Sarbanes-Oxley Act vs. Dodd-Frank Law: What’s the Difference?


The Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act have been hailed by some as two of the most important corporate reform laws passed by the United States in recent decades. Both followed costly but very different kinds of scandals and corporate collapses that rocked Wall Street.

Sarbanes-Oxley intended to protect investors from corporate accounting fraud by strengthening the accuracy and reliability of financial disclosures. It was approved by Congress in 2002 after a series of multi-billion dollar accounting scandals, perhaps the most famous at the energy trading company Enron and the telecommunications company WorldCom.

The Dodd-Frank Act was passed in 2010 in response to the 2007-08 financial crisis, which brought Wall Street to its knees. Dodd-Frank was primarily intended to reduce risk in the financial system by more closely regulating large banks and financial institutions.

Key takeaways

  • Passed in 2002, the Sarbanes-Oxley Act tightened the rules regarding the accuracy of corporate financial reporting to prevent accounting fraud after a series of high-profile scandals cost investors billions of dollars.
  • Passed in 2010, the Dodd-Frank Wall Street Consumer Protection and Reform Act more closely regulated risk-taking by banks and established rules to prevent predatory lending to consumers after the financial crisis of 2007- 08.

The Sarbanes-Oxley Act

To protect investors from corporate accounting fraud, Sarbanes-Oxley placed responsibility for a company’s financial reporting squarely on the shoulders of its top executives. It directed that the chief executive officers (CEO) and the chief financial officers (CFO) personally certify the accuracy of the information in financial reports and confirm that controls and procedures are in place to evaluate and verify that accuracy.

In fact, CEOs and CFOs were required to personally sign financial reports, confirming that they were compliant with Securities and Exchange Commission regulations. Failure to do so could result in fines of up to $ 15 million and prison terms of up to 20 years.

The Dodd-Frank Act

The massive Dodd-Frank Act was intended to protect investors and taxpayers by strengthening financial system regulations, with a view to containing risk and ending “too big to fail” bank bailouts such as those that occurred. during the financial period. crisis.

Key Dodd-Frank provisions include the Volcker Rule, regulation of risky derivatives such as credit default swaps and mortgage-backed securities, and increasing financial buffers on banks.

The Volcker Rule, named for former Federal Reserve Chairman Paul Volcker, prohibited commercial banks from engaging in short-term speculative operations with depositors’ money. These measures were intended to prevent the accumulation of excessive risk by large financial institutions, which was a major factor in the financial crisis and the collapse of Wall Street.

Dodd-Frank also created the Financial Stability Oversight Board to monitor risk in the financial system, and the Consumer Financial Protection Office to protect consumers from abusive lending practices. Predatory lending practices were blamed for contributing to the subprime collapse at the heart of the financial crisis.

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Mark Holland

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