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Failed Regulation

Autor:   •  September 18, 2011  •  Case Study  •  4,328 Words (18 Pages)  •  955 Views

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Introduction

In the modern American corporation, ownership is typically spread widely over many individuals and institutions. As a result, the owners as a group cannot effectively manage a business. Instead, owners delegate management responsibility to a hired professional. This separation between widely dispersed ownership and professional management is associated with the work of Adolf Berle and Gardiner Means. Berle and Means' main concern was the growing concentration of economic power in a few hands and the coincident decline in the competitiveness of markets. At the heart of this problem was what they saw as the impossibility of absentee owners disciplining management. Managers would be free to pursue self-interests at the shareholders' expense and could use company resources for perquisites. The net result of these actions by management would reduce shareholders' wealth and overall decline in efficiency in the allocation of productive resources (Weinberg, 2003). In addition, the hands off approach by the owners and shareholders would result in many corporate scandals.

Due to the absentee ownership, today's business environment is characterized by corporate fraud, bankruptcies, and other various illegal acts. These scandals usually occur during recessions or other economic problems, and two characteristics emerge from these scandals which are corporate greed and earnings manipulation. This earnings manipulation can be seen in the case of Enron where the company utilized mark-to-market to overstate their earnings. Enron is just one example of where the government moves in to pass legislation to prevent such a scandal from ever occurring again. Unfortunately, government leaders are failing to understand the primary cause for accounting scandals and corruption which are at an individual level. The leaders' failure to understand the primary cause will result in more laws to deal with the symptoms of the problems we face in the corporate world. Thus, a solution to decrease scandals would be to implement the human factor model, not passing more legislation. Specifically, this paper will discuss the Securities Acts of 1933 and 1934, Foreign Corrupt Practices of 1977, and Sarbanes-Oxley Act of 2002 with applicable cases involving each act.

Securities Act of 1933

The roaring twenties was marked by an exuberant culture, risky credit behavior, and lack of corporate oversight left stockholders vulnerable to new corporate schemes such as stock price manipulation, false claims on new releases, inside trading, and misleading financial statements. After the stock market crash of 1929 and during the depression that followed, the U.S. government began recognizing that trust and confidence in the financial institutions was critical to the economic well-being of our country (Adjibolosoo & Nott, 2005).

To restore the trust and confidence,

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