Government regulation of securities exists so that firm’s cannot bloat their profits on their financial records. This in turn causes investors to invest money in them when they are not privy to their actual records. When people think of “shady” accounting the first thing that comes to mind is most likely the Enron scandal of 2001.
“The Enron collapse illustrates that government regulation can lessen asymmetric information problems, but cannot eliminate them. The Enron bankruptcy not only increased concerns in financial markets about the quality of accounting information supplied by corporations, but also led to hardship for many of the firm’s former employees, who found that their pensions had become worthless” (Mishkin, F. S., & Eakins, S. G. (2009).
Public distrust of financial institutions has a huge impact on the economy because it stops people from buying, trading and selling securities. “The solution, however, would involve the government in releasing negative information about the firms, a practice that might be politically difficult. A second possibility is for the government to regulate securities markets in a way that encourages firms to reveal honest information about themselves so that investors can determine how good or bad the firms are” (Mishkin, F. S., & Eakins, S. G. (2009). A novel idea one might say but an idea that our economy is built on and depends on to thrive.
This is where the Securities and Exchange Commission (SEC) comes into play. “In the United States, the Securities and Exchange Commission (SEC) is the government agency that requires firms selling their securities to have independent audits, in which accounting firms certify that the firm is adhering to standard accounting principles and disclosing accurate information about sales, assets, and earnings” (Mishkin, F. S., & Eakins, S. G. (2009). Sounds like a