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Government Regulation in the Accounting Industry

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Government Regulation in the
Accounting Industry
Rebecca Gregory
Kaplan University Outline
Securities Acts of 1933 and 1934
• Brief History of the Securities Act of 1933
• Objectives of the Securities Act of 1933
• Summary of the Securities Act of 1933
• Necessity of the Securities Act of 1934
• Summary of the Securities Act of 1934
• Peat Marwick Fraud/Scandal
The Foreign Corrupt Practices Act of 1977
• Brief History of the Foreign Corrupt Practices Act of 1977
• Summary of the Foreign Corrupt Practices Act of 1977
• Kellogg Brown & Root LLC Fraud/Scandal
Sarbanes Oxley Act (SOX)
• The Purpose of SOX
• Summary of SOX
• US Bank of Seattle Fraud/Scandal

Government Regulation in the Accounting Industry
The Great Depression and the Crash of 1929 led the United States into the beginning of new regulations. The first of these regulations was the Securities Act of 1933, which had a goal of prohibiting deceit, misrepresentation, and fraud in the sale of securities.
The abusive practices of many banks and Wall Street firms resulted in the creation of the Securities and Exchange Commission (SEC) in 1934. It was established by The Securities Act of 1934 and gave the SEC power to monitor the sale of securities in the U.S.
As a result of SEC investigations in the 1970's, it was discovered that many businesses were making payments to foreign officials for the purpose of obtaining or retaining business with them. Therefore, Congress enacted the Foreign Corrupt Practices Act of 1977 (FCPA) to stop the bribery of foreign officials and to restore public confidence in the integrity of the American business system.
The Sarbanes Oxley Act was introduced in 2002. It was created to protect investors after the many corporate scandals of companies such as Enron, Arthur Andersen, and WorldCom. The Act created new standards for corporate accountability and new penalties for not following the standards. It specifies new financial reporting responsibilities, which include new internal controls and procedures.
It seems as though as time goes by, the amount and scope of regulations keeps increasing. This is a result of corrupt and unethical activities that keep taking place within our corporate world. Are these regulations helping us at all? Perhaps we are on the verge of over-regulation. This paper will discuss these regulations in order to answer this question. Securities Acts of 1933 and 1934
Brief History of the Securities Act of 1933
The Securities Act of 1933 was enacted as a result of the market crash of 1929. It was the first major piece of federal legislation to apply to the sale of securities. The legislation was enacted as the need for more information within and about the securities markets was acknowledged (Parker Waichman LLP , 2012). It is also known as the Truth in Securities Act because the Act would cause securities companies to provide potential investors with enough information to make informed investment decisions.
Objectives of the Securities Act of 1933
The 1933 Act has two basic objectives:
• to require that investors receive significant (or “material”) information concerning securities being offered for public sale;
• to prohibit deceit, misrepresentations, and other fraud in the sale of securities to the public (Parker Waichman LLP ).
Brief Summary of the Securities Act of 1933
The Act requires that securities offered or sold to the public in the U.S. must be registered by filing a registration statement. A prospectus is filed along with the registration statement.
Under the Act, the registration statement must include:
• a description of the issuer's properties and business;
• a description of the securities to be offered for sale;
• information about the management of the issuer;
• information about the securities (if other than common stock);
• financial statements certified by independent accountants (Parker Waichman LLP).
If a statement is incomplete or inaccurate, the statement is not allowed to become effective and a misstatement or omission of material fact can result in the registration's suspension.
Necessity of the Securities Act of 1934
Security transactions that are conducted with securities exchanges and over-the-counter markets are affected by national public interest. This makes it necessary to regulate these transactions and any practices and matters related to them. Regulations help to protect interstate commerce, the national credit, the Federal taxing power, and make the national banking system and Federal Reserve System more effective. Regulation also helps to insure the maintenance of fair and honest markets in such transactions (Sarkar, 2012).
The Securities Act of 1934 also established the Securities and Exchange Commission (SEC). The Act gives the SEC power to govern the sale of securities in the United States.
Brief Summary of the Securities Act of 1934
The 1934 Act includes provisions for the following:
• Insider Trading--The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities.
• Tender Offers-- The 1934 Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer.
• Corporate Reporting-- Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports.
• Proxy Solicitations-- The 1934 Act governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action.
• Registration of Exchanges-- The Act requires a variety of market participants to register with the Commission, including exchanges, brokers and dealers, transfer agents, and clearing agencies (Sarkar).
Peat Marwick Fraud/Scandal
In 1968 Peat, Marwick, Mitchell & Co. (Peat Marwick) was an auditor that violated the Securities Act of 1933. One of the companies that they audited was BarChris Construction Corporation. BarChris had reported overstatements of sales, profits, and orders, and understated liabilities. They had also failed to disclose large officer loans and customer delinquencies. Furthermore, BarChris constructed bowling alleys and had failed to disclose income from bowling alleys that they built and sold to a third party that had been leased back to one of their subsidiaries. Peat Marwick certified the company’s statements and were convicted of criminal violations for their audit activities.
The court held that Peat Marwick had not used due diligence in their work or they would have discovered the failure to disclose this arrangement. The court also stated that by certifying the company’s financial statements, Peat Marwick was falsely representing to investors that such due diligence had been done (M E Sharpe, 2006).

The Foreign Corrupt Practices Act of 1977
Brief History of the Foreign Corrupt Practices Act of 1977
As a result of SEC investigations in the 1970's, over 400 U.S. companies admitted making questionable or illegal payments in excess of $300 million to foreign government officials, politicians, and political parties. Congress enacted the Foreign Corrupt Practices Act of 1977 (FCPA) to stop the bribery of foreign officials and to restore public confidence in the integrity of the American business system (Cook & Connor, 2010).
Brief Summary of the Foreign Corrupt Practices Act of 1977
The anti-bribery provisions of the FCPA make it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. Since 1998, they also apply to foreign firms and persons who take part in any act of a corrupt payment while in the United States.
There are five elements which must be met to constitute a violation of the Act:
• Who -- The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm.
• Corrupt intent -- The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person.
• Payment -- The FCPA prohibits paying, offering, or promising to pay money or anything of value.
• Recipient -- The prohibition extends only to corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office.
• Business Purpose Test -- The FCPA prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person (US Department of Justice, 2012).
The FCPA also prohibits corrupt payments through third parties. This means that it is unlawful to make a payment to a third party, such as joint venture partners and agents, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official.
Violators of this Act are subject to fines, imprisonment, and possible suspension or barring from doing business with the Federal government.
Kellogg Brown & Root LLC Fraud/Scandal
Kellogg Brown & Root LLC (KBR) had bribed Nigerian government officials over a 10-year period in order to obtain construction contracts. KBR “met with high-ranking Nigerian government officials and their representatives on at least four occasions to arrange the bribe payments. To conceal the illicit payments, the joint venture entered into sham contracts with two agents, one based in the United Kingdom and one based in Japan, to funnel money to Nigerian officials” (SEC, 2009). KBR and Halliburton, KBR's former parent company, had also engaged in books and records violations as well as internal controls violations related to the bribery. Halliburton had failed to maintain and enforce adequate internal controls concerning the use of foreign sales agents. Halliburton's performed a due diligence investigation of the United Kingdom agent but failed to detect or prevent the bribery scheme. They failed to conduct a due diligence investigation on the Japanese agent. As a result, Halliburton’s records contained false information relating to these payments.
KBR and Halliburton had to pay $177 million to settle the SEC's charges. KBR also had to pay a $402 million fine (SEC).
Sarbanes Oxley Act (SOX)
The Purpose of SOX
The Sarbanes Oxley Act of 2002 (SOX) was created in response to the series of misleading and fraudulent activity of corporations in the 1990s such as Enron, Xerox, and WorldCom. These companies had published deceptive financial statements that resulted in huge losses for stakeholders.
SOX created new standards for corporate accountability as well as new penalties for acts of wrongdoing. It changed how corporate boards and executives must interact with each other and with corporate auditors. It made them accountable for the accuracy of financial statements. The Act specifies new financial reporting responsibilities, including adherence to new internal controls and procedures designed to ensure the validity of their financial records (The Data Governance Institute, 2012).
Brief Summary of SOX
Before SOX was created, companies used self-regulation in their accounting transactions. SOX changed this by establishing the Public Company Accounting Oversight Board (PCAOB). The PCOAB is given authority and empowered by the SEC to regulate and enforce the regulations of the accounting industry. Under the regulations of the SOX, it is now required for all accounting firms and all public traded companies to be registered with the SEC.
SOX also removed some conflicts of interest that existed with these companies. Examples are: (a) accounting firms also provided consulting services to their clients, (b) auditors reported to the firm’s executives (auditors now report to an audit committee), (c) auditors now only supervise the same client for five years at a time, and (d) CEOs and CFOs now certify that they reviewed their firm’s financial statements records (The Data Governance Institute).
The Act requires all financial reports to include an internal control report. Year-end financial reports must contain an assessment of the effectiveness of the internal controls. The issuer's auditing firm is required to attest to that assessment. The auditing firm does this after reviewing controls, policies, and procedures their audit.
SOX is arranged into eleven titles. As far as compliance is concerned, the most important sections within these are often considered to be 302, 401, 404, 409, 802, and 806. Section 302 requires corporations to periodically certify financial statements. Section 401 requires that financial statements be accurate and not contain incorrect statements. Section 404 relates to internal control structure and the procedures for financial reporting. Section 409 requires that information on material changes in financial conditions or operations be published. Section 802 states penalties and fines. Section 806 provides whistleblower protection for employees of publicly traded companies (Addison-Hewitt, 2006).
US Bank of Seattle Fraud/Scandal
US Bank in Seattle violated the whistleblower provisions of SOX. One of its bank managers had filed a report in August 1977 claiming “that income amounts on loan applications were being altered by bank employees, loans were not being paid off when refinanced, and checking accounts and credit cards were being opened for customers who did not request such accounts” (U.S. Department of Labor, 2010). As a result, the manager was terminated from his employment.
The U.S. Department of Labor's Occupational Safety and Health Administration (OSHA) ordered the bank to reinstate him and pay him back-wages. The bank was also ordered to expunge employment records of the termination, to post an OSHA fact sheet and notice to employees, and to provide training for its employees at its Renton, Washington branch about the whistleblower provisions of the Sarbanes Oxley Act (U.S. Department of Labor, 2010).
This paper began by introducing the Securities Act of 1933, which had a goal of prohibiting deceit, misrepresentation, and fraud in the sale of securities. Even with penalties, the Act needed more help to implement its regulations. The Securities Act of 1934, along with the creation of the SEC, helped to monitor the sale of securities. However, people can be very creative. The crimes keep changing just enough to sidestep the law; hence the need for more regulations.
Next comes bribery and the creation of the FCPA. Then the world is turned upside down after the scandals of Enron, Arthur Andersen, and WorldCom. Because of them SOX was introduced. Yet there are still corporations being found guilty of violating these regulations.
In 2010, the Dodd-Frank act was created. It contains 16 titles and is 849 pages long. SOX had been considered to be long at 66 pages. The purpose of Dodd-Frank was to address the systemic weaknesses of our financial system. However, “the over-inclusiveness of Dodd-Frank, with hundreds of pages of law mandating rulemaking in areas unrelated to the causes of or weaknesses that contributed to the financial crisis, will make it more difficult for regulators to focus their energies on important mission critical priorities and more pressing risks” (Casey, 2011).
Although corporate crime continues to take place after implementing regulations, the perpetrators are getting discovered and penalized. This is no different than crime in the rest of society. Without the regulations, the crime would be more frequent. The continual addition of regulations is necessary because of the ever-changing types of crimes that occur. Dodd-Frank is too extensive, though, and might be ignored due to the difficulties conforming to all that it contains. Otherwise, the regulations in the accounting industry are necessary in order to deter wrongdoing and to assist accountability, transparency, and accuracy. References
Addison-Hewitt Associates. (2006). A Guide To The Sarbanes-Oxley Act . Retrieved June 24, 2012, from
Casey, K. L. (2011, January 23). The Regulatory Implementation and Implications of Dodd-Frank. Retrieved August 5, 2012, from U.S. Securities and Exchange Commission:
Cook, R. C., & Connor, S. (2010, January). The Foreign Corrupt Practices Act: An Overview. Retrieved July 30, 2012, from Jones Day:
M E Sharpe. (2006). Accountants as Gatekeepers. Retrieved June 18, 2012, from A Financial History of Modern U.S. Corporate Scandals from Enron to Reform:
Parker Waichman LLP. (2012). Securities Act of 1933. Retrieved July 29, 2012, from Securities Fraud:
Sarkar, D. (2012). Securities Exchange Act of 1934. Retrieved July 29, 2012, from Legal Information Institute:
SEC. (2009, February 11). SEC Charges KBR and Halliburton for FCPA Violations. Retrieved July 30, 2012, from US Securities and Exchange Commission:
Smith, A. K. (2012). Does the SEC Have Your Back? Kiplinger's Personal Finance, 21-25.
The Data Governance Institute. (2012). Sarbanes-Oxley Essential Information. Retrieved June 24, 2012, from
U.S. Department of Labor. (2010, June 1). OSHA Regional News Release. Retrieved July 30, 2012, from OSHA:
US Department of Justice. (2012). Foreign Corrupt Practices Act. Retrieved July 30, 2012, from United States Department of Justice:…...

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Government Regulation and Corporate America

...Unit 3 Research Paper Government Regulation and Corporate America Kaplan University Online All companies in the United States have to abide by many rules and regulations set in place by our government. It seems as if there are so many if you are just learning about them but once you know and understand them, they all make sense and seem logical. If we had less regulation, there would be more people committing fraud and getting away with it. There are plenty of regulations in place right now and no more are needed unless people are continuing to abuse the system and new ones need put into place. As long as everyone continues to do their job properly, there is no need for any more government regulation. Securities Acts of 1933 and 1934 The Securities Acts of 1933 and 1934 ensure that companies are not misleading in their financial statements that investors base their opinions on. If an investor sees any financial statement to a company, and believes they are in good shape and that they should invest in that company, the company is held liable for any loss the incur. The Securities Act of 1933 requires that before selling securities publicly, a company must register them first. Companies must go through the Securities Exchange Commission and file a registration statement. When they file, they must include their audited financial statements (Beatty & Samuelson, 2010). After this is done, a company may offer their securities on a public market for investors which may......

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