Government Regulation

Topics: U.S. Securities and Exchange Commission, Enron, Accounting scandals Pages: 9 (2796 words) Published: April 5, 2013
Government Regulation

Research Paper 1

John Smith


Government regulation is around us everywhere. The government needs to make sure that the public’s interests are maintained and preserved. Being an accounting student, I have heard and read about regulation in the accounting industry numerous times. There have been many major accounting scandals in history that have lead to many different kinds of government regulation. The government regulations in accounting are mostly enacted to protect investors. From 2000 to 2002 there was an abundant number of large corporate accounting frauds, which led to the Sarbanes-Oxley Act of 2002. Previous regulations were efficient to a certain extent, but scandals still happened and more regulation seemed to always be needed. Even though the new SOX regulation seems powerful and efficient, I believe that there will always be a need for additional regulation in order to prevent future scandals.

Securities Acts of 1933 and 1934

Summary of Regulation

The stock market crash of 1929 resulted in the Securities Act of 1933. This act required that before a company an offer or sell securities in a public offering, they must register the securities with the Securities and Exchange Commission (SEC). The registration statement is used to notify the SEC that a sale of securities is pending and that the information needs to be disclosed to prospective buyers. This statement includes information about the issuer and its business, a description of the stock, the proposed use of the proceeds from the offering, and audited balance sheets and income statements. This registration process ensures that buyers of the security have accurate and complete information about the security before they decide to invest in it. Even though the SEC requires all of this information, they do not investigate the quality of the offering. They are mainly concerned with the accuracy of the securities, and the Securities Act of 1933 prohibits fraud in any securities transactions, whether or not they are registered (Spindler, 2006).

A year later, the Securities Exchange Act of 1934 was put into place. This act requires that public companies continuously disclose annual reports, quarterly reports, and form 8-K’s, which are used to report significant events. Because most buyers do not purchase new securities from the company in an initial public offering and instead buy stock, which is secondhand because other people have already owned it, the Act’s purpose is to provide those investors with ongoing information about the companies. This disclosure policy was enacted to provide investors and speculators with enough information to enable them to arrive at their own rationale decisions and to prevent financial manipulation (Benston, 1973).

Analysis of related fraud/scandal

The famous Martha Stewart scandal is a great example of fraud relating to the securities acts. Under section 17(a) of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934, insider trading is not allowed. Insider trading is trading a corporation’s stock or other securities as a result of hearing non-public information about the company. In December of 2001, Martha Stewart avoided a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock after receiving material, nonpublic information from her broker Peter Bacanovic. It turned out that the day after she sold the stock, it fell 16%. The federal court in Manhattan alleged that Stewart committed illegal insider trading when she sold the stock of the biopharmaceutical company. Not only did she commit insider trading, but her and Bacanovic created an alibi for the ImClone sales and concealed important facts during SEC and criminal investigations (Carlin, 2003).

The punishment for insider trading can be fines, imprisonment, and paying three times the profit made to the SEC. Stewart was sentenced to serve a five month term and a two...

References: Benston, G. J. (1973). Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934. American Economic Review, 63(1), 132-155. Retrieved from EBSCOhost.
Carlin, Wayne. (2003). SEC Charges Martha Stewart, Broker Peter Bacanovic, with Illegal Insider Trading. U.S. Securities and Exchange Commission. Retrieved from
Enofe, A. (2010). REAPING THE FRUITS OF EVIL: HOW SCANDALS HELP RESHAPE THE ACCOUNTING PROFESSION. International Journal of Business, Accounting, & Finance, 4(2), 53-69. Retrieved from EBSCOhost.
Holt, R. N., & Fincher, R. E. (1981). The Foreign Corrupt Practices Act. Financial Analysts Journal, 37(2), 73. Retrieved from EBSCOhost.
Parles, L., O 'Sullivan, S. A., & Shannon, J. H. (2007). Sarbanes-Oxley: An Overview of Current Issues and Concerns. Review of Business, 27(3), 38-46. Retrieved from EBSCOhost.
Scarboro, Cheryl. (2010). SEC Charges General Electric and Two Subsidiaries with FCPA Violations. U.S. Securities and Exchange Commission. Retrieved from
Spindler, J. (2006). Is it Time to Wind Up the Securities Act of 1933?. Regulation, 29(4), 48-55. Retrieved from EBSCOhost.
White, J. B. (2009). The Influence of Sarbanes-Oxley on the Foreign Corrupt Practices Act. International Journal of Global Management Studies Quarterly, 1(2), 18-30. Retrieved from EBSCOhost.
Wiesen, J. (2003). Congress Enacts Sarbanes-Oxley Act of 2002: A Two-Ton Gorilla Awakes and Speaks. Journal of Accounting, Auditing & Finance, 18(3), 429-448. Retrieved from EBSCOhost.
Yuhao, L. (2010). The Case Analysis of the Scandal of Enron. International Journal of Business & Management, 5(10), 37-41. Retrieved from EBSCOhost.
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