Chapter Twelve

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Chapter Twelve
Financial Reporting and the Securities and
Exchange Commission
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Securities and Exchange Commission (SEC)
Established by the Securities Exchange Act of
1934.
Commissioners serve 5-year, staggered terms.
Only 3 of 5 can come from the same political
party.
The chairperson is from the same political party
as the President.
5 commissioners appointed by the President.
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Office of Information Technology
Office of the Chief Accountant
Division of Market Regulation
Division of Corporate Finance
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Federal Securities Laws
The Stock Market Crash of 1929 ..led to the
The 1934 Act Established the SEC
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Goals of the SEC

• To prohibit dissemination of materially misstated
  information.

• To ensure full fair disclosure to all investors.

• To prevent misuse of information by inside
  parties.

• To regulate the operation of securities markets.

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Full and Fair Disclosure
Requires continuous reporting by publicly traded
companies.
New securities must be registered prior to public
sale.
Prohibits fraudulent and unfair behavior.
Requires registration of interstate holding
companies of public utilities.
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Full and Fair Disclosure
Trust Indenture Act of 1939
Investment Advisers Act of 1940 and Securities
Investor Protection Act of 1970
Requires registration of indentures related to
public issue of bonds, notes, etc.
Requires registration of investment advisors and
requires them to follow certain standards.
Investment Company Act of 1940
Requires registration of investment companies.
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Full and Fair Disclosure
Foreign Corrupt Practices Act of 1977
Insider Trader Sanctions Act of 1984 Insider
Trader and Securities Fraud Enforcement Act of
1988
Amends Securities Exchange Act of 1934. Requires
maintenance of accounting records and adequate
internal accounting controls.
Increase penalties against persons who profit
from illegal use of inside information.
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Full and Fair Disclosure
Sarbanes-Oxley Act of 2002
E
Designed as a response and answer to the numerous
corporate accounting scandals that came to light
in 2001 and 2002.
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The SECs Impact on Financial Reporting
In addition to audited financial statements,
Rule 14c-3 of the 1934 Act requires the
following

• 5-year summary of operations.
• Description of the business activities.
• 3-year summary of industry segments.
• Listing of company directors and executive
  officers.
• Market price of the common stock for each quarter
  on the last 2 years.
• Restrictions on the companys ability to pay
  dividends.
• MDA

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The SECs Impact on Financial Reporting

• All non-audit services provided by the
  independent auditing firm.
• Whether the Board of Directors approved all
  non-audit services and considered whether they
  would impair the auditors independence.
• The of non-audit fees to the total annual audit
  fee.
• Individual non-audit fees gt 3 of the annual
  audit fee.

Certain information about the auditor must also
be disclosed.
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Sarbanes-Oxley Act of 2002 Section 101
Creation of Public Company Accounting Oversight
Board

• Board charged with
• Establishing auditing, quality control, and
  independence standards.
• Performing periodic inspections of registered
  public accounting firms.
• Could have potentially replaced the Auditing
  Standards Board of the AICPA.

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Sarbanes-Oxley Act of 2002 Section 101
Creation of Public Company Accounting Oversight
Board

• Five members
• 2 of the 5 must be or have been CPAs.
• Remaining 3 must NOT be CPAs.
• The Board will be funded through mandatory fees.
• Funding
• Accounting firms must register with the Board and
  pay fees.
• Applies to foreign firms as well.

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Sarbanes-Oxley Act of 2002 Auditor Independence
To ensure future independence of audit firms,
some previously common concurrent services are
now prohibited.

• Bookkeeping services.
• AIS design and implementation.
• Appraisal or valuation services.
• Internal audit outsourcing.
• Management functions/Human Resource Management.
• Investment advising.
• Legal services or expert services.

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Sarbanes-Oxley Act of 2002Audit Committees
Audit Committees will also be expected to
exercise more oversight in the future.

• Financial Experts on the BOD must be identified
  in the annual report.
• Experience with accounting matters like the ones
  used in the company.
• Must have served as an auditor, CFO, controller,
  or Chief Accounting Officer of a public company.
• Independence of financial experts must be
  disclosed.
• The Committee hires the external auditor.
• The auditor now reports to the Committee instead
  of to management.

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SEC Requirements
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The SECs Authority Over GAAP
Authority only extends to publicly traded
companies.
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The SECs Authority Over GAAP
The SEC does issue authoritative documents.
Financial Reporting Releases (FRRs)
Staff Accounting Bulletins (SABs)
Supplements to Regulations S-K and S-X
Views on current accounting and disclosure
matters.
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Filings with the SEC
Two basic categories of filings
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Common SEC Registration Statement Forms
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Registration Process
Note This process is both time-consuming and
expenive.
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Registration Requirements

• PART I
• Audited financial Statements.
• An explanation of the use of the proceeds.
• A description of the security risks.
• A description of the business.

General contents of SEC registration reports.

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

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Offerings Exempt from SEC Filing

• Securities issued by governments, banks, and
  SLs
• Securities issued that are restricted to a
  companys own existing shareholders.
• Offerings lt 5 million

• Offerings lt 1 million made to made within a
  12-month period.
• Offerings lt 5 million made to 35 or fewer
  investors within a 12-month period.
• Private placement of securities to lt 36 investors
  who already have knowledge of the company.

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Periodic Filings with the SEC
Form 10-Q
Form 10-K
Quarterly report filed within 45 days of end of
quarter. Financial statement are un-audited.
Annual report filed within 90 days of fiscal
year-end. Includes audited financial statements.
Form 8-K
Used to disclose a unique or significant
happening.
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Proxy Statements

• A document that allows the board of directors to
  vote on behalf of a stockholder.
• 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
• Has to be accompanied by an annual report
  (usually)

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End of Chapter 12
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