Investors have specific rights, which are typically protected by the application of laws, rules, and regulations. Many of these rights also contain accounting and disclosure requirements that give investors the information they need to exercise other rights. Participating in shareholders' meetings, receiving dividends on a pro-rata basis, electing directors, subscribing to new securities issues on the same terms as investors, being informed of the risks, obligations, and costs of an investment, and having orders promptly executed at the best price are just a few of the other rights that investors are protected from.
Insiders frequently use their discretion to deceive investors and other outsiders through their financial reporting, which is a common theme in scandals. Investors have a right to timely information that is easy to understand and that enables them to make wise decisions.
Companies have the option of structuring their disclosures in ways that may be deceptive or unclear through the use of earnings management (intentionally manipulating a company's earnings so that the figures match a predetermined target) or impression management (presenting a company's performance in the best light possible, potentially leading to selective financial communication). Such earnings opacity can manifest as earnings aggressiveness, which derives from a propensity to inflate reported earnings, loss avoidance, which is a propensity to conceal negative earnings, and earnings smoothing (results from reporting artificially stabilized earnings). The correlation between accounting performance and a company's actual economic performance is unquestionably weakened by these three methods.
Congress passed the Sarbanes-Oxley Act 68 years after the SEC was established (SOX). On July 30, 2002, President George W. Bush signed the Public Company Accounting Reform and Investor Protection Act, popularly known as SOX, into law. It has significantly altered how all publicly traded U.S. companies conduct and record their business operations. By offering some amount of investor protection through regulation, SOX essentially aims to reverse the public's deteriorating trust in the accounting and financial reporting process. The Public Company Accounting Oversight Board, a private, nonprofit entity, was established to oversee public corporations' financial reporting in order to achieve this.
Outside of the United States, laws defending investors frequently originate from several sources. Regardless of the source, both the content and enforcement of the laws are very important. In the majority of nations, market authorities, judges, or even individual market participants themselves enforce rules and regulations. Such enforcement cannot be taken for granted in many nations. Courts can occasionally be sluggish, susceptible to political pressure, and even dishonest.
Bibliography:
Walter Aerts, “Picking Up the Pieces: Impression Management in the Retrospective Attributional Framing of Accounting Outcomes,” Accounting, Organiza- tions and Society (v.30, 2005); Utpal Bhattacharya, Hazem Daouk, and Michael Welker, “The World Price of Earn- ings Opacity,” Accounting Review (v.78, 2003)
