Chapter Twelve

Financial Reporting and the Securities and Exchange Commission

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Learning Objective 12-1

Understand the origin andexpansive role of the securities and Exchange Commission.

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Major Influence on the

Development of US GAAP

Independent Agency of the

Federal Government

Established by the Securities

Exchange Act of 1934.

Mandate is to ensure that

complete and reliable

information is available to

investors

Direct authorityApplies to Publicly

HeldCompanies

SECSEC

Securities and Exchange Commission (SEC)

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Learning Objective 12-2

Describe the purpose(s) ofvarious federal securities laws.

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Securities Exchange Act of 1934

Securities Exchange Act of 1934Securities Act of 1933Securities Act of 1933

Federal Securities Laws

Regulates the initial offering of securities by a company or

underwriter.

Regulates the initial offering of securities by a company or

underwriter.

Regulates the subsequent trading of securities through

brokers and exchanges.

Regulates the subsequent trading of securities through

brokers and exchanges.

The 1934 Act Established the SEC

Spurred by the Great Depression following the 1929 Stock Market Crash, Congress enacted:

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Full and Fair Disclosure

Securities Act of 1933 New securities must be

registered prior to public sale.

Securities Act of 1933 New securities must be

registered prior to public sale.

Securities Exchange Act of 1934

Requires continuous reporting by publicly

traded companies. Prohibits fraudulent and unfair behavior.

Securities Exchange Act of 1934

Requires continuous reporting by publicly

traded companies. Prohibits fraudulent and unfair behavior.

Public Utility Holding Company Act of 1935

Requires registration of interstate holding companies

of public utilities.

Public Utility Holding Company Act of 1935

Requires registration of interstate holding companies

of public utilities.

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Full and Fair Disclosure

Trust Indenture Act of 1939 Requires registration of

indentures related to public issue of bonds, notes, etc.

Trust Indenture Act of 1939 Requires registration of

indentures related to public issue of bonds, notes, etc.

Investment Company Act of 1940

Requires registration of investment companies.

Investment Company Act of 1940

Requires registration of investment companies.

Investment Advisers Act of 1940 and

Securities Investor Protection Act of 1970

Requires registration of investment advisors and requires them to

follow certain standards.

Investment Advisers Act of 1940 and

Securities Investor Protection Act of 1970

Requires registration of investment advisors and requires them to

follow certain standards.

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Full and Fair Disclosure

Foreign Corrupt Practices Act of 1977Amends Securities

Exchange Act of 1934. Requires maintenance of accounting records and adequate internal accounting controls.

Foreign Corrupt Practices Act of 1977Amends Securities

Exchange Act of 1934. Requires maintenance of accounting records and adequate internal accounting controls.

Insider Trader Sanctions Act of 1984 & Insider Trader and Securities

Fraud Enforcement Act of 1988 increase

penalties against persons who profit from illegal

use of inside information.

Insider Trader Sanctions Act of 1984 & Insider Trader and Securities

Fraud Enforcement Act of 1988 increase

penalties against persons who profit from illegal

use of inside information.

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Learning Objective 12-3

Understand the Congressionalrationale for enacting theSarbanes-Oxley Act and theresponsibilities of the PublicAccounting Oversight Board.

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Created Public Company Accounting Oversight Board, under oversight and enforcement authority of the SEC, that is charged with:

Establishing auditing, quality control, and independence standards.

Performing periodic inspections of registered public accounting firms.

Sarbanes-Oxley Act of 2002 (SOX)

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Passed in response to corporate accounting scandals (Enron, WorldCom, Adelpia Communications, etc.).

Learning Objective 12-4

Describe the SEC’s role inestablishing generally acceptedaccounting principles (GAAP).

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SEC’s Authority over GAAP

Regulation S-K

Establishes requirements for all

nonfinancial information

contained in SEC filings.

Regulation S-X

Prescribes the form and content of the

financial statements, and the related notes and

schedules.

There are two basic documents which lay out the requirements of the SEC:

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Congress has assigned

GAAP-setting authority to

the SEC.

The SEC allows the

FASB to set GAAP. The FASB’s

standards can be overridden by the SEC.

Authority only extends to publicly traded companies.

SEC’s Authority Over GAAP

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The SEC issues authoritative documents:

Financial Reporting Releases (FRR’s) Supplements to

Regulations S-K and S-X

Staff Accounting Bulletins (SAB’s) Views on current accounting and

disclosure matters.

SEC’s Authority Over GAAP

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Learning Objective 12-5

Define and describe an issuer’sfilings with the Securities andExchange Commission.

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Filings with the SEC

Legislation and regulations require registrants to make numerous filings including two basic categories of filings:

Registration StatementsPeriodic Filings

SEC charges a registration fee based on value of securities offered, $136.40 for each $1 million.

Fees in excess of costs creates a surplus that is a source of debate:

Is it a revenue source for the government?Are corporations being overcharged for

registration?Is the SEC sufficiently funded?

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Form Description

S-1Usually used by new registrants when no other form is prescribed.

S-3Used by large companies with a significant following in the stock market. Has reduced disclosure requirements.

S-4Used for securities issued in connection with business combination transactions.

S-8 Used for employee stock plansS-11 Used by certain real estate companies

Common SEC Registration Statement Forms

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Learning Objective 12-6

Describe an issuer’s registrationprocess, various formsused by the issuers, and theexemption(s) from registration.

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Registration Process

1. Registration Statements delivered to SEC

2. Review by Div. Of Corp. Finance

3. A deficiency letter sent to registrant

4. Approved after deficiencies are cleared

5. Once the registration is effective, the securities can be sold.

Note: This process is both time-consuming and expensive.

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Registration Requirements –General Contents Report

PART I – “Prospectus” Audited financial Statements. An explanation of the use of the proceeds. A description of the security risks. A description of the business.

PART II Used by the SEC staff. Includes additional information about the

company.

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Form 10-QQuarterly report filed

within 45 days of end of quarter.

Financial statement are unaudited.

Form 10-KAnnual report filed within 90 days of fiscal year-end.Includes audited financial

statements.

Form 8-KUsed to disclose a unique or

significant happening, within 15 days of the event.

Periodic Filings with the SEC

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Proxy Statements

Proxy Statements:

Allow board of directors to vote on behalf of stockholders.

Must be filed with SEC 10 days prior to distribution. Needs to indicate on whose behalf the solicitation is made.

Must disclose fully all matters that are to be voted on at the meeting.

Is usually accompanied by an annual report.

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