Washington's remedy was the Sarbanes-Oxley Act, swiftly signed into law by President Bush on July 30, 2002, and hailed as the most substantial business legislation since the Great Depression.

For many small investors, though, it's not clear what's changed, and experts agree it's too soon to say whether the law will bring about the desired reforms. It's still being phased in, has yet to be tested in court and has yet to see its first penalty imposed.

The way lawmakers saw it last year, just about every link in the chain of information between corporations and individual investors had been compromised or was vulnerable, said accountant David E. Hardesty, the author of "Corporate Governance and Accounting Under the Sarbanes-Oxley Act of 2002," a 6,000-page guide for securities professionals.

"Each place where information could be altered, either inadvertently or on purpose, Sarbanes-Oxley attempts to fix it," Hardesty said. "These problems were created by people who were willing to take the risk that they could cook the books and get away with it. In today's environment, the feeling is that if we cook the books, we might get caught."

What the law does

The law is intended to make financial information released by public companies as accurate as possible by tweaking the checks and balances already in place. It enhances the independence of corporate boards and auditors and threatens serious sanctions for chief executives and chief financial officers who violate the rules. Among the highlights:

• CEOs and CFOs must certify reports submitted to the Securities and Exchange Commission. Criminal penalties of up to 20 years can be imposed if records are altered, destroyed or inaccurately stated.

• A corporate board's audit committee must consist entirely of independent directors and must take control of hiring, overseeing and compensating the company's auditor. To avoid the prospect of conflict, the auditor must report directly to the committee rather than to management.

• A quasi-governmental board has been established to oversee audits — a provision expected to have a greater impact on the accounting industry than any since the 1930s. The five-member board sets quality-control standards for audits; inspects and investigates registered accounting firms; and has the power to issue subpoenas and impose sanctions for violations of rules.

• Accounting firms are prohibited from providing most of the non-audit services for the public companies they audit. To maintain independence, the law requires that lead audit partners be rotated every five years and limits the ability of auditors to take jobs in senior financial positions at the companies they serve.

The law also called for greater financial disclosures, extended the time frame of the statute of limitations and expanded the penalties for securities fraud, and established rules to protect "whistleblowers" who report corporate abuses.

Much of the law's provisions are in place, but parts won't take effect until regulators and stock exchanges write and formally adopt corresponding rules.

One provision not yet in effect is supposed to prevent conflicts of interests for stock research analysts at securities firms. New internal accounting controls won't take effect for another year. It may take years for the law to be fully understood.

"It's very hard for the individual investor to say, 'OK, what have I made off ... Sarbanes-Oxley?' " said John Markese, head of the American Institute of Individual Investors. "I think there will be dividends, but they may not pay for a while."

SEC bulked up

Congress increased the SEC's budget for the fiscal year beginning Oct. 1, nearly doubling it to $841.5 million. The agency, strained by ongoing investigations and prosecutions, plans to expand its staff as it steps up routine reviews of annual reports and other filings by public companies. SEC Chairman William Donaldson has vowed to shift the balance of power away from "imperial CEOs" and back toward boards and investors.

The Bush administration's first SEC chairman, Harvey Pitt, arrived in 2001 with a gentler approach to big business. That was before Enron's $63.4 billion collapse took corporate America's breath away and before WorldCom's $103.9 billion failure surpassed Enron as the largest bankruptcy in history.

The stunning sequence of fiascos that followed, and criticism of the SEC's tepid response, put Pitt out of a job and led to an unlikely alliance between two congressmen from opposite sides of the political fence. With midterm elections on the horizon and investors threatening to show their outrage at the polls, Sen. Paul Sarbanes, D-Md., and Rep. Michael Oxley, R-Ohio, authored a bill to accelerate regulatory changes long resisted by Wall Street.

A prevalence of questions

In practical terms, the law has forced people to ask more questions. Chief executives are demanding more information before approving financial statements and some companies have started internal certification processes in which line managers attest to the accuracy of their reports. Boards are questioning auditors more vigorously; directors are re-examining their own performances.

The demand for independent financial experts as board members has skyrocketed, with retired CFOs and audit partners among the most attractive candidates. Prospective board members face a host of new concerns, with liability insurance often topping the list. Before agreeing to join a board, many want to talk to the company's auditors, lawyers and other board members, said Andrea Redmond, co-manager of board services at recruiting firm Russell Reynolds.

Only 40 percent of companies expect to be in immediate compliance when the law takes full effect, according to a study by the Business Performance Management Forum. Some decide the cost is too high; the number of companies going private, and thus no longer subject to the law, rose 22 percent in the past year.

Many companies are seeing legal, accounting and consulting fees rise as they try to comply. The more bureaucratic aspects of the law can be especially frustrating for some executives; they might object to the idea of forming big committees, establishing extensive procedures and creating tedious paper trails.

But in the current regulatory environment, "it doesn't make sense to cut corners," said Douglas M. Hagerman, a securities lawyer with Foley & Lardner who has advised companies and boards on governance issues.

A survey by the Business Roundtable found that many companies have taken steps to comply, particularly with regard to the independence of their boards. Despite some complaints, the changes have been a burden for only those companies that did not have good practices in place, said Franklin D. Raines, CEO of Fannie Mae and chairman of the group's governance task force.

Enforcement muscle

Now the SEC, a federal agency created in 1934 in response to the stock market crash of 1929, is flexing a reinvigorated enforcement muscle at corporate America, accountants and investment firms.

Under Donaldson, an investment banker himself, the SEC recently imposed a $500 million civil fine — by far its largest ever — in a settlement with WorldCom, with the sum going into a fund for investors who lost money in the bankrupt telecom's alleged fraud. And in a deal framed by the SEC and other regulators this year, 10 of Wall Street's biggest firms agreed to pay $1.4 billion to settle charges they issued biased stock recommendations.

Whether the law helped strengthen public trust in the markets over the last year isn't clear. Investors will more often cite rising stock prices and the absence of another corporate implosion as the most encouraging factors. But the idea that the government is doing something to deter corporate thieves does hold appeal.

Positive perception

Barbara Nitzberg, a public relations professional who belongs to a New York investment club, said Sarbanes-Oxley hasn't been discussed much at her group's spirited monthly meetings, where members largely rely on Value Line summaries and base decisions on factors including earnings growth and sector performance. Still, there is a perception that the market is on the mend.