The Impact of Federal Regulations on Identifying, Preventing, and Eliminating Corporate Fraud

By Alleyne, Beverley J.; Elson, Raymond J. | Journal of Legal, Ethical and Regulatory Issues, January 2013 | Go to article overview
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The Impact of Federal Regulations on Identifying, Preventing, and Eliminating Corporate Fraud

Alleyne, Beverley J., Elson, Raymond J., Journal of Legal, Ethical and Regulatory Issues


The Securities and Exchange Commission's Federal Securities Acts of 1933 and 1934, and the Sarbanes Oxley Act of 2002 (SOX) are two of the most powerful pieces of legislation developed with the intent to curb and in many cases, eliminate corporate fraud. The 1933 and 1934 Federal Securities Acts were developed as a result of October 1929 crash of the United States stock market, and SOX was developed as a direct result of the collapse of energy giant Enron among others. Are these legislations accomplishing their goals? Is it even possible to stop fraud from occurring? The SOX report card has mixed reviews and divided opinions--three years after the law was enacted, the question remains--has it made a proven difference in the level of corporate fraud? The question of effectiveness and worth remains the topic of much debate (Sweeney, 2005).

This paper examines the effectiveness of legislation, specifically the Securities Acts of 1933 and 1934, and SOX, in identifying, preventing, and eliminating corporate fraud.


What started as accounting scandals quickly evolved into full-blown corporate fraud at companies such as Tyco, WorldCom, Global Crossing and Adelphia, to name a few. In 2008, a mere seven years after the Enron debacle, the United States economy crashed. The housing bubble, banking and credit-market crisis, and the subprime failure have all been identified as the culprits. Businesses failed, corporations collapsed and millions of jobs were lost. Consumer confidence is now at a new low. Huge banks such Washington Mutual, the nation's largest savings and loan bank was dismantled and brokered the sales of the company to JP Morgan Chase (Block, 2008). Other giant mortgage companies such as Fannie Mae and Freddie Mac, and automobiles behemoths like General Motors were unable to exist without immediate governmental financial aid. Corporate mismanagement and fraud were just a few of the reasons provided as the cause of these collapses.

Federal securities transactions are regulated by several statutes and the most important ones are the Securities Exchange Act of 1933 and the Securities Act of 1934. These acts attempted to make market competition vigorous by demanding fair and full exposure in the marketplace of all material information (Cronin, Evansburg, & Garfinkle-Huff, 2001). The purpose of the 1933 Act is to provide fair and full disclosure of the character of securities sold in foreign commerce, interstate commerce, and through the mail, and to stop fraud in the sale of securities. The 1933 and 1934 Securities Acts and the US Supreme Court rulings viewed securities as stock of closely held companies and therefore subject to antifraud provisions of the Acts (Quinlivan, 1992).

SOX was signed into law on July 31, 2002. Congress instituted SOX in the wake of Enron's demise. Facing political pressure to act, the U.S. House of Representatives and the Senate immediately approved a package of reforms by near-unanimous approval (Dodwell, 2008). The requirements of SOX are considered as the most overwhelming changes affecting corporate governance since the Securities and Exchange Acts of 1933 and 1934 (Bumiller, 2002; Mitchell, 2003). About six years after its passing, however, many governance experts question whether the expense and time of compliance created any real reforms. The Securities Acts and SOX were legislated primarily to address reports of misrepresentation by corporate executives, corporate mismanagement, and excesses of management (Valenti, 2008).

SOX was passed as a result of the Enron destruction and other corporate downfalls that shook the investor community and the general public (Dodwell, 2008). The intent was to curb corporate mishandling, excesses, and misleading by corporate executives. The Act provides key provisions related to corporate boards, with at least one member having financial expertise (Valenti, 2008).

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The Impact of Federal Regulations on Identifying, Preventing, and Eliminating Corporate Fraud


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