WorldCom, including its CEO, Bernard Bernie Ebers, had used accounting tricks to inflate the company's earnings. You see how accounting is playing a problem here. They inflated the company's earnings by as much as $11 billion. Several of these executives, including Ebers, received extensive prison sentences. The last major scandal of 2002 involved this man, Dennis Kozlowski. He was the CEO of Tyco International. Eventually, Kozlowski and senior managers were convicted of essentially stealing money from Tyco in the form of unauthorized bonuses, loans, and other payments. Key figures in the government's allegations against Dennis Kozlowski and Tyco were the chief financial officer, the CFO, and the corporate counsel, the attorney for the firm. Dennis only has one S. It may be good to step back at this point and ask yourself some questions and reflect on what problems you're seeing. What are the problems that are going on here? Well, I think we can enumerate them this way. We have executives of public companies misusing money that belongs to the corporation. We have problems with auditors, both internal and external, who are hiding liabilities and losses. You have executives of these public corporations being aided and abetted by financial officers, chief financial officers, and others, and lawyers within the company. You have poor oversight by institutions that should be watching out like the board of directors or the audit board, which oversees audits of public companies. In light of this, you might ask yourself, what might have been some good solutions to the problems? Well, Congress obviously had their own ideas, United States Congress. In 2002, the Sarbanes-Oxley bill was introduced and passed by the summer of 2002. Let's take a look at some of the key requirements. It established a public company accounting oversight board. A public company accounting oversight board. We'll notice again that one of the major problems here in these scandals was accounting and how it was being reported, how the audits were being done. The public accounting oversight board was established to regulate accounting and auditing requirements of public companies and the firms that audit them. Along with this, auditors of public companies must register. Auditors of public companies must register with the public accounting oversight board, also known as the PCAOB, and they're required to maintain independence. So for instance, the company that audits, the outside auditors that come in, have to be independent from the rest of the company if there are any relationships with the public company. In other words, they're campaigning conflicts of interest. The auditors must maintain independence and not get any types of benefits or payoffs that would influence them. On the other hand, audit committees also must maintain independence from the rest of the public company. So members of audit committees of the public companies are required to be independent. Again, it's a keystone here. Executives now are on the hook because they have to certify the documents that are going to the SEC and to the public company accounting oversight board. Executives are required to certify the integrity of financial reporting to the SEC and the effectiveness of internal controls. And lastly, addresses corporate attorneys. Corporate attorneys now under Sarbanes-Oxley must report violations of securities laws. So they can't play a role. They can't hide anything as may have happened in some of these previous scandals. Alright, so let's take a look at some of the penalties that we've seen instituted by Sarbanes-Oxley. There were several penalties that were instituted, including fines and imprisonment up to 25 years in prison for defrauding investors. There were increased prison sentences for mail and wire fraud using the mails or using electronic means to commit fraud. These were raised from 5 to 20 years. Executives can face up to 20 years for falsely certifying the statements they're required to make. So falsely certifying the statements they're required to make relating to the company's financial conditions. So if you had thought some good solutions to the problems might include more criminal penalties, or if you thought might include more individual accountability, as we saw many people kind of trying to get away by saying they weren't required to do certain acts, well then you're thinking the same way as the congressmen and women who adopted the Sarbanes-Oxley Act. Stronger regulation of companies that audit public companies, individual accountability, including for audits, auditors and lawyers, and criminal civil penalties, tougher criminal and civil penalties, all of these were important aspects of Sarbanes-Oxley Act.