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Chapter Twelve

Financial Financial Reporting and Reporting and the Securities the Securities and Exchange and Exchange CommissionCommission

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5 commissioners appointed by the

President.

5 commissioners appointed by the

President.

Commissioners serve 5-year,

staggered terms.

Commissioners serve 5-year,

staggered terms.

Established by the Securities

Exchange Act of 1934.

Established by the Securities

Exchange Act of 1934.

Only 3 of 5 can come from the same political

party.

Only 3 of 5 can come from the same political

party.

The chairperson is from the same

political party as the President.

The chairperson is from the same

political party as the President.

SECSEC

Securities and Exchange Commission (SEC)

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Division of Market

Regulation

Division of Market

Regulation

Division of Enforcement

Division of Investment

Management

Office of Compliance

Inspections and Examinations

Division of Corporate Finance

Division of Corporate Finance

SECSEC

Office of Information Technology

Office of Information Technology

Office of the Chief

Accountant

Office of the Chief

Accountant

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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

The Stock Market Crash of 1929 …..The Stock Market Crash of 1929 …..led to the……led to the……

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Goals of the SEC

To ensure full & fair disclosure to

all investors.

To ensure full & fair disclosure to

all investors.

To prohibit dissemination of

materially misstated information.

To prohibit dissemination of

materially misstated information.

To prevent misuse of

information by inside parties.

To prevent misuse of

information by inside parties.

To regulate the operation of

securities markets.

To regulate the operation of

securities markets.

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Securities Exchange Act of 1934

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

Public Utility Holding Company Act of 1935

Public Utility Holding Company Act of 1935

Full and Fair Disclosure

Requires continuous reporting by publicly traded

companies.

Requires continuous reporting by publicly traded

companies.

New securities must be registered prior to public

sale.

New securities must be registered prior to public

sale.

Requires registration of interstate holding companies

of public utilities.

Requires registration of interstate holding companies

of public utilities.

Prohibits fraudulent and unfair behavior.

Prohibits fraudulent and unfair behavior.

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Trust Indenture Act of 1939

Trust Indenture Act of 1939

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

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

Investment Company Act of 1940

Investment Company Act of 1940

Requires registration of investment companies.

Requires registration of investment companies.

Investment Advisers Act of 1940 and Securities Investor Protection Act

of 1970

Investment Advisers Act of 1940 and Securities Investor Protection Act

of 1970

Requires registration of investment advisors and requires them to follow

certain standards.

Requires registration of investment advisors and requires them to follow

certain standards.

Full and Fair Disclosure

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Foreign Corrupt Practices Act of 1977

Foreign Corrupt Practices Act of 1977

Amends Securities Exchange Act of 1934. Requires

maintenance of accounting records and adequate

internal accounting controls.

Amends 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

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.

Increase penalties against persons who profit from

illegal use of inside information.

Full and Fair Disclosure

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Sarbanes-Oxley Act of 2002

Sarbanes-Oxley Act of 2002

Designed as a response and answer to the

numerous corporate accounting scandals that came to light in

2001 and 2002.

Designed as a response and answer to the

numerous corporate accounting scandals that came to light in

2001 and 2002.

Full and Fair Disclosure

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In addition to audited financial

statements, Rule 14c-3 of the 1934 Act requires the following:

The SEC’s Impact on Financial Reporting

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

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

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Certain information about the

auditor must also be

disclosed.

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.

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.

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Creation of Public Company Accounting Oversight Board

Creation of Public Company Accounting Oversight Board

Sarbanes-Oxley Act of 2002 Section 101

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.

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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Creation of Public Company Accounting Oversight Board

Creation of Public Company Accounting Oversight Board

Sarbanes-Oxley Act of 2002 Section 101

Five membersFive members 2 of the 5 must be or have been CPAs.2 of the 5 must be or have been CPAs. Remaining 3 must NOT be CPAs.Remaining 3 must NOT be CPAs. The Board will be funded through mandatory The Board will be funded through mandatory

fees.fees.

FundingFunding Accounting firms must register with the

Board and pay fees. Applies to foreign firms as well.

Five membersFive members 2 of the 5 must be or have been CPAs.2 of the 5 must be or have been CPAs. Remaining 3 must NOT be CPAs.Remaining 3 must NOT be CPAs. The Board will be funded through mandatory The Board will be funded through mandatory

fees.fees.

FundingFunding Accounting firms must register with the

Board and pay fees. Applies to foreign firms as well.

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To ensure future independence of audit firms, some previously common concurrent services

are now prohibited.

To ensure future independence of audit firms, some previously common concurrent services

are now prohibited.

Sarbanes-Oxley Act of 2002 Auditor Independence

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.

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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Audit Committees will also be expected to exercise more oversight in the future.

Audit Committees will also be expected to exercise more oversight in the future.

Sarbanes-Oxley Act of 2002Audit Committees

Financial Experts on the BOD must be Financial Experts on the BOD must be identified in the annual report. identified in the annual report. Experience with accounting matters like the ones Experience with accounting matters like the ones

used in the company.used in the company. Must have served as an auditor, CFO, controller, Must have served as an auditor, CFO, controller,

or Chief Accounting Officer of a public company.or Chief Accounting Officer of a public company. Independence of “financial experts” must be Independence of “financial experts” must be

disclosed.disclosed.

The Committee hires the external auditor.The Committee hires the external auditor. The auditor now reports to the Committee instead The auditor now reports to the Committee instead

of to management.of to management.

Financial Experts on the BOD must be Financial Experts on the BOD must be identified in the annual report. identified in the annual report. Experience with accounting matters like the ones Experience with accounting matters like the ones

used in the company.used in the company. Must have served as an auditor, CFO, controller, Must have served as an auditor, CFO, controller,

or Chief Accounting Officer of a public company.or Chief Accounting Officer of a public company. Independence of “financial experts” must be Independence of “financial experts” must be

disclosed.disclosed.

The Committee hires the external auditor.The Committee hires the external auditor. The auditor now reports to the Committee instead The auditor now reports to the Committee instead

of to management.of to management.

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E s ta b lishe s re q u ire m e n tsfo r a ll n o n fin a n c ia l

in fo rm a tio n co n ta in edin S E C filin g s.

Regulation S-K

P re scrib e s th e fo rm a ndco n ten t o f th e f in an c ia l

s ta tem en ts.

Regulation S-X

2 B asic D ocum ents

SEC Requirements

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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 always be (and

was once) overridden by the SEC. (See Oil &

GAS – best efforts)Authority only extends to

publicly traded companies.

Authority only extends to publicly traded companies.

The SEC’s Authority Over GAAP

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The SEC does issue authoritative documents.

Financial Reporting Releases (FRR’s)

Financial Reporting Releases (FRR’s)

Staff Accounting Bulletins (SAB’s)

Staff Accounting Bulletins (SAB’s)

Supplements to Regulations S-K and

S-X

Supplements to Regulations S-K and

S-X

Views on current accounting and

disclosure matters.

Views on current accounting and

disclosure matters.

The SEC’s Authority Over GAAP

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Filings with the SEC

Two basic categories of Two basic categories of filings filings

Two basic categories of Two basic categories of filings filings

Registration Registration StatementsStatements

Registration Registration StatementsStatements

Periodic Periodic FilingsFilings

Periodic Periodic FilingsFilings

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Common SEC Registration Statement Forms

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Registration Process

Registration Statements

delivered to SEC

Review by Div. Of Corp. Finance

Deficiency letter sent to registrant

Approved after deficiencies are

cleared

Once the registration is effective, the securities

can be sold.

Note: This Note: This process is both process is both

time-time-consuming consuming

and expen$ive.and expen$ive.

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General contents of

SEC registration

reports.

Registration Requirements

PART IPART I Audited financial Statements. An explanation of the use of

the proceeds. A description of the security

risks. A description of the business.

PART IPART I Audited financial Statements. An explanation of the use of

the proceeds. A description of the security

risks. A description of the business.

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

about the company.

PART IIPART 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 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.

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Form 10-QForm 10-Q

Quarterly report filed within 45 days of end of

quarter.Financial statement are

un-audited.

Quarterly report filed within 45 days of end of

quarter.Financial statement are

un-audited.

Form 10-KForm 10-K

Annual report filed within 90 days of fiscal

year-end.Includes audited

financial statements.

Annual report filed within 90 days of fiscal

year-end.Includes audited

financial statements.

Form 8-KForm 8-K

Used to disclose a unique or significant

happening.

Used to disclose a unique or significant

happening.

Periodic Filings with the SEC

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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)

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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That was fun!

Can we do it again?

End of Chapter 12