The prevalence of various financial scandals around the corporate circle has been regarded as one of the many threats that loom around financial institutions. In some cases, this type of scandals has led to the closure of institutions such as Enron and WorldCom (Goldmann, 2010). Such failures of companies occur due to internal or external crimes that are committed within these financial institutions thereby exposing them to risks. At a time when the number of institutions experiencing financial scandals was on the rise, SOX act was passed in 2002 by the US congress to address this challenge (Boatright, 2010). Since its inception, SOX has been effective in reducing the number of financial scandals.
Section 404 of the SOX act mandates the reporting and attesting of the "assessment" on the efficacy of the "management" in the company's internal controls (Loughran, 2010). The SOX further provide protection to whistle blowers in the corporate and this has motivated many to reveal financial misconduct or corruption. Plourd (2007) contends that about "$1 billion dollars in fraud-related forfeitures" has been given back to victims of frauds (Para. 3).Additionally, SOX has promoted "reliability" and "accuracy" of financial statements (Goldmann, 2010, 187). However, a number of financial institution have collapsed due to noncompliance of SOX as well as the fact that SOX does not mention internal auditors in a firms and this has been exploited by fraudulent individuals (Goldmann, 2010).
Institutions managed by SEC such as Lehman and AIG closed down despite having clean financial records as a result of shortcoming in accounting.) highlights that "the passage of federal law" turned accountants to the guardian of the new full disclosure requirement. As a result, accountants have had conflicts of loyalty between firms employing them and the investors. Consequently, some accountants have falsified their financial statements due to lack of efficacy of SEC auditors in hindering "management misconduct" (Markham, 2006, 171).