Because of growing concerns about both agency and ethical issues, in 2002 Congress passed the Sarbanes-Oxley Act, or SOX as it is commonly called. One of the primary inspirations for this new law was Enron, which failed financially in December 2001. Prior to bankruptcy, Enron’s board of directors actually voted on two occasions to temporarily suspend its own

“code of ethics” to permit its CFO to engage in risky financial ventures that benefited the CFO personally while exposing the corporation to substantial risk.

SOX holds corporate advisors who have access to or influence on company decisions (such as a firm’s accountants, lawyers, company officers, and boards of directors) legally accountable for any instances of misconduct. The act very simply and directly identifies its purpose as being “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes” and mandates that senior executives take individual responsibility for the accuracy and completeness of the firm’s financial reports.

SOX safeguards the interests of the shareholders by providing greater protection against accounting fraud and financial misconduct.

Unfortunately, all this has not come without a price. Although SOX has received praise from the likes of the former Federal Reserve Chairman Alan Greenspan and has increased investor confidence in financial reporting, it has also been criticized. The demanding reporting requirements are quite costly and, as a result, may inhibit firms from listing on U.S. stock markets.

Concept Check 1. What is the main difference between an investment banker and a commercial banker?
2. What are the three major functions of an investment banker?
3. What are the five key methods by which securities are distributed to final investors?
4. Within the financial markets, explain what we mean by “private placements” and name the advantages and disadvantages.