Financial Fraud Deterred By Sarbanes-Oxley Act

Sarbanes-Oxley Act is legislation enacted in response to the high-profileEnron and WorldCom financial scandals. This Paper first summarizes theSarbanes-Oxley Act into two points: increase the detection probabilityand the incremental penalty. Then I develop an agency model onstock-based compensation, which includes the detection probability andincremental penalty. I find an increase in the detection probability and/orthe incremental penalty can reduce the extent of manipulation effectively.I also investigate the change in managerial discretion over financialreporting following the Sarbanes-Oxley Act. I select those Chinesecompanies listed in US, and do the empirical analysis by the ModifiedCross Selectional Jones Model, Multiple Factor Regressions and T-Test. Ifind that firms report lower discretionary accruals after Sarbanes-OxleyAct than in the period preceding Sarbanes-Oxley Act. Finally I givesuggestions to future legislation in China.