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

Major Influence on the Development of US GAAP Independent Agency of the Federal Government Established by the Securities Exchange Act of Mandate is to ensure that complete and reliable information is available to investors Direct authority Applies to Publicly Held Companies SEC Securities and Exchange Commission (SEC) 12-3

Learning Objective 12-2 Describe the purpose(s) of various federal securities laws. 12-4

Securities Exchange Act of 1934 Securities Act of 1933 Federal Securities Laws Regulates the initial offering of securities by a company or underwriter. 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: 12-5

Full and Fair Disclosure 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. 12-6

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. 12-7

Full and Fair Disclosure Foreign Corrupt Practices Act of 1977 Amends Securities Exchange Act of Requires maintenance of accounting records and adequate internal accounting controls. Foreign Corrupt Practices Act of 1977 Amends Securities Exchange Act of 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. 12-8

Learning Objective 12-3 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act and the responsibilities of the Public Accounting Oversight Board. 12-9

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

Learning Objective 12-4 Describe the SEC’s role in establishing generally accepted accounting principles (GAAP)

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: 12-12

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 12-13

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 12-14

Learning Objective 12-5 Define and describe an issuer’s filings with the Securities and Exchange Commission

Filings with the SEC   Legislation and regulations require registrants to make numerous filings including two basic categories of filings: Registration Statements Periodic Filings   SEC charges a registration fee based on value of securities offered, $ 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? 12-16

Common SEC Registration Statement Forms 12-17

Learning Objective 12-6 Describe an issuer’s registration process, various forms used by the issuers, and the exemption(s) from registration

Registration Process 1. 1.Registration Statements delivered to SEC 2. 2.Review by Div. Of Corp. Finance 3. 3.A deficiency letter sent to registrant 4. 4.Approved after deficiencies are cleared 5. 5.Once the registration is effective, the securities can be sold. Note: This process is both time-consuming and expensive

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

Form 10-Q Quarterly report filed within 45 days of end of quarter. Financial statement are unaudited. Form 10-K 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, within 15 days of the event. Periodic Filings with the SEC 12-21

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