Securities and Exchange Commission Historical Society

Wrestling with Reform: Financial Scandals and the Legislation They Inspired

Steady Drumbeat of Corporate Scandals: Sarbanes-Oxley Act of 2002

WorldCom and the Rush to Legislate

“Just the shock of WorldCom, it was several times the size of Enron. Enron, of course, was the largest bankruptcy in history at that time and then just six or seven months later, WorldCom exceeded that by several times over.  Sarbanes-Oxley was about accounting, auditing, it was about corporate governance, but in a larger sense, it was about restoring confidence to investors in the marketplace.”

Peggy Peterson, November 15, 2012 A Measured Response?

The collapse of WorldCom gave the final push for reform.  Founded in 1983, WorldCom boomed with the telecommunications industry in the 1990s before falling victim to high expectations and low demand.  It shifted costs between different accounts to pump up its profits on paper, and utilized accounting gimmicks abetted by Arthur Andersen, its auditor. 

In the spring of 2002, an internal auditor sounded the alarm.  On June 25, WorldCom announced an investigation into improprieties of an “unprecedented magnitude.”  A month later, the company filed the largest Chapter 11 bankruptcy in American history to that point, costing stockholders over $180 billion. (43)

WorldCom’s collapse gave fresh momentum to the Sarbanes bill.  What the Wall Street Journal called a “steady drumbeat of corporate scandals,” along with impending Congressional elections, undermined Republican resistance and created a crucible for legislation.  Senate Majority Leader Thomas Daschle (D-South Dakota) claimed that he now could rally eighty votes behind the legislation.  Representative Oxley worried that things were moving too quickly: “summary executions would get about 85 votes in the Senate right now,” he said.  He convened and chaired a conference committee to refine the bill. (44)  

The day the conference began, the Dow fell 390 points, further weakening Republican resistance.  Despite sparring over consulting services and the accounting board, most Republicans wished to pass a bill and move on.  Thus, the corporate governance and accounting reform provisions of the Sarbanes bill came through largely unscathed.  The new bill passed 423 to 3 in the House on April 24 and 99 to 0 in the Senate on July 15.  President George W. Bush signed the Sarbanes-Oxley Act of 2002 into law July 30. (45)

The Sarbanes-Oxley timeline demonstrates how events drive legislation.  The Enron scandal alone brought only a modest legislative response; had the scandals ended there, with the Senate nearly evenly split, the Oxley bill would have been the likely vehicle for reform.  But the “steady drumbeat” of scandals, the resounding crash of WorldCom, pending elections, and market downturn made possible broader reform than Congress originally intended.


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Footnotes:

(43) Fotios Harmantzis, “Inside the Telecom Crash: Bankruptcies, Fallacies, and Scandals.”  Telecommunications Management, School of Technology Management, Stevens Institute of Technology, 5-7.  The Economist, “WorldCon?” June 25, 2002.  The Economist, “Another Cowboy Bites the Dust,” June 27, 2002.  Harmantzis, “Inside the Telecom Crash: Bankruptcies, Fallacies, and Scandals,” 6.

(44) Wall Street Journal, “Accounting Reform Gets Big Lift As Senate Panel Backs New Board,” June 19, 2002.  Washington Post, “Business Reform Gains Support in Senate, SEC,” June 27, 2002.  New York Times, “GOP in Congress Moving Past Bush on Business Fraud,” July 12, 2002.

(45) New York Times, “The Confidence Crisis,” July 21, 2002.  Roberta Romano,  “The Sarbanes-Oxley Act and the Making of Quack Corporate Governance,” 117.

Related Museum Resources

Papers

July 30, 2002
document pdf (Government Records)
Winter 2003
document pdf (Courtesy of Theodore Levine)
June 2, 2004
document pdf (prepared for the museum by Harvey L. Pitt)
April 5, 2006
transcript pdf (with permission of The George Washington University Law School)

Oral Histories

14 April 2008

Daniel Goelzer

Programs

15 November 2012

A Measured Response?

Moderator: Robert K.D. Colby

Presenter(s): Daniel Goelzer, Peggy Peterson, Dean Shahinian, Linda Chatman Thomsen

16 October 2012

Deloitte Fireside Chat VII: The Profession Looks at Sarbanes-Oxley

Moderator: Mark Peecher

Presenter(s): Alan Beller, Joseph Ucuzoglu

30 July 2012

The Sarbanes-Oxley Act: The First Decade

Moderator: Mark Beasley

Presenter(s): Michael Oxley, Paul Sarbanes

Made possible through the support of the Center for Audit Quality

07 June 2012

A Creative Irritant: The Relationship between the SEC and Accounting Standard Setters (Thirteenth Annual Meeting)

Moderator: George Fritz

Presenter(s): Dennis Beresford, Edmund Jenkins, A. Clarence Sampson

22 March 2012

Diane Sanger Memorial Lecture

Presenter(s): Harvey Goldschmid

Made possible through the support of the family of Diane Sanger

21 April 2009

Fireside Chat - SEC Office of Chief Accountant

Moderator: Theresa Gabaldon

Presenter(s): John Albert, Gary Previts

16 October 2007

Fireside Chat - Sarbanes-Oxley Section 404

Moderator: Theresa Gabaldon

Presenter(s): Kurt Schacht, Herbert Wander

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