Investor Protection Policy.
Investors have specific rights that are usually protected by the application of laws, rules and regulations. Many of these rights also contain accounting and disclosure requirements that provide investors with the information they need to exercise other rights. Attending shareholder meetings, receiving dividends on a pro rata basis, electing directors, subscribing to new issues of securities on the same terms as investors, being informed of the risks, liabilities and costs of an investment and executing orders immediately at the best price are just a few other rights available to investors protected.
Insiders often use their discretion to deceive investors and other outsiders through their financial reporting, a common topic of scandal. Investors have the right to timely information that is easy to understand and that enables them to make wise decisions.
Companies have the ability to structure their disclosures in ways that can be misleading or unclear through earnings management (deliberately manipulating the company's earnings to match a predetermined target) or impression management (presenting the company's performance in the best possible light). , which can lead to selective financial communication). Such earnings opacity can manifest as earnings aggressiveness, which results from the tendency to inflate reported earnings, loss avoidance, which is the tendency to hide negative earnings, and earnings smoothing (the results of reporting artificially stabilized earnings). The correlation between the accounting performance and the actual economic performance of the firm is undoubtedly weakened by these three methods.
Congress passed the Sarbanes-Oxley Act 68 years after the creation of the SEC (SOX). On July 30, 2002, President George W. Bush signed into law the Public Company Accounting Reform and Investor Protection Act, popularly known as SOX. It significantly changed the way all publicly traded US companies conduct and record their business operations. By offering some measure of investor protection through regulation, SOX essentially seeks to reverse deteriorating public confidence in the accounting and financial reporting process. For this purpose, a private non-profit organization, the Public Company Accounting Oversight Board, was established to oversee the accounting reporting of public companies.
Outside the United States, investor protection laws often come from several sources. Regardless of the source, both the content and the enforceability of laws are very important. In most countries, market authorities, judges or even individual market participants themselves enforce the rules and regulations. Such enforcement cannot be taken for granted in many countries. Courts can at times be slow, susceptible to political pressure and even dishonest.