Week 2 Regulatory Bodies and Regulations Assignment The Securities Act 1933 was enacted as a result of the market crash that occurred in the United States of America It acted as the first comprehensive legislation that offered guidance on sales of securities This came as a result of the existence of high information asymmetry in the securities market at the time The two key objectives of this act were to demand that investors be provided with information regarding securities that were being sold It was also meant for prohibiting misrepresentations deceit and other forms of fraud in the securities exchange market It was not until 1934 that Securities Act of 1934 which is the key legislation that led to the establishment of the Securities Exchange Commission This study focuses on financial and investment fraud and the role that these legislations and enforcing body SEC plays in limiting such fraud in the light of Bernie Madoff case Bernard Madoff scammed an estimated 50 billion from his investors over a 20 year period Investopedia 2015 According to the 1933 Securities Act those issuing securities in the market were expected to disclose their business description of the securities being issued management system of the organization issuing the security and certified financial statements of the accounting entity All these forms of legislation were aimed at prohibiting fraud from occurring in the market Securities Act of 1934 provided for the development of Securities Exchange Commission SEC
The Act also prohibited insider trading required full disclosure on details that opted to gain control of more than 5 of the company and disclosure of materials that were being used for soliciting the shareholders votes Forrester 2014 Role of SEC in Limiting Financial Fraud Since its formation it is evident that SEC plays an important role in limiting financial fraud within the United States of America The regulator ensures that accounting entities provides objective and accurate financial reports It is such reports that market reports are based on The regulatory body has a task force that detects and step in to present financial misstatements It also ensures that there are no violations of the independence of auditors while at the same time imposing hefty penalties on those caught engaging in financial fraud SEC recognizes that fraud can occur in an accounting entity and hence the need to identify ways of detecting and limiting it is critical to the interests of the investors and the economy at large To limit fraud SEC under the provisions of Sarbanes Oxley 2002 the act required enhanced internal controls for public companies Forrester 2014 Accounting entities are expected to disclose the reliability of their internal control and top management is expected to assent to the periodic financial statements taking responsibility for any deliberate misstatements in such financial statements SEC Obligations on Fraud Investigations The SEC has a number of obligations that it is expected to play in investigations of financial fraud No publicly held companies that are immune from fraud investigations by SEC In its investigation process SEC assesses the extent to which accounting entities have adhered to the established compliance policies and code of conduct Fraud opportunities such as gifts or political donations should be supported with an immediate need by the organization that is in direct interest of the shareholders It requires that accounting entities provide clear and well organized financial information
The regulatory body is also expected to assess the managerial tone identifying whether there is any indication that the fundamental laws and policies were followed or not Proper documentation of financial information is also expected to be maintained Formal investigations are often carried out without notice to the company to avoid concealing of vital information by the entity under investigation When found guilty legal action is taken against such entities While there are myriad sources of information that can arouse that official curiosity following are some of the more common stories from the News Papers competitors foreign governments auditors industry sweeps periodic reports and whistleblowers among others Forrester 2014 Recommendations on Identification Reporting and Prevention of Fraud In order to enhance identification of fraud in accounting entities there is a need for the SEC to ensure that industry sweeps frequency is high This is expected to get hold of those engaging in such fraud by surprise There is equally a need for the regulator to ensure that the rights of whistleblowers are not violated when such whistleblowing occurs More so anonymous channels of whistle blowing should be put in place This will encourage whistleblowing in accounting entities increasing chances of identification of financial fraud The commission should also have extensively trained and experienced lawyers auditors and information technologist if fraud detection is to be enhanced To boost reporting of financial and investment frauds whistle blowing and enhanced security markets information systems should be put in place This would boost relaying of the identified fraud risks to the relevant parties To increase the prevention of fraud the SEC should adopt hefty penalties for those found engaging in such fraud The provisions in law in regards to such enforcements should be altered to increase jail terms for those engaging in fraud as well as SEC officials who may conspire with such criminals References Forrester M 2014 A Primer on SEC Investigations and Enforcement Actions Related to Financial Reporting and Accounting Cases Retrieved from http media mofo com files Uploads Images 140122 SEC Investigation Handbook pdf Investopedia 2015 How to avoid falling prey to the next Madoff Retrieved from http www investopedia com articles fundamental analysis 09 investing due diligence asp
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