Chapter Twelve Financial Reporting and the Securities and Exchange Commission Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Learning Objective 12-1 Understand the origin and expansive role of the securities and Exchange Commission 12-2 Securities and Exchange Commission (SEC) Independent Agency of the Established by the Securities Federal Exchange Act of 1934 Government SEC SEC Direct authority Applies to Publicly Mandate is to ensure that Held Companies complete and reliable Major Influence on the information is available to Development of US GAAP investors 12-3 Securities and Exchange Commission (SEC) Headed by commissioners Only of can belong to the appointed by the President (with same political party Senate consent) The chairperson is usually from SEC SEC Commissioners serve 5-year, staggered terms the same political party as the President Deposited over $1.648 Billion of fees in U.S Treasury in 2012 12-4 Securities and Exchange Commission (SEC) Composed of four divisions and 23 offices including: Division of Corporation Finance Division of Investment Management Division of Trading and Markets Division of Enforcement Office of Information Technology Office of Compliance Inspections and Examinations Office of the Chief Accountant 12-5 Learning Objective 12-2 Describe the purpose(s) of various federal securities laws 12-6 Federal Securities Laws Spurred by the Great Depression following the 1929 Stock Market Crash, Congress enacted: Securities SecuritiesAct Actofof1933 1933 Securities SecuritiesExchange ExchangeAct Actofof1934 1934 Regulates Regulatesthe theinitial initialoffering offeringofofsecurities securitiesby byaa Regulates Regulatesthe thesubsequent subsequenttrading tradingofofsecurities securities company companyor orunderwriter underwriter through throughbrokers brokersand andexchanges exchanges The 1934 Act Established the SEC 12-7 Goals of the SEC Ensuring full & fair disclosure to all investors Prohibiting dissemination of materially misstated information Preventing misuse of information by inside parties Regulating the operation of securities markets 12-8 Full and Fair Disclosure Securities SecuritiesAct Actofof1933 1933New Newsecurities securities must mustbe beregistered registeredprior priortotopublic publicsale sale Securities SecuritiesExchange ExchangeAct Actofof1934 1934 Requires Requirescontinuous continuousreporting reportingby bypublicly publicly traded tradedcompanies companies.Prohibits Prohibitsfraudulent fraudulent and andunfair unfairbehavior behavior Public PublicUtility UtilityHolding HoldingCompany CompanyAct Actofof1935 1935 Requires Requiresregistration registrationofofinterstate interstateholding holding companies companiesofofpublic publicutilities utilities 12-9 Full and Fair Disclosure Trust TrustIndenture IndentureAct Actofof1939 1939 Requires Requiresregistration registrationofofindentures indenturesrelated relatedtoto Investment InvestmentAdvisers AdvisersAct Actofof1940 1940and and public publicissue issueofofbonds, bonds,notes, notes,etc etc Securities SecuritiesInvestor InvestorProtection ProtectionAct Actofof 1970 1970 Requires Requiresregistration registrationofofinvestment investment Investment Investment Company CompanyAct Actofof1940 1940 advisors advisorsand andrequires requiresthem themtotofollow follow certain certainstandards standards Requires Requiresregistration registrationofofinvestment investmentcompanies companies 12-10 SEC’s Authority over GAAP There are two basic documents which lay out the requirements of the SEC: Regulation S-K Regulation S-X Establishes requirements for all Prescribes the form and content of nonfinancial information contained the financial statements, and the in SEC filings related notes and schedules 12-23 SEC’s Authority Over GAAP The SEC allows the FASB to set GAAP Congress has assigned The FASB’s standards GAAP-setting authority can be overridden by the to the SEC SEC Authority only extends to publicly traded companies 12-24 SEC’s Authority Over GAAP The SEC issues authoritative documents: Financial Reporting Releases (FRR’s) Staff Accounting Bulletins (SAB’s) Supplements to Regulations S-K and Views on current accounting and S-X disclosure matters 12-25 Additional SEC Authority When deemed necessary, the SEC may: Require additional disclosure Establish a moratorium on specific accounting practices Challenge individual statements (forcing a specific registrant to change its filings) Overrule the FASB 12-26 Learning Objective 12-5 Define and describe an issuer’s filings with the Securities and Exchange Commission 12-27 Filings with the SEC Legislation and regulations require registrants to make numerous filings including these two basic categories of filings Registration Statements Periodic Filings 12-28 SEC Fees The SEC charges a registration fee based on the value of securities offered, $136.40 for each $1 million, a small fraction of the offering The 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? 12-29 Common SEC Registration Statement Forms 12-30 Learning Objective 12-6 Describe an issuer’s registration process, various forms used by the issuers, and the exemption(s) from registration 12-31 Registration Process Registration Statements delivered to SEC Review by Div Of Corp Finance A deficiency letter sent to registrant Approved after deficiencies are cleared Once the registration is effective, the securities can be sold Note: This process is both time-consuming and expensive 12-32 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 12-33 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 Securities issued by non-profit organizations Offerings < $1 million to be 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 12-34 Periodic Filings with the SEC Form 10-K Form 10-Q Annual report filed within 90 days of fiscal Quarterly report filed within 45 days of end of year-end quarter Includes audited financial statements Financial statement are unaudited Form 8-K Used to disclose a unique or significant happening, within 15 days of the event 12-35 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 12-36 Electronic Data Gathering, Analysis, and Retrieval System - EDGAR The SEC’s “Electronic Data Gathering and Retrieval” System: Designed to reduce overwhelming paper flow into the SEC Allows for public access to SEC filings and information through the Internet 12-37 ... penalties accounting accountingrecords recordsand andadequate adequate against againstpersons personswho whoprofit profitfrom fromillegal illegaluse use internal internalaccounting accountingcontrols... corporateaccounting accounting scandals scandals The 2002 Act Established the Public Company Accounting Oversight Board 12-17 Sarbanes-Oxley Act of 2002 Section 101 Creation of Public Company Accounting. .. registered public accounting firms Could potentially replace the Auditing Standards Board of the AICPA 12-18 Sarbanes-Oxley Act of 2002 Section 101 Creation of Public Company Accounting Oversight