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
Save to active project

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


INTRODUCTION

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.

BACKGROUND

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).

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

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

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?