“Just the shock of WorldCom, it was several times the size of Enron. Enron, of course, was the largest bankruptcy in history at that time and then just six or seven months later, WorldCom exceeded that by several times over. Sarbanes-Oxley was about accounting, auditing, it was about corporate governance, but in a larger sense, it was about restoring confidence to investors in the marketplace.”
The collapse of WorldCom gave the final push for reform. Founded in 1983, WorldCom boomed with the telecommunications industry in the 1990s before falling victim to high expectations and low demand. It shifted costs between different accounts to pump up its profits on paper, and utilized accounting gimmicks abetted by Arthur Andersen, its auditor.
In the spring of 2002, an internal auditor sounded the alarm. On June 25, WorldCom announced an investigation into improprieties of an “unprecedented magnitude.” A month later, the company filed the largest Chapter 11 bankruptcy in American history to that point, costing stockholders over $180 billion. (43)
WorldCom’s collapse gave fresh momentum to the Sarbanes bill. What the Wall Street Journal called a “steady drumbeat of corporate scandals,” along with impending Congressional elections, undermined Republican resistance and created a crucible for legislation. Senate Majority Leader Thomas Daschle (D-South Dakota) claimed that he now could rally eighty votes behind the legislation. Representative Oxley worried that things were moving too quickly: “summary executions would get about 85 votes in the Senate right now,” he said. He convened and chaired a conference committee to refine the bill. (44)
The day the conference began, the Dow fell 390 points, further weakening Republican resistance. Despite sparring over consulting services and the accounting board, most Republicans wished to pass a bill and move on. Thus, the corporate governance and accounting reform provisions of the Sarbanes bill came through largely unscathed. The new bill passed 423 to 3 in the House on April 24 and 99 to 0 in the Senate on July 15. President George W. Bush signed the Sarbanes-Oxley Act of 2002 into law July 30. (45)
The Sarbanes-Oxley timeline demonstrates how events drive legislation. The Enron scandal alone brought only a modest legislative response; had the scandals ended there, with the Senate nearly evenly split, the Oxley bill would have been the likely vehicle for reform. But the “steady drumbeat” of scandals, the resounding crash of WorldCom, pending elections, and market downturn made possible broader reform than Congress originally intended.
(43) Fotios Harmantzis, “Inside the Telecom Crash: Bankruptcies, Fallacies, and Scandals.” Telecommunications Management, School of Technology Management, Stevens Institute of Technology, 5-7. The Economist, “WorldCon?” June 25, 2002. The Economist, “Another Cowboy Bites the Dust,” June 27, 2002. Harmantzis, “Inside the Telecom Crash: Bankruptcies, Fallacies, and Scandals,” 6.
(44) Wall Street Journal, “Accounting Reform Gets Big Lift As Senate Panel Backs New Board,” June 19, 2002. Washington Post, “Business Reform Gains Support in Senate, SEC,” June 27, 2002. New York Times, “GOP in Congress Moving Past Bush on Business Fraud,” July 12, 2002.
(45) New York Times, “The Confidence Crisis,” July 21, 2002. Roberta Romano, “The Sarbanes-Oxley Act and the Making of Quack Corporate Governance,” 117.
Daniel Goelzer served on the staff of the SEC from the mid-70’s through 1990. He began his SEC career in 1974 as a staff attorney in the Office of the General Counsel, and rose through the ranks to become the Commission’s General Counsel from 1983 to 1990. He also worked in the Office of the Chairman and was Executive Assistant to both Chairman Harold Williams and Chairman John Shad. After leaving the SEC, he was partner at the law firm of Baker & McKenzie LLP in Washington, DC until his appointment as a founding Board member of the Public Company Accounting Oversight Board (PCAOB) in 2002. He served as PCAOB’s Acting Chairman from 2009 – 2011 and returned to Baker & McKenzie after his PCAOB term ended in 2012. He was one of the founding Trustees of the SEC Historical Society.
