Connie Burkey
Unit 3
Regulations in the Industry of Accounting
Research Paper
Professor Lerner

When looking at the regulations that the government has set down in the accounting sector the old saying “rules are made to be broken comes to mind. Like the rules that are created in the home or for society as a whole, government regulations are set in place to ensure that transactions are being conducted in an honest and lawful manner, and to give a sense of accountability to everyone. These laws that were created by Congress may negatively work for one party and positively affect another. In most cases these regulations are put in place to protect the investor and consumers, and to provide repercussions for a business that does not follow these regulations. Over the last few years, we have seen numerous businesses and individuals, such as Enron and Martha Stewart, who found loopholes around the government regulations that gave them the opportunity to commit the unlawful acts they were involved in. Even with all of the technologically advanced systems set in place individuals in corporate America continue to engage in scandalous behaviors. It has become increasingly obvious that the number of fraudulent activities committed by businesses is on the rise. With, the addition of globalization in the market becoming ever popular, we shall truly start to see that will bring forth cultural clashes that will bring about a new set of problems. I believe with all the different changes coming about fraudulent actions, I believe that there will be a need for stronger and more detailed regulations. The accounting industry throughout the years has been presented with numerous cases that show how important it is to create regulations to protect the consumer. In the proceeding paragraphs I will provide information of three important regulations that affect the accounting industry. These are the The Securities Act of 1933 and 1934, Foreign Corrupt Practices Act of 1977, and Sarbanes Oxley Act of 2002. The Securities Acts of 1933 and 1934 were created to safeguard the security industry. These two acts provide principles that ensure that the sales of securities are done lawfully. Beatty and Samuelson’s text defines a security as “any transaction in which the buyer invests money in a common enterprise and expects to earn a profit predominantly from the efforts of others” (2010, pg. 361). As with many regulations, these two acts provide more protection for the investor than for the business. The Securities Act of 1933, which is also known as the “truth in securities” law, has two objectives that are to be met. First it requires that investors receive financial and any other significant information concerning the securities that are being offered for sale to the public. The second requirement for this act is that it prohibits any deceit, any misrepresentation and any other fraud with the sale of the security. In order for a business to meet these objectives they must register through the SEC and provide information any information that is needed for the investor can make sound decisions when making purchases. Some of this information that may be needed is a description of the business, the type of securities that are for sale, and information on the management of the company and financial statement for the company. Once the company is registered through the SEC, this does not guarantee investors that the purchase of a security will mean success and be profitable; it just means that the company has provided all the information necessary to place the security on the market. Under the Securities Act of 1933 there were some securities that were exempted from the registration process. These included private offerings and offerings of a limited size that don’t need the mandatory registration through the SEC. The following year the Securities Act of 1934 was created. The Securities Exchange Act of 1934 was passed by congress to strengthen the government’s control of the financial markets. It was preceded by the Securities Exchange Act of 1933 which was enacted during the Great Depression in hopes that the stock market crash of 1929 would not be repeated. The basic difference between the two acts was that the 1933 Act was to govern the original sales of securities by requiring that the issuers, the companies offering the securities, offer up sufficient information about themselves and the securities so that the potential buyers could make informed decisions. The 1934 Act was aimed at the secondary market where buyers don’t buy from the issuer but instead from other investors (Security, 2012). The 1934 Act also required more disclosures from issuers and was enacted to prevent unfair practices at the various exchanges as well as giving the authority of the exchange to the SEC which was one of the many administrative agencies set up by Franklin D Roosevelt (Securities, 2012). A major part of 1934 Act is that it required any issuer with over $10 million in assets and 500 or more shareholders to register its stock with the SEC. With this registration came additional required filings such as the quarterly financial report, a yearly financial report, as well as reporting any unusual events, an example of which would be a merger or takeover (Beatty & Samuelson, pg. 363, 2010). The 1934 Act seems to be an ever changing document as it has been amended by Congress many times through the years. It is due to the need to remedy any new issues that arise whether through technology or new security devices. The Martha Stewart case was a very popular story in the press that violated the Securities Act of 1933 and 1934. According to an article posted in June 2003, Stewart conducted insider trading when she sold her stock in a biopharmaceutical company on December 27, 2001, after Ms. Stewart received an unlawful tip from her broker Peter Bacanovic, who at the time was working for Merrill Lynch. Mr. Bacanovic additionally provided an alibi for Stewart’s sales of ImClone stock and kept back pertinent information during the SEC and criminal investigation of her trades (Carlin & Rashkover). Insider trading is illegal when someone bases their trade of stock on information that was kept away from the public. Insider trading can be punished with jail time and fines and the parties may be forced to pay the SEC three times the profit made from the sale. The case of Martha Stewart she was required to pay $30,000 in fines and was sentenced to five months in jail and two years probation. Bacanovic received an identical sentence but was only responsible for $4,000 in fines. When this ordeal happened it had a negative effect on Stewart’s successful career. Sales of her business products dropped and the value of her stocks took a dive on the exchange. Stewart’s involvement not only affected her but also affected her employees and investors. I will say that Stewart has really came back from this ordeal and has seemed to get her company back on track financially and put her image back in good standing. The foreign Corrupt Practices Act was adopted in 1977. This was a time period when more than 450 US corporations were involved in foreign bribery. Congress passed this act hoping to solve this issue. The Foreign Corrupt Practices Act was signed by President Jimmy Carter as an amendment to the Securities Act of 1934. The act stated that “it is a crime for any American company to make or promise to make payment or gifts to foreign officials, political candidates,, or parties in order to influence a government decision, even if the payment is legal under local law” (Beatty & Samuelson, 2010, pg 365). The FCPA requires that all companies whose securities are listed in the US meet the accounting provisions of the US. This means that companies are required to develop and maintain a system that tracks the positions of the company assets. There can be no accounts that might hold funds for illegal payments. Punishment for violating the record keeping and accounting provisions of the FCPA are the same as with most crimes that apply to securities laws (Gatti, OGrady, & Morgan, 1977). In the 1970s a complex of scandals collectively known as Watergate consumed both government and public attention. Misdeeds committed during the administration of President Richard M. Nixon prompted investigations, including scrutiny of the conduct of major American corporations with close ties to the administration. Investigators learned of hidden slush funds and substantial payments of bribes by over 400 U.S. companies to foreign officials or political parties to obtain major contracts or other advantages. Following extensive hearings, Congress enacted the FCPA in 1977. When this was enacted by Congress, it became a fear that this could be detrimental to business. What was determined was that businesses were not suffering from the inability to compete due to the FCPA (Romaneski, 1982). I believe that this may become an issue with a global market and more international ventures that there will be a need for more provisions to this act will be needed to be set in place (Henning, 2012). Unlike cases involving other government regulations, many individuals do not believe they are committing any unlawful transactions under the Foreign Corrupt Practice Act, but merely conducting a valid business transaction. January 2009, Pat Caldwell, who was a former US Secret Service agent, and then he became the head of sales for the company Protective Products of America. Protective Products of America is a Florida firm that sells body armor to federal and state agencies. Mr. Caldwell was arrested in January of 2012 for bribery. It is alleged that Caldwell was given $15 million to set up the presidential guards of an African country. Undercover agents for the US set up the deal and Caldwell and he took the bait. According to Ken Steir in Time Magazine, Caldwell met with the undercover agents on a couple of occasions and accepted the deal and the added 20% commission to the original price as a cut for them (2010). After Caldwell received his first payment of $18,000, and the first order was shipped, Mr. Caldwell along with 21 other law enforcement executives was arrested. They were all charged with bribery. Sarbanes-Oxley Act was named after Senator Paul Sarbanes from Maryland and Representative Michael Oxley from Ohio. Sarbanes-Oxley was introduced in July of 2002. SOX was to apply to all public companies and international companies that registered securities with the SEC. The principles of this act have created new standards for financial practices, internal control, and ways to make sure that financial information is being accurately reported. The enactment of Sarbanes-Oxley presents new penalties for individuals who choose not to obey the guidelines set in place by this act. Under SOX individuals are liable for the financial information reported and will have to deal with the consequences of their actions. SOX includes eleven titles that have the standards for the accounting practices. Titles three, four, and eight contain the most information of how these accounting practices are to be carried out. Title three speaks of Corporate Responsibility for Financial Reports. Sections of this title present principles about providing necessary signatures of the review of reports and disclosure on the financial statements. Section 302 states the requirement of truthful reports and statements that are not misleading to investors. Other sections provide important information on Management Assessment of Internal Controls and Criminal Penalties for Altering Documents (Parles & Shannon, 2007). One of the biggest and most publicized scandals in American history and led to the creation of the Sarbanes-Oxley Act was the Enron ordeal. Enron was an energy business founded in Omaha, Nebraska in 1985 but based their business out of Houston, Texas. Former Chief Executive Jeffrey Skilling, CFO Andrew Fastow, and other top executives created some loopholes that allowed them to provide fraudulent activities that eventually would result in the demise of Enron, as well of the auditing firm of Arthur Andersen. The executives of Enron committed some of the worst activities of white-collar crimes in the US. The executives of Enron were able to hide billions in debt from deals and projects that were not really successful. These executives of Enron were embezzling funds from large investments and reported fraudulent earnings to their investors. Since Enron was reporting this financial information equity continued to rise and would attract new investors. The Enron executives were not reporting true figures and debt and losses were hidden in subsidiary partnerships and swindled money from investors of the multinational corporation.
In the year 2000, Enron stocks were worth up to $90 per share, and then plummeted to less than a dollar at the end of 2001. In October 2001 Enron announced that they were experiencing over $600 billion in net loss which would reduce shareholders equity by over 1 billion dollars. After failing to sell the company Enron filed for bankruptcy under Chapter 11 of the US Bankruptcy Code. The effects of this scandal not only effected the executives who were directly involved, but employees of Enron and Arthur Andersen who lost their jobs as both companies closed. Creditors, stockholders, taxpayers and the general public were all affected by the news of the Enron Scandal. SOX was implemented with the hopes of preventing such scandals (Yuhao, 2010). Experiences that we encounter not only teach us a lesson, but they also make us wiser. This can also be said about corporate America. Despite the many scandals, government regulations have been amended and new regulations have been set in place to protect investors and to continue an excellent view of the American business. The securities acts were created to protect the investor yet loopholes were found and used. Based on this occurrence the Securities Acts of 1933 and 1934 were amended too the Foreign Corrupt Practice Act. With the occurrence of other scandals SOX was created to try and prevent future fraudulent activities. Today as we progress into a more diversified world, more scandals will surely arise and so will government regulations. I find it very sad that many people have been and will be affected, both directly and indirectly, by those who are overcome with the defect of greed. We have an ever changing economy and so will each industry and its practices. There are no perfect people or business, but we hope we can strive to develop regulations that have more penalties that less of these unlawful activities will occur.
References:
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Brickely, K. (2003). From Enron to WorldCom and Beyond: Life and Crime after Sarbanes-Oxley. Washington University Law Quarterly.
Carlin, W. M. & Rashkover, B.W. (2003). SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider Trading. U.S. Securities and Exchange Commission. Retrieved June 22, 2012, from www.SEC.gov
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