Can Government Regulations Prevent Financial Crises? T he financial crisis of 2008 led to a historical serious ethical failings." He notes that businesses decline in stock markets throughout the world. of all types, such as banks, have been increasingly In the United States, the market eventually bot- regulated by burgeoning rules and regulations. tomed out at 53.7 percent below its previous high Yet, at a time of crisis, despite the numerous regu- value. Almost two years later, the U.S's SEC Commis- latory requirements, or perhaps because of them, ETHICAL PERSPECTIVES sioner, Luis Aguilar, observed that the SEC still was a holes in the regulations have been exploited by un- long way from understanding the financial crisis and ethical persons. identifying who should be policed to avoid another The report makes the case that a robust commit- similar crisis. ment to ethical business practices on the part of direc- To improve the SEC's oversight function, Aguilar tors and key personnel provides a tough line of defense proposed that the SEC establish a capacity to carry against reputational damage and should be a funda- out surveillance of market behavior in real time. mental component of any risk management strategy. He said, "Real-time market participation is necessary Recommendations of the report include setting the for effective, regulatory fact-finding, oversight, and right tone at the top and promoting a sense of ethi- enforcement." In addition, the SEC has proposed a cal responsibility, not merely complying with external new rule mandating that stock exchanges establish rules. By doing so, a business will ensure a vibrant a "consolidated audit trail system" that would enable ethical culture that will lead to socially responsible regulators to track information pertaining to trading business practices. orders received and executed across the securities markets. QUESTIONS: In response to the 2008 financial crisis, a report, "Risk and Reward-Tempering the Pursuit of Profit," 1) Do you think the U.S. SEC will be able to ensure was issued by the U.K.'s Association of Chartered that there will not be another financial crisis like Certified Accountants (ACCA). The report encour- the one in 2008? Do you think that real-time ages businesses to pay more attention to ethical surveillance of market behavior will help? responsibilities. In addition, the report urges busi- 2) Do you think that with enough regulations, nesses to give top priority to recruit senior execu- people's ethical failings can be prevented? tives and financial staff that have strong ethical 3) Why do you think the ACCA report recommended compasses. The ACCA report considers areas in which the setting the right tone at the top? financial system went awry prior to the crisis, in par- Sources: Jaclyn Jaeger, "Bamey Frank, SEC's Aguilar on Financial Crisis," ticular the ethical lapses of many people. Compliance Week www.complianceweek.com/article/5968/barney- Paul Moxey, ACCA's head of corporate governance frank-secs-aguilar-on-financial-crisis, accessed June 2, 2010; WebCPA, and risk management, helped write the report. "Accounting Group Calls for Better Business Ethics,"WebCPA, www webcpa.comews/Accounting-Group-Calls-Better-Business-Ethics- Moxey observes, "The financial crisis has highlighted 54459-1.html, accessed June 3, 2010