Final answer:
The Sarbanes-Oxley Act reformed corporate governance by enforcing stricter oversight, accountability, and transparency within corporations to protect investors and increase confidence in public companies’ financial information.
Step-by-step explanation:
The Sarbanes-Oxley Act of 2002 had a profound impact on corporate governance, reshaping how corporations operate and enforcing stricter compliance measures. This legislation came about after a series of accounting scandals involving corporations like Enron, Tyco International, and WorldCom, which revealed significant lapses in corporate accountability and financial reporting. The Act mandated a series of reforms to enhance corporate governance, including stricter oversight by the board of directors, more rigorous auditing processes by independent audit firms, and elevated roles for outside investors in holding the company to account.
To protect investors and restore trust in financial markets, the Sarbanes-Oxley Act imposed new responsibilities on corporate management and auditors. The board of directors, serving as the first line of defense in corporate governance, now faces increased accountability and regulations ensuring they act in shareholders' best interests. Audit firms are now required to attest to the accuracy of financial statements, and any material misstatement can lead to severe penalties. Moreover, the Act empowered investors, especially institutional ones, with a greater voice and additional safeguards when it comes to overseeing companies in which they hold stakes.
In cases like that of Lehman Brothers, where corporate governance did not prevent misinformation to investors, Sarbanes-Oxley seeks to prevent such occurrences. The Act's provisions have consequently built a framework that aims to prevent accounting fraud and encourage the ethical management of companies, thereby strengthening investor confidence and the integrity of financial markets.