The Sarbanes-Oxley Act Case Study

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Capitalism is almost too good to be true, but there comes a time when government intervention becomes a necessity, especially after a series of scandals in corporate businesses that destroyed the trust of investors and consumers. The government finally had to come up with a solution due to the fact that the free market is no longer efficient on its own. Established in 2002, the Sarbanes-Oxley Act, also known as Public Accounting Reform and Investor Protection Act, is a federal law that aims to improve corporate governance by increasing compliance regulations and financial transparency in hopes of preventing big scale corruptions such as the Enron Scandal from happening again. The Enron Scandal, along with other corruption and fraud in the businesses …show more content…

The need to create a law to correct the corruption and accounting fraud is a sign of a market failure. Fike and Gwartney (2015) define market failure as “situations where there is a systematic conflict between personal self-interest and getting the most out of the available resources” (p. 208). In a market, there are sellers and buyers that are competing for a limited amount of resources. When a market is running efficiently, the number of goods and services produces match the demand of the public. That is a state of equilibrium. A market failure occurs when equilibrium is disturbed. In Enron’s case, those who were a part of the scandal had greed and desires that their salaries couldn’t satisfy. Their personal interest urged them to take what is not theirs, which is not only illegal but it creates a resource deficit as well. Enron, being a big and influential company, has a great impact in society; therefore, when it fails, it creates a chain reaction that affects other businesses, investors, and the general public. People start selling their stocks and stop investing. The failure of Enron is a negative externality. The decisions that the executives made that were a part of the scandal negatively affect investors and the general public. As a result, when a company as significant as Enron failures, it creates a market

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