As the investors worldwide were recuperating from busted tech-bubble of 2000, a series of corporate misgovernance, fraudulent accounting practices and auditing abnormalities surfaced from corporations like Enron and WorldCom. In response of these corporate financial scandals, US Congress passed a legislation known as "The Sarbanes-Oxley Act" or "SOX" (by July 30, 2002) which brought in new set of regulations and responsibilities for all boards of US public companies, their executive management members and associated public auditing & accounting firms, ordering Securities and Exchange Commission (SEC) to administer the entire compliance process.
SOX Act tried to address disturbing trends in US Public Corporations in relation to inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts' conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities and Exchange Commission.
Inadequate oversight of accountants: To minimize accounting irregularities, a Public Company Accounting Oversight Board (Sarbanes 2002) has been established and charged with authority to keep vigilance over public accounting firms providing auditing services to various public corporations. Strict guidelines has been provided for registering auditors, improving accounting standards (GAAP and especially non-GAAP), defining various compliance processes, policing and inspection for conduct and quality control.
Lack of auditor independence: Prior to SOX enforcement, various auditors of public corporations became engaged in providing "other" or "non-auditing" consulting services to their respective clients creating classic contexts of "conflict of interest". In order to maintain these lucrative consulting opportunities, auditors who otherwise should have behaved like corporate financial watchdogs, failed to challenge several accounting anomalies, often in collusion with some senior management exectutives. SOX enforced auditor independence as one of its core directive to prevent future occurance of such incidents.
Weak corporate governance: SOX mandated that chief executive members of public corporations (usually CEO or CFO)