Part 1 Reply to discussion
Securities Market” Please respond to the following:
- From the e-Activity, examine the mission and history of the SEC. Determine whether the regulatory bodies of the securities market have been helpful or hurtful to the average investor since their creation. Support your decision.
- Select one specific regulation of the securities market, and propose three ways that you believe that regulation can be improved. Please elaborate with details.
Part 2 Reply to statement below
The mission of the SEC is to protect investors, provide fair and efficient markets, and enable capital information (What We Do, 2013). The SEC requires public companies to disclose true, accurate, meaningful financial information and any other relevant information that may help investors make informed decisions about whether or not to invest in their company. While this mission is supposed to be helpful in nature, it doesn’t stop all occurrences of bad behavior. There are still company executives that are consumed by greed and will do anything that it takes to make money, even if it means fudging their financial statements in order to mislead current and potential investors. This was the case with Enron.
Enron used one of the most highly regarded accounting firms, Arthur Andersen, to audit their financial statements that were released for public viewing. This gave investors and regulators a false sense of security and trust. Enron actually used off-balance-sheet special purpose vehicles to hide their debt and bad assets from their investors and creditors (Investopedia, 2016), and Arthur Anderson provided their stamp of approval anyways. When everything was finally exposed, both the Enron and Arthur Andersen executives were prosecuted for their roles in the inevitable collapse of this highly regarded and highly invested company.
Therefore, while the purpose of the SEC is to help investors, it will never be able to fully stop people from finding loopholes, or just plain out ignoring the rules in order to make the most profit in the shortest amount of time. The SEC just doesn’t have the amount of man power it would need to oversee every single entity to ensure that they are compliant. Sometimes, it takes a mess like the Enron scandal get more funding for government entities like the SEC so that they can be in a better position to enforce their regulations.
Select one specific regulation of the securities market, and propose three ways that you believe that regulation can be improved. Please elaborate with details.
I selected Section 404 of the Sarbanes-Oxley Act of 2002. This section requires executive management to establish internal controls and then report how adequate those controls are. An outside, registered auditing firm must then confirm, attest to, and report their assessment of how effective the internal controls are. This is an extremely important and valuable regulation, as it requires companies to make up their own ethical procedures and then have another unbiased entity evaluate them on their effectiveness. While this regulation seems simple enough in writing, it can be a very hard practice for some companies to implement because 1) it is expensive to retain the services of a knowledgeable, worthwhile audit company, 2) it can be hard to find employees that are experienced and knowledgeable, and 3) the company’s focus may shift elsewhere until audit time rolls around.
The first issue is finding an affordable, respected audit company. Of course, you do get what you pay for. However, if the regulation provided a checklist of items that the auditor should review, then the company could use that checklist to ensure that everything was together and ready upon arrival of the auditing group. It would also lessen the load for the auditor and streamline the process between companies. I have worked with a few different auditing companies, and they all seem to have different items that they check. If they had a baseline checklist then it might help speed up the process, thereby reducing the cost to the companies.
Secondly, it is hard to find employees with the experience and knowledge needed to work solely on the SOX compliance. Employees are taking on more and more tasks every day. This makes it extremely hard for an employee to really be an “expert” in any field, which leaves the door open for human error. If webinars were available to the public to help educate people about what they should expect as an employer, employee, and/or investor, then that would help everyone stay up-to-date and in compliance.
Lastly, companies tend to focus only on regulations prior to audits. The rest of the time their focus may be shifted to the actual well-being of their company and/or employees. This means that things can get missed throughout the year and not caught until the audit rolls around. The SEC could perform small, random check-ups throughout the year with a sampling of companies that changes yearly. This way companies would be more mindful to stay on track as they would never know when they would get a surprise check-up.
However, no matter how many regulations are put into place, nor how good the regulation is, there is really no way that any regulation will be able to cut out all bad behavior. People will find a way to “work around” the issue or they may unknowingly do something wrong that causes big issues. Any investment in securities will contain a set of risks, so investors must hope for the best but also be prepared for the worst when making any type of investment decision.
Bodie, Z. (2013). Essentials of Investments. New York: McGraw-Hill.
Investopedia. (2016, December 2). Enron Scandal: The Fall of a Wall Street Darling. Retrieved from Investopedia: http://www.investopedia.com/updates/enron-scandal-summary/
What We Do. (2013, June 10). Retrieved from U.S. Securities and Exchange Commission: https://www.sec.gov/Article/whatwedo.html