How to regulate the business

Governments and Business Regulation

Governments have governed the way businesses operate since the dawn of civilization. Technology improvements have led to an increase in government participation in business in the twenty-first century. Businesses are regulated by the government to safeguard customers and guarantee moral business practices. Additionally, the government earns money through taxes and commercial licenses by regulating industries (Rahn, 2015). Scholars, business executives, and lawmakers have all expressed opposing viewpoints on the topic of government regulation of business. Critics contend that regulations have made it more difficult for companies to operate successfully (Rahn, 2015). Furthermore, the detractors claim that firms in America are overly controlled by the government. The federal, local and state statutes are more than enough in regulating the conduct of a business. This paper assesses the purpose of the U.S Securities and Exchange Commission (SEC) and how it directly impacts businesses.

U.S. Securities and Exchange Commission (SEC)

The SEC is an autonomous and non-partisan, United States federal government bureau located in Washington D.C. The agency’s history dates back to the 1930s, during the Great Depression. The depression resulted in a crash in the stock market. Company share prices depreciated significantly resulting in a slowdown in the economy. This lead to enactment of the Securities Exchange Act by the Congress, giving rise to the Securities Exchange Commission. The Bureau is governed by five commissioners appointed by the President, for a term of five years. The Bureau is divided into five departments.

Purpose of SEC and How It Directly Impacts Business

The SEC mission is to safeguard investors by maintaining an organized and efficient financial market and enabling capital creation. Over the years, many publicly listed corporations have misstated their financial statements to attract investors and boost their share price. The SEC has set up statutory conditions that require organizations to submit their annual financial records (Bernstein, 2015). The agency carries out due diligence to ensure the submitted financial reports present a true and fair view of the organization’s financial performance.

Additionally, the SEC requires the management of companies to present the management discussion and analysis. The management discussion and analysis contains a summary of how the business performed in the previous financial period (Bernsten, 2015). This document also contains measures taken by the management to curb financial misconduct in the organization. The management risks facing a jail term if they take part in fraudulent activities.

The bureau also issues practicing licenses to financial service firms. Financial institutions such as brokerage firms, mutual funds, hedge funds and investment firms must register with the SEC to operate a business. Moreover, the Bureau punishes the financial services firms for professional misconduct. A practitioner risks losing his practicing certificate if he is found guilty of professional misconduct.

Positive and Negative Implications of SEC Regulations

Through established laws and guidelines, the SEC has impacted both positively and negatively to the businesses. One positive direct implication of SEC by-laws is strengthening of the audit committee of publicly listed organizations. The audit committee consists of the board of directors. It is charged with the responsibility of supervising disclosure of financial reports (Badolato, 2014). In past years, major companies such as Enron and WorldCom have engaged in fraudulent activities. In response, the SEC established the Sarbanes-Oxley Act. The statute stipulates that the audit committee should be independent when performing its oversight duties (Rockness, 2005). This increases public confidence in publicly listed companies.

In addition, the bureau has improved corporate governance in publicly listed companies. It is now difficult for organizations to take part in fraudulent activities. The management is answerable to the bureau in the event of misappropriation of funds. The agency has also prevented major financial firms from potential collapse in the wake of the 2007-2008 financial meltdown (Erkens, 2012)

The SEC has set many bureaucratic controls making it difficult for companies to expand their operations. Small companies looking to expand their capital share by IPO often shy away because of these bureaucratic measures. The cost of complying with these regulatory requirements may also be very high for small business. Further, the SEC laws reveal organization’s confidential financial information to the public. This exposes the company to its competitors.

Conclusion

Government regulation on businesses is aimed at protecting consumers. Without government regulation, businesses would take advantage of consumers. Investors also benefit from government regulation. The SEC is a good example of a government department that has regulated the financial markets. The SEC has put in place stringent measures to ensure the financial market runs in an ethical and efficient way. All in all, over regulation may kill innovation and little regulation may result in mismanagement of funds and exploitation of consumers.

References

Badolato, P. G., Donelson, D. C., & Ege, M. (2014). Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2), 208-230.

Bernstein, M. H. (2015). Regulating business by an independent commission. Princeton University Press.

Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389-411.

Rahn, R. (2005, August 10). Why do we regulate? Lower Taxes, Less Government, More Freedom. Retrieved February 21, 2012, from http://www.freedomworks.org/publications.

Rockness, H., & Rockness, J. (2005). Legislated ethics: From Enron to Sarbanes-Oxley, the impact on corporate America. Journal of Business Ethics, 57(1), 31-54.