Security Exchange Commission is the federal agency created by the US Congress through the securities Act of 1933 and the Securities Exchange Act of 1934. The agency was created in response to the stock exchange crash of 1929 caused by the misrepresentation of financial statements among the companies. The primary role of the SEC was to ensure that the financial statements of publicly traded companies were honest and to regulate the conduct of brokers and dealers in the stock exchange market. Under the Securities Exchange Act of 1934 regulation S-X, public companies are required to disclose interim financial statement audited by an external auditor for the benefit of the investors ( SEC, 2018). The role of the external auditor is to re-evaluate the financial reports of a company and give an unbiased report regarding the truthfulness of the financial reports. External auditors are bound by the accounting standards and expected to disclose any form of fraud, errors, omissions or projections that influence the representation of a company’s financial health. Cardiff Lexington Corporation is a publicly-traded investment company that is bound by the Securities Exchange Act of 1934 regulation S-X.
In 2018, Securities and Exchange Commission investigation revealed that Florida-based Cardiff Lexington Corporation had filed one Form 10-Q financial statements before review by an external auditor (SEC, 2018). The investigations relied on the evaluation of the 10-Q filings, comment letters written by the staff and other measures of violation. Incompliance indicates possibility of misrepresentation of the financial status of the company with the intention of defrauding investors. Cardiff Lexington Corporation accepted to the charges advanced by Security and Exchange Commission and agreed to pay a $25,000 penalty. The level of disclosure required by the Securities Exchange Act of 1934 regulation S-X intends to prevent fraud, omissions, errors and conspiracy to misrepresent an organization’s financial status. This helps to ensure that the investors can timely receive accurate and reliable interim financial information on quarterly basis. Data disclosed on 10-Q financial statements helps investors to assess the level of risk that comes with investment in specific companies. Depriving investors off the benefit of review of the financial statements by an independent auditor increases the risk of bad investment choices and possible loss for the investors.
Delegate your assignment to our experts and they will do the rest.
According to Svara, (2007), public administrators are neither autonomous nor in charge of their practice. Instead, they operate within organizational structures that require them to partners with others in advancing the organizational goals, strengthen the institution, improve efficiency and ensure that the organization is as ethical as possible (Gueras & Garofalo, 2010). Similarly, all employees of a company including senior management such as board of directors, CEOs, and managers as well as the junior-most employees are called to serve not as they please but in a manner that strengthens the company, aligns with the company’s goals and upholds the highest possible level of ethics. Complying with the Securities Exchange Act of 1934, regulation S-X not only advances the interest of the investors but Cardiff Lexington Corporation as well. A good reputation is essential for any investment company like Cardiff Lexington Corporation in that the investors must trust the company. Failure to engage an independent auditor before filing Form 10-Q can be seen as adopting a strategy that injures the company’s reputation and is, therefore, is not in the best interest of the company. The requirement to engage an independent auditor in hope of instilling honesty in financial reporting can also be seen as an ethical requirement on part of the management. This, therefore, means that failure to engage an independent auditor is not only detrimental to the company but also unethical.
Svara, (2007) illuminates on the responsibilities of a public administrator. Public administrators have the responsibility to serve people, be accountable to the people, advance the public interest, serve their organization uphold the rule of law, policies and regulations and to serve their superiors. In the case of a publicly owned company, the owners are the shareholders who delegate the management responsibility. The management, therefore, has the responsibility of serving the best interest of the shareholders, their superiors. The managers are also expected to be responsible for their actions. Accepting to pay the $25,000 penalty is therefore justifiable as an act of taking responsibility for the breach of regulations, unaccountability and inability to serve the best interest of the investors.
Svara (2007), proposes a three-step ethical problem-solving model. The problem solving requires proper description and analysis of the situation prior decision making. This involves the identification of the various alternatives available as well as our responsibility to the organization, law, public and superiors. Svara identifies internal mechanism and alarming the public as two alternative methods that can be used with the problem of wrongdoing within an organization. The decision should be based on the possible effects of whistleblowing and the willingness of the superiors in resolving the matter. The fact that the SEC brings the issue to the attention of the public is in the best interest of the public and in fulfilment of the agency’s obligation. Accepting to pay the $25,000 penalty on part of Cardiff Lexington Corporation may have come as a means of avoiding further adverse impact on the company’s reputation. Litigation in court would expose the company to further negative publicity hence increased risk of creating distrust among investors. Cardiff Lexington Corporation suffers high risk of negative publicity as it creates distrust among her investors. Distrust will adversely affect the number of investors and hence the stock price of the company and access to capital.
In summary, there is a critical need for sufficient analysis of a situation before adopting internal mechanism or whistleblowing (Gueras & Garofalo, 2010). There is need to protect an organization as much as there is need to protect the public interest. Balancing between organizational interest, law, policies, superiors and public interest should be done in a practical and beneficial manner.
References
Gueras, D., & Garofalo, C. (2010). Practical Ethics In Public Administration. Oakland, CA: Berrett-Koehler Publishers.
SEC. (2018, September 21). Public Companies Charged With Failing to Comply With Quarterly Reporting Obligations. Retrieved from https://www.sec.gov/news/press-release/2018-207 .
Svara, J. (2007), Ethics Primer for Public Administrators in Government and Nonprofit Organizations, London: Jones and Bartlett Publishers.
