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Chapter Twelve

Chapter Twelve. Financial Reporting and the Securities and Exchange Commission. Securities and Exchange Commission (SEC). SEC. Established by the Securities Exchange Act of 1934. Commissioners serve 5-year, staggered terms. The chairperson is from the same political party as the President.

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Chapter Twelve

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  1. Chapter Twelve Financial Reporting and the Securities and Exchange Commission

  2. Securities and Exchange Commission (SEC) SEC Established by the Securities Exchange Act of 1934. Commissioners serve 5-year, staggered terms. The chairperson is from the same political party as the President. Only 3 of 5 can come from the same political party. 5 commissioners appointed by the President.

  3. Division of Investment Management Division of Enforcement SEC Office of Compliance Inspections and Examinations Office of Information Technology Office of the Chief Accountant Division of Market Regulation Division of Corporate Finance

  4. Federal Securities Laws Securities Act of 1933 Securities Exchange Act of 1934 Regulates the initial offering of securities by a company or underwriter. Regulates the subsequent trading of securities through brokers and exchanges. The Stock Market Crash of 1929 …..led to the…… The 1934 Act Established the SEC

  5. 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.

  6. Full and Fair Disclosure Securities Act of 1933 Securities Exchange Act of 1934 Public Utility Holding Company Act of 1935 New securities must be registered prior to public sale. Requires continuous reporting by publicly traded companies. Prohibits fraudulent and unfair behavior. Requires registration of interstate holding companies of public utilities.

  7. 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.

  8. 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.

  9. 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.

  10. The SEC’s 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 company’s ability to pay dividends. • MD&A

  11. The SEC’s 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 auditor’s independence. • The % of non-audit fees to the total annual audit fee. • Individual non-audit fees > 3% of the annual audit fee. Certain information about the auditor must also be disclosed.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. SEC Requirements

  17. The SEC’s Authority Over GAAP Congress has assigned GAAP-setting authority to the SEC. The FASB’s standards can always be (and was once) overridden by the SEC. (See Oil & GAS – best efforts) The SEC allows the FASB to set GAAP. Authority only extends to publicly traded companies.

  18. The SEC’s Authority Over GAAP The SEC does issue authoritative documents. Financial Reporting Releases (FRR’s) Staff Accounting Bulletins (SAB’s) Supplements to Regulations S-K and S-X Views on current accounting and disclosure matters.

  19. Filings with the SEC Registration Statements Periodic Filings Two basic categories of filings

  20. Common SEC Registration Statement Forms

  21. Registration Process Review by Div. Of Corp. Finance Deficiency letter sent to registrant Registration Statements delivered to SEC Approved after deficiencies are cleared Once the registration is effective, the securities can be sold. Note: This process is both time-consuming and expen$ive.

  22. PART I 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. Registration Requirements General contents of SEC registration reports.

  23. Securities issued by governments, banks, and S&L’s Securities issued that are restricted to a company’s own existing shareholders. Offerings < $5 million Offerings < $1 million made to made within a 12-month period. Offerings < $5 million made to 35 or fewer investors within a 12-month period. Private placement of securities to < 36 investors who already have knowledge of the company. Offerings Exempt from SEC Filing

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

  25. 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) Proxy Statements

  26. End of Chapter 12 That was fun! Can we do it again?

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