Accounting Regulation & Investors

Unfortunately, if the past 15 years in the financial world have taught us anything at all, it is the people simply cannot be trusted when it comes to money. Greed will and usually does win out if left completely to our own devices. We saw it in the late 90s with the dot com bubble, companies springing up for IPOs (initial public offerings) when they had absolutely no product to sell. We saw it early last decade when multiple companies used faulty accounting to hide or reallocate debts, bumping up their bottom lines and artificially inflating profits and stock prices. We saw it again just a few years ago when the Great Recession hit. Brokerage firms completely overleveraged and hid toxic debt in A A A funds with the belief that good accounts would outweigh the defaults (wrong!). And these do not even include the massive Ponzi schemes (a common racket that is now almost a century old) that are revealed on almost a quarterly basis where investors lose everything.

In the wake of each of these events, the financial and accounting industries faced a great deal of public outrage. Each time the market took a hit (followed by 401Ks, portfolios, housing prices, and even the job market), tax payers demanded blood and the heads of those responsible on a platter. Beyond that, they also want assurances that such things cannot happen again. The latter is a difficult task to accomplish. The financial and accounting worlds are extremely complicated and difficult to regulate. This is not just because of the industries themselves, but also because every other industry in existence must operate in those realms.

A common problem is trying to account for each possible loophole (and greed will take advantage of these loopholes wherever they exist) while at the same time simplifying the overall markets - another item that investors continually want. Current accounting regulation is so complex and detailed that even experienced accountants struggle to understand all codes. The average voter will call to simplify it, not seeing the need for it to be so tedious. However, they tend to forget that the rules that were put in place were not done so because people like more laws. They were done so because somebody had abused that rule in the past and somebody else suffered for it. Simple blanket reform is a wonderful idea, but significantly tougher to implement across an entire system than often deemed.

That is not to say that we have not seen a great deal of regulation. The biggest, in the wake of the Enron/Arthur Andersen scandal, has been the Sarbanes-Oxley Act (commonly referred to as SOX). SOX did take some steps to standardize practices and improve transparency in areas where previous laws had been a bit vague. However, before seeing this as an overall solution, it should be noted that the events that led to the scandal were not legal. The accounting being used by Enron was already an illegal act. If a company is willing to behave illegally, then simply having more laws and reforms that they can ignore is not a solution to the problem.

This dire outlook means that it needs to be up to investors themselves to pay attention to their money and where they put it. They need to do their own research and pay attention not only to a stock's bottom line, but how it was obtained. If it looks a little fishy and like some numbers have been moved around, then that likely reflects a risk not taking.

http://goarticles.com/article/Accounting-Regulation-Investors/5182451/