Government Protections Against Stock Market Abuses

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Strategies of Market & Non-Market Business Environments

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:01 SEC
  • 0:58 Fraudulent Accounting
  • 2:27 Insider Trading
  • 3:30 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Jennifer Lombardo
Companies are monitored and policed by the Security and Exchange Commission in order to protect stockholders against market abuses. In this lesson, you will learn how the SEC prevents insider trading and fraudulent accounting.


Who protects stockholders from unethical business conduct? In this lesson, we will explain how the government protects against stock market abuses, such as fraudulent accounting and insider trading. Fortunately, there are some safeguards in place to help protect stockholders and their interests. The Securities and Exchange Commission's (SEC) mission is to protect stockholders' rights and ensure ethical activities by corporations.

The Securities and Exchange Commission was formed in 1934 as a result of the stock market crash and the need to protect investors' interests. You can view the SEC as a government superhero agency out to protect against corporate financial evil. Let's take a look at two areas stockholders are specifically concerned about: fraudulent accounting and insider trading. Both of these unethical practices can hurt stockholders' investments.

Fraudulent Accounting

The SEC has recently spent more time ensuring that companies provide accurate and transparent financial information to stockholders due to numerous financial crises, such as Enron. The elimination of fraudulent accounting, or falsifying an accounting document for financial gain, allows stockholders to make more informed decisions about their investment practices.

By law, stockholders are supposed to have access to all company financial information. Congress passed a new law in 2002 that broadened the powers of the SEC to monitor information disclosure by companies. The Sarbanes-Oxley Act was passed to establish new standards for corporate accountability. In addition, new penalties were also created in case companies were unethical in their corporate financial disclosures.

The biggest change was that the new law allowed the SEC to ensure that companies were utilizing internal controls and audits to ensure the validity of their financial records. Previously, companies were using accounting firms to conduct their financial statements and also act as their auditors, which created an atmosphere ripe for bad financial decisions. The Sarbanes-Oxley Act ensures that independent verification is conducted, so CEOs and COOs must be aware of their own financial health.

Insider Trading

Another area that has threatened stockholder investments is the issue of insider trading, which is when a person has access to confidential information about a company's financial situation and then uses the information to buy or sell the company's stock before the public has a chance to learn the information.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account