Introduction
Accountability of public funds is a key pillar of a financial system, the recent corporate debacles and cases of poor corporate governance in the United States have led to the loss of faith in financial institutions, among the American public including financial investors. The level of greed and carelessness shown by corporate executives has led to an uproar by the American public who blame the government for not placing strict rules and regulations that will govern the financial framework in the United States (Welytok. 1-5). Corporate debacles like Enron, WorldCom, Adelphia, the Madoff case, and the recent plunge of the American economy into the recession can be partly blamed on the Government for not putting a comprehensive legal framework governing the financial world.
Therefore in retaliation elected leaders of the Senate and House of Representatives together with interested parties went ahead and came up with legislation such as the Glass-Stegall, Sarbanes-Oxley, Dodd-Frank acts that were put in place to restore the confidence of the public in the financial systems in America. It is these pieces of legislation that were put in place to encourage better corporate governance and ethics amongst the American business executives who manage broad financial portfolios that belong to investors. Reforms in the financial sector have therefore gone ahead to try and improve the efficiency, security of investors, whistleblowers, and accountability among the participants of the financial systems.
A critical look at the Act’s
The Glass-Steagall act
The Glass-Steagall act of 1933 also known as the banking act of 1933 was sponsored by Henry Steagall and Carter Glass established Federal Deposit Insurance Corporation in the United States that was put in place in order to control the speculation in the financial system. The act intended to stop deflation of the American currency, enable the federal reserve to have full authority to regulate interest rates of saving accounts, expand the reserves ability to rediscount more types of assets such as bonds, and commercial paper, and distinction of bank types according to their nature of business this is because there existed a conflict of interest and a likelihood of fraud between the investment portion of these banks and the commercial part of these banks which carried out the same activities hand in hand, therefore, forcing this legislation to demand separation of these type of functions giving birth to commercial banks and investment banks (Eckbo. 190-196).
The repeal of the Glass-Steal act removed the separation that existed between the Wall Street investment banks and depository banks currently making financial analysts criticize this step and blame it for damaging the American financial system and leading to the most recent financial crisis.
Many financial experts thought that the Glass-Steagall act had many shortcomings and therefore sought it to be repealed, it was finally repealed on 12th November 1999. Its repeal meant that the firewall separating commercial banks which handle deposits and make loans and investment banks which underwrite securities no longer existed. During the repeal of this act, Senator Byron L. Dorgan went ahead to state that by reversing the Glass-Steagall act the American financial system would feel the heat in the future and ten years later it is true to say that by pulling down the firewall that existed between the commercial and investment banks was one of the main factors that led to the financial crisis.
Banking executives who had a large hunger in trading in securities such as mortgages went ahead to over-utilize funds that were from commercial banks leading to the most recent credit crunch in the United States of America. Gramm-Leach-Bliley Act which replaces the Glass-Steagall act was considered unsuitable for ensuring full regulation that would secure public funds by those who opposed the repeal of the Glass-Steagall.
Sarbanes-Oxley act
The Sarbanes-Oxley act 2002 also known as the public Accounting Reform Act in the American senate and as the corporate and Auditing Accountability and Responsibility Act was enacted to enhance the standards under which American companies both public listed companies together with regulatory bodies should work in bringing about a more sound financial system and restore public confidence in the American financial system which had been missing in the American public because of numerous corporate debacles that followed the failure of Enron, Adelphia and WorldCom. The bill was named after Senator Paul Sarbanes and Representative Michael G. Oxley (Welytok. Ch1. 9-13).
The number of corporate debacles and poor corporate governance that were as a result of creative accounting cost American investors billions of dollars and led to a steep fall in share prices of company stocks shaking investor confidence in the American financial system. The American legislature was accused of leaving loopholes in the American laws that allowed corporate executives to defraud the public and operate unethically the existence of auditor conflicts, boardroom failures, conflict of interest by security analysts, inadequate availability for the security exchange commission, poor banking practices, the internet and technological bubble and excessive executive compensation left loopholes which allowed fraud and economic malice could be committed by greedy and unethical business executives.
The Sarbanes-Oxley act contains 11 titles that were implemented in order to ensure better financial and accounting in American public corporations. The first title is the Public company accounting oversight board this title has nine sections that define the processes by which an oversight company shall be established to oversee the overall registration and supervision of auditing firms.
A specific guideline which the auditing function shall be established in public companies and registered together with how quality control and independence standards and rules that call for the appointment of independent auditors who will in no way help in doctoring financial statements shall be put into place. This section also lays rules that qualify foreign accounting firms to operate within the United States of America and the various accounting standards that they will be required to follow. The introduction of this section will in turn call for more accuracy in financial reporting.
The second title auditor independence has a total of nine titles that define the services that fall outside the scope of auditors, audit partner rotation and appointment, auditor conflicts of interest, and the auditor reapproval requirements. Therefore this section was established to ensure the independent appointment of independent auditors who will in no way help in doctoring financial statements shall be put into place. The third title of the Sanbox ensures corporate responsibility ensuring individual responsibility of the C.E.O and the C.F.O on financial documents that contain their signatures.
Furthermore, this title was formed to make sure that incidences of insider trading and improper influence on the conduct of audits shall not occur. The fourth title demands for public corporations to release enhanced financial disclosures in periodic reports, transactions involving senior executives, and off-balance sheet activities. Sandbox ensures that a code of ethics is followed by senior financial officers. The fifth title goes ahead to offer rules to do with Analyst conflict of interests prohibiting security analysts from not disclosing issues of conflict or excluding themselves from financial activities that are in violation of this title.
The sixth title of Sabox offers a clear legal framework by which the Security exchange commission has the authority to operate and censure security analysts and how it can obtain resources to carry out its operations. Sabox furthermore in the seventh title lays a legal framework by which the security exchange e commission can in case of discrepancies or suspects’ foul play go ahead and conduct studies and report its findings.
The eighth title of Sabox lay’s a framework by which corporate crimes and frauds which include altering of financial statements can be punished, the section also offers guidelines for protecting employees who provide evidence of fraud and offer penalties for defrauding shareholders of publicly traded companies. This section is also known as the section crime and criminal fraud act of 2002.
The ninth title of Sabox create a legal framework by which punishment of white collar crimes can be punished this section is also known white-collar collar crime penalty enhancement act of 2002 such crimes which include penalties like mail and wire fraud, violation of employee retirement schemes, and attempt or conspiracies to commit criminal fraud offenses ( Bainbridge, 99). The tenth title of Sandbox which is corporate tax returns lays a legal framework that makes it compulsory that the company’s chief executive should ensure that the tax returns are filled and signed personally by him or her.
The last part the 11 title of Sandbox gives a legal framework for ensuring corporate fraud responsibility and is also known as the corporate fraud accountability act of 2002 giving the penalties involved with tampering with records, the security exchange commission ability to freeze assets, and offers a framework of punishing those who retaliate against informants together with federal sentencing guidelines of corporate criminals (Welytok. 18-62).
Dodd-Frank Act
The Dodd-Frank Wall Street reform and consumer protection act is a federal act that received the presidential accent in July 2010. This act was brought into being due to the numerous cries from many quarters calling for reform within the American financial system. The bill was proposed in the house by Barney Frank and in the senate by the chairman of the banking committee Chris Dodd. Following the recent recession and credit crunch, it was necessary that the legislature comes up with much better legislation that would to tighten the grip and secure America’s financial regulatory system and avoid any future repetitions of the recent witnessed recession Dodd-Frank Act has been said to consider covering the weaknesses of Sabox.
The Dodd-Frank act has its origins in the recent financial crises and therefore included titles and sections that aim to enforce legal obligations where there were loopholes that previously existed in the financial system that can be said to be responsible for the recession. The bill therefore has 16 titles whereby title one which is financial stability which brings together different bodies and chairs to monitor systematic risk and research the actual situation of the economy (Richardson & Cooley 50-145).
After accessing the economy and identifying the risks then the financial oversight council consisting of ten members will go forward and promote market discipline by eliminating the culture of government bailouts in the economy, the council will then further respond to threats that threaten the United States economy and lead United States into stability and restore investor confidence. The council is to collect relevant data from all quarters and formulate strategy that will assess the risks and correct the situation.
Furthermore the bill lays the foundation of orderly liquidation of financial institutions and who have the authority to do so. The Dodd-Frank Act has outlined a clear guideline that is to govern hedge funds and other investment companies together with all issues concerning the insurance of financial instruments. Wall Street participants are now required to be transparent and highly accountable of their investment activities which involve the handling of public finds.
Furthermore, the bill goes ahead to offer clear protection to investors that aim to secure funds that they may have invested. Since the major causes of the recent recession included haphazard issuances of mortgages this act sets legislation to ensure sound practices in the mortgage markets. With titles such as the pay back act and Federal Reserve provisions all aim to improve the financial health of the American financial institutions and economy and avoid future financial mishaps.
Conclusion
The introduction and accent of Glass-stegal. Sarbanes-Oxley. Dodd-Frank Acts have assisted in improving the health of the American financial system. Malicious business executives who play around with investor funds being driven by greed, and negligence are now kept on a leash (Richardson & Cooley. 77-83). Furthermore, whistle-blowers and informants can now testify to economic crimes and be assured of their safety. On the other hand, it is somehow true to argue that the levels of pursuing business objectives such as profitability and share pricing have now been hindered by these laws because now perusing business objectives must be within the bounds of the law.
References
Eckbo, Bjom. Handbook of corporate finance: empirical corporate finance. Maryland: Elsevier, 2007. Print.
Bainbridge, Stephen. The Complete Guide to Sarbanes-Oxley: Understanding How It Affects Your Business. Avon: Adams Media, Inc, 2007. Print.
Richardson David & Cooley Thomas. Regulating Wall Street: The New Architecture of Global Finance. New Jersey: John Wiley & sons, inc, 2010. Print.
Welytok, Jill. Sarbanes-Oxley for Dummies 2nd edn. Indianapolis: Wiley Publishers, 2008. Print.