Final answer:
Major accounting scandals of the early 2000s led to the enactment of the Sarbanes-Oxley Act to increase confidence in corporate financial reporting. The Act introduced strict reforms to prevent fraudulent activities and protect investors. High-profile companies like Enron, Tyco International, and WorldCom were involved in these scandals.
Step-by-step explanation:
Major accounting scandals in the early 2000s significantly impacted the business world, involving high-profile companies like Enron, Tyco International, and WorldCom. These scandals exposed deep flaws in corporate governance and accounting practices, leading to considerable losses for investors and erosion of trust in financial markets. To address these issues and restore confidence, the United States government enacted the Sarbanes-Oxley Act of 2002, which aimed to overhaul the regulatory standards for public corporations and accounting firms.
The Sarbanes-Oxley Act brought in stricter regulatory requirements for financial disclosures and internal controls, aiming to prevent fraudulent accounting activities. It mandated chief executive officers and chief financial officers to certify the accuracy of financial statements, significantly raised the penalties for fraudulent financial activity, and created the Public Company Accounting Oversight Board (PCAOB) to oversee the audits of public companies.
These scandals, along with subsequent financial crises, such as the 2008 financial meltdown instigated by the bankruptcies of firms like Lehman Brothers and fraudulent schemes by financiers like Bernard Madoff, highlighted the need for stronger oversight and transparency. This laid the groundwork for preventive measures aiming to safeguard investors and the broader economy from corporate and financial fraud.