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1 – 10 of over 22000The purpose of this paper is to examine the relationship between enforcement and compliance and to report on the results of an empirical study that assesses the impact of…
Abstract
Purpose
The purpose of this paper is to examine the relationship between enforcement and compliance and to report on the results of an empirical study that assesses the impact of enforcement action by the Australian Securities and Investments Commission (ASIC) on the subsequent compliance by violators.
Design/methodology/approach
Following an extensive literature review, a sample of 50 similar complaints made to ASIC during the 2005/2006 financial year, were selected and grouped into two samples. The first sample, described as the enforcement sample, comprised of complaints that had been resourced for investigation by ASIC, and the second sample, described as the non‐enforcement sample, comprised of complaints that had not been resourced for investigation. An analysis was conducted to compare how many subsequent complaints had been received by ASIC in the following three years against members of the two samples.
Findings
The empirical evidence of the decrease in subsequent complaints against corporate violators subject to enforcement action clearly supports the argument that enforcement action does have an impact on corporate compliance of those violators. However, it has to be acknowledged that differences in rates of subsequent violation still do not guarantee that there is a cause and effect relationship between compliance and enforcement, as it is possible enforcement action may have resulted in violators becoming better at avoiding detection and complaint.
Research limitations/implications
The samples were limited to complaints identified in the 2005/2006 year and only taken from two of ASIC's five regulatory categories, so caution is required when interpreting and making generalisations from the results. Only three years of subsequent complaints were examined so the study was limited to the examination of relatively short‐term effects of enforcement action.
Practical implications
Corporate regulators such as ASIC now need to obtain and examine qualitative data from violators and potential violators to gain insights into their actions and motivations after investigation and enforcement actions. This may enable regulators to better understand the impact on violators themselves and the extent to which media reporting of enforcement action may have a demonstration effect on potential violators.
Originality/value
The paper provides valuable empirical evidence of the influence of enforcement on compliance, which should be of interest to corporate regulators and those interested in regulation and corporate governance.
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Aiman Nariman Mohd Sulaiman, Azza Isma Moideen and Sharon David Moreira
This paper aims to chart the enforcement actions taken by the Malaysian regulatory authorities in relation to illegal investment schemes in Malaysia, and clarifies the various…
Abstract
Purpose
This paper aims to chart the enforcement actions taken by the Malaysian regulatory authorities in relation to illegal investment schemes in Malaysia, and clarifies the various strategies adopted by the Malaysian regulatory authorities to ensure protection of investors in the capital market. The enforcement actions relate to the Swisscash scheme as well as commodities futures involving crude palm oil and a more recent case involving gold futures. These schemes share similar characteristics with Ponzi schemes that were thrust into the international limelight in the notorious Madoff Ponzi scheme and its allegation of regulatory failure.
Design/methodology/approach
The paper clarifies, by way of case study, public enforcement of illegal investment schemes promoted through the Internet and schemes involving cross-border investments.
Findings
The enforcement powers of the regulatory authorities in Malaysia are being utilized to ensure compliance with the law. The enforcement actions by the regulatory authorities in the afore-stated cases are significant in view of the successful custodial sentence of imprisonment, the regulators’ public enforcement action intended to compensate investors and the most recent case which is unfolding, due to the large number of alleged perpetrators and significant wealth transfer involved.
Originality/value
Given the allegation of regulatory failure in other jurisdictions, this paper enables a view to be formulated of the timeliness and appropriateness of the enforcement actions.
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Xin Yu and Ying Zheng
The purpose of this paper is to examine whether the political connections of listed firms in China affect how the market reacts to cases of financial misrepresentation…
Abstract
Purpose
The purpose of this paper is to examine whether the political connections of listed firms in China affect how the market reacts to cases of financial misrepresentation investigated by the regulatory authorities.
Design/methodology/approach
The authors use an event study method and the financial misrepresentation events in China stock markets as research setting and empirically test the association between market reactions to the announcement of financial misrepresentations and the presence of political connections.
Findings
The results show that on average, there is no significant market reaction to financial misrepresentation for politically connected firms. In contrast, however, there is a significantly negative market reaction for non-connected firms, which suggests that investors do not punish politically connected firms for financial misrepresentation. The authors argue that politically connected companies use the altered financial information to gain legitimacy and obtain benefits from the government. Consistent with the argument, the authors find that in the years after they disclose their financial misrepresentation, firms with political connections are more likely to increase their bank loans than firms without political connections.
Originality/value
The authors provide a new explanation for the low-earnings quality of politically connected firms.
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This paper sets out how the FSA intends to use enforcement tools to support its financial crime strategy and reduce the risk that regulated firms are used to further money…
Abstract
This paper sets out how the FSA intends to use enforcement tools to support its financial crime strategy and reduce the risk that regulated firms are used to further money laundering. It reiterates that public enforcement action is only one of a wide range of regulatory tools that may be used when faced with money laundering failures and sets out the circumstances in which such action is more likely to occur.
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John D. Finnerty, Shantaram Hegde and Chris B Malone
The purpose of this paper is to examine the hypothesis that a period of sustained supernormal firm performance (for up to five years before fraud commission) creates financial…
Abstract
Purpose
The purpose of this paper is to examine the hypothesis that a period of sustained supernormal firm performance (for up to five years before fraud commission) creates financial pressure on actors/agents so they have a propensity to behave fraudulently to keep the good times (apparently) rolling.
Design/methodology/approach
Applying the Fama and French (1993) three-factor model using a range of calendar time portfolio methodologies, the authors measure abnormal drifts in stock performance in periods up to five years before alleged fraud commission dates. The authors examine a sample of 561 US firms subject to enforcement actions initiated by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) over 1968-2009.
Findings
The authors find that sustained firm-specific positive stock price performance for up to five years followed by the almost inevitable adverse shock, which eventually brings the good times to an end, generally precedes corporate fraud. Fraud occurs when firm managers engage in misconduct in a misguided attempt to keep the good times (apparently) rolling despite the negative shock.
Research limitations/implications
The sample is restricted to firms with trading histories on the stock market prior to the misconduct, and to firms contained in the Federal Securities Regulation database of US firms subject to enforcement actions initiated by the SEC and the DOJ over 1968-2009.
Practical implications
The desire to keep the good times rolling appears to be a very important driver of fraudulent behavior, even after controlling for the executive compensation incentive effects and business cycle effects emphasized in prior studies. The robust findings of positive abnormal returns for up to five years preceding initial fraud commission suggest that regulators and investors would be well-advised to scrutinize the behavior of firms that exhibit surprisingly persistent superior performance over an extended period. If the financial results appear too good to be true, a closer examination might just reveal that they indeed are.
Social implications
While most investors generally like to see the “good times keep rolling” this pressure can create ethical dilemmas for managers.
Originality/value
Unlike most other papers in this area of the literature, which concentrate on the pre-fraud disclosure, the authors investigate the firm’s performance in the pre-fraud commission period. The authors find that the commission of the alleged fraud is preceded by a sustained period of surprisingly good performance of up to five years in length. The authors believe that the paper provides empirical evidence that supports the hypothesis that a period of sustained supernormal firm performance (for up to five years before fraud commission) creates financial pressure on actors/agents so they have a propensity to behave fraudulently to keep the good times (apparently) rolling.
John C. Lere and Bruce R. Gaumnitz
This paper describes ways to improve the effectiveness of a code of ethics where the goal is to affect the alternative chosen by a decision maker. These avenues for improvement…
Abstract
This paper describes ways to improve the effectiveness of a code of ethics where the goal is to affect the alternative chosen by a decision maker. These avenues for improvement are divided into those related to the content of the code and those related to enforcement provisions associated with a code. Improvements related to the content of the code are designed to change decision makers’ perceptions as to whether an action is ethical in such a way that they change the action chosen. Improvements related to enforcement provisions are designed to change how decision makers value the outcomes associated with selecting specific actions.
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To consider the recommendations made by the Financial Services Authority (FSA) enforcement process review (the review).
Abstract
Purpose
To consider the recommendations made by the Financial Services Authority (FSA) enforcement process review (the review).
Design/methodology/approach
This paper has considered the concerns raised by the Financial Services and Markets Tribunal in the Legal & General case, the reaction of the FSA to those concerns and the terms of reference for the review, plus the impact of the review's 44 recommendations.
Findings
That the recommendations will bring greater transparency to the FSA's process of investigating regulatory breaches and taking enforcement action against firms and individuals, although it may take some time for the regulator and the city to adapt to the revised enforcement process.
Originality/value
This paper will be of interest to firms and individuals in the regulated sector and regulatory lawyers interested in the FSA's enforcement process.
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Richard J. Parrino, Peter Romeo and Alan Dye
The purpose of this paper is to review the enforcement initiative announced by the US Securities and Exchange Commission (SEC) in September 2014 directed at reporting violations…
Abstract
Purpose
The purpose of this paper is to review the enforcement initiative announced by the US Securities and Exchange Commission (SEC) in September 2014 directed at reporting violations of the Securities Exchange Act of 1934 (Exchange Act) by public company officers, directors and significant stockholders. The paper considers the notable features of the first round of SEC enforcement actions pursuant to that initiative and proposes measures public companies and their insiders can adopt to enhance compliance with their reporting and related disclosure obligations under the Exchange Act.
Design/methodology/approach
The paper examines the SEC’s enforcement initiative against the backdrop of the agency’s enforcement activity since 1990 for violations by public company insiders of the reporting provisions of Sections 13 and 16 of the Exchange Act. The paper summarizes the features of the reporting violations that attracted SEC enforcement interest in the recent proceedings and identifies the factors apparently weighed by the SEC in determining the amount of the penalties sought against those charged with the violations.
Findings
The SEC’s latest enforcement actions are unprecedented for insider reporting violations. The new enforcement initiative represents an abandonment by the SEC of its largely passive approach of the past dozen years in which it charged insider reporting violations only when they related to fraud or other major violations of the securities laws. If reporting violations are flagrant, the SEC now promises to target the offenders for enforcement on a stand-alone basis without regard to other possible wrongdoing. The SEC also cautions that, as it did in some of the recent enforcement actions, it may charge companies that promise to assist their insiders in the preparation and filing of their reports, but do not to make the filings in a timely manner, with contributing to the filing failures.
Originality/value
The paper provides expert guidance from experienced securities lawyers.
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Emily Ryo and Ian Peacock
In the current era of intensified immigration enforcement and heightened risks of deportation even for long-term lawful permanent residents, citizenship has taken on a new meaning…
Abstract
In the current era of intensified immigration enforcement and heightened risks of deportation even for long-term lawful permanent residents, citizenship has taken on a new meaning and greater importance. There is also growing evidence that citizenship denials in their various forms have become inextricably linked to immigration enforcement. Who is denied citizenship, why, and under what circumstances? This chapter begins to address these questions by developing a typology of citizenship denials and providing an empirical overview of each type of citizenship denial. Taken together, the typology of citizenship denials and the accompanying empirical overview illustrate the close connection between immigration enforcement and citizenship rights in the United States.
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Breon S. Peace, Jennifer Kennedy Park, Robin M. Bergen and Nowell D. Bamberger
To explain and analyze two Enforcement Advisories that set forth the factors the US Commodity Futures Trading Commission Division of Enforcement may consider in assessing…
Abstract
Purpose
To explain and analyze two Enforcement Advisories that set forth the factors the US Commodity Futures Trading Commission Division of Enforcement may consider in assessing cooperation by companies and individuals in the context of CFTC enforcement proceedings.
Design/methodology/approach
Explains the background, including the 2007 Enforcement Advisory for Companies. Explains the 2017 Enforcement Advisory for Companies and the parallel Enforcement Advisory for Individuals, including policy-based considerations and factors such as the materiality, timeliness, nature, and quality of a company’s cooperation; the value of a company’s cooperation to the Commission’s broader law enforcement interests; and the company’s culpability, culture and other relevant factors. Provides examples of uncooperative conduct. Discusses a broader trend among enforcement authorities in the US and abroad of setting higher cooperation standards.
Findings
The new Advisories make clear that merely complying with requests for information from the CFTC staff will not be sufficient; a company or individual seeking cooperation credit as part of a resolution with the CFTC must go above and beyond its legal obligations in order to qualify for such credit.
Originality/value
Practical guidance from experienced white collar defense, regulatory enforcement, civil litigation and arbitration lawyers.
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