Economic consequences

The financial scandals of Enron, WorldCom and some other large companies in the beginning of this century, encouraged Congress to introduce the Sarbanes Oxley Act (SOX) 2002 in order to fight the escalating commitment of financial statement fraud. The main objective of this legislation was to recover the investors’ trust in the American stock market, and enhancing the prevention and detection of corporate fraud. In this thesis I will be analyzing the effectiveness of SOX 2002 in preventing financial statement fraud, performing an empirical research based on restatement data from 1997 till 2006, corporate governance characteristics and effective internal control systems. The restatements data are originally from the GAO database, corporate governance characteristics were collected from the Risk Metrics database and internal controls information were obtained from the Audit analytics database. To perform this study a logistic regression model was used to examine whether the implementation of SOX have prevent fraudulent reporting through effective internal controls systems and some corporate governance components. Finally, the results of the study showed that SOX has not been able to prevent or reduce the likelihood of financial statement fraud. The main changes in corporate governance characteristics, board structure and audit committee composition, did not show to have any influence on the probability of fraud scenarios after SOX’s implementation. However, the effectiveness of internal controls- a compliance requirement implemented by SOX- appeared to have a very significant impact on the prevention of corporate fraud. This means that some reforms are still needed on the level of corporate governance and other segments of SOX, in order to have a more efficient result from this law.