Government Regulations

Introduction

The saying "rules are made to be broken" comes to mind as I began to analyze the topic of discussion for this research paper. Like rules created in a classroom or at home, government regulations are in place to create uniformity, to ensure that transactions are being conducted in a lawful and honest manner and to give individuals a sense of accountability. Created based on laws made by Congress, these regulations may work in best interest of one party and may negatively affect another. In a lot of cases, government regulations support investors and consumers and provide negative repercussions for businesses. Over the past years, we have been informed about numerous businesses and individuals, such as Enron and Martha Stewart, who have found loopholes around government regulations that allowed them to commit unlawful activities. Even with the increase in technologically advanced systems, individuals in corporate America continue engage in scandalous behaviours. Since then it has been evident that the number of fraudulent activities committed by businesses has increased. Additionally, globalization is becoming more popular and as a result cultural clashes may bring forth new problems. With a mix of different cultures and customs in the United States, government regulations may be stretched beyond their limits. As I foresee an increase in fraudulent actions, I strongly believe that there will be a need for more strong and detailed regulations.

The accounting industry has presented numerous cases that show how important it is to create more regulations. In the paragraphs to follow, I will provide a summary of three important regulations that affect the accounting industry, Securities Acts of 1933 and 1934, Foreign Currupt Practices Act of 1977 and Sarbanes Oxley Act of 2002. Additionally, I will discuss scandals or cases that relate to them.

Securities Acts of 1933 and 1934

Created to safe guard the security industry, the securities acts of 1933 and 1934 provide principles that ensure lawful sale of securities. Beatty and Samuel's text define a security as "any transaction in which the buyer (1) invests money in a common enterprise and (2) expects to earn a profit predominantly from the efforts of others" (2010, p. 361). Like most regulations, both acts provide more protection for investors than for businesses. The Securities Act of 1933, also referred to as the "truth in securities" law, has two basic objectives: (1) require that investors receive financial and other significant information concerning securities being offered for public sale; and (2) prohibit deceit, misrepresentations, and other fraud in the sale of securities.

In order to meet these objectives, businesses must register through the Security of Exchange Committee (SEC) and provide important information necessary in helping investors make decisions about purchases. Information about the company's business, a description of securities that are for sale, information about the management of the company and financial statements are information that is provided to the public upon registration. Once securities are registered, that do not guarantee investors that the purchase of any security will ensure success or be profitable; it means that the company has provided all the necessary information needed to place the security on the market.

Under the 1933 act, some securities were exempted from the registration process; private offering and offering of limited size are examples of securities that didn't need the mandatory registration through the SEC.

The following year, the Securities Act of 1934 was created. This act, signed by Franklin Roosevelt gives the SEC more authority over securities. Under this 1934 act, public companies are required to file annual reports on Form 10-K, quarterly reports on Form 10-Q and Form 8-K (Beatty & Samuel, p.363, 2010).

Analysis of Related Fraud/Scandal

One very popular story that violated the Securities 1933 and 1934 acts was the Martha Stewart case. According to an article posted in June 2003, Stewart conducted insider trading when she sold stock in a biopharmaceutical company, ImClone Systems, Inc., on Dec. 27, 2001, after receiving an unlawful tip from Bacanovic, who at the time was a broker with Merrill Lynch, Pierce, Fenner & Smith Incorporated. Additionally, Stewart's broker, Bacanovic subsequently created an alibi for Stewart's ImClone sales and held back important facts during SEC and criminal investigations into her trades (Carlin & Rashkover).

Insider trading is illegal once the issuer bases their trade of stocks on information that was withheld from the public. The repercussions for such actions include jail time and fines. Additionally, guilty parties may be forced to turn over to the SEC three times the profit they have made. In Martha Stewart's case, she was required to pay $30,000 in fines and was sentenced tp five months in jail with two years probation. Bacanovis received the same sentence, but was responsible for $4,000 in fines. Both Stewart and her broker knew that they were committing unlawful activities. Stewart's actions had a negative effect on the successful entrepreneur; sales of her business products drop and there was a significant drop in the value of the stocks. Their actions not only affected their careers but it also affected other investors of related companies, as well as future investors.

The Foreign Corrupt Practices Act of 1977

The Foreign Corrupt Practices Act was adopted in 1977 in a period where more than 450 major US corporations were engaging in foreign bribery. With hopes of solving this issue, Congress passed the Foreign Corrupt Practice Act as an amendment to the Securities Act of 1934. Signed by Pres. Jimmy Carter, this act states 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 governmental decision, even if the payment is legal under local law" (Beatty & Samuel, 2010, p 365).

The FCPA also requires companies whose securities are listed in the United States to meet its accounting provisions. Under these accounting provisions, companies are required to develop and maintain system that tracks the position of all of the companies' assets. As a result, accounts that hold funds that may be used for illegal payments should not exist and companies should be unable to falsify expenses. Punishments for violating the accounting and record-keeping provisions of the FCPA are the same penalties that apply to most violations of the securities laws. These penalties include monetary