Chapter Twelve
Financial
Reporting and
the Securities
and Exchange
Commission
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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
Federal
Government
Direct authority
Applies to
Publicly
Held
Companies
Established by
the Securities
Exchange Act of
1934.
SEC
Major Influence
on the
Development of
US GAAP
Mandate is to
ensure that
complete and
reliable
information is
available to
investors
12-3
Learning Objective 12-2
Describe the purpose(s) of
various federal securities laws.
12-4
Federal Securities Laws
Spurred by the Great Depression following the
1929 Stock Market Crash, Congress enacted:
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 1934 Act Established the SEC
12-5
Full and Fair Disclosure
Securities Act of 1933
New securities must be
registered prior to
public sale.
Public Utility Holding
Company Act of 1935
Requires registration of
interstate holding companies
of public utilities.
Securities Exchange Act
of 1934
Requires continuous
reporting by publicly
traded companies.
Prohibits fraudulent
and unfair behavior.
12-6
Full and Fair Disclosure
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 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 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 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
Sarbanes-Oxley Act of 2002 (SOX)

Passed in response to corporate accounting scandals
(Enron, WorldCom, Adelpia Communications, etc.).

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.
12-10
Learning Objective 12-4
Describe the SEC’s role in
establishing generally accepted
accounting principles (GAAP).
12-11
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
nonfinancial
information
contained in SEC
filings.
Prescribes the form
and content of the
financial
statements, and the
related notes and
schedules.
12-12
SEC’s Authority Over GAAP
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.
12-13
SEC’s Authority Over GAAP
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.
12-14
Learning Objective 12-5
Define and describe an issuer’s
filings with the Securities and
Exchange Commission.
12-15
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, $136.40 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
Description
Usually used by new registrants when no other form is
S-1
prescribed.
Used by large companies with a significant following in the stock
S-3
market. Has reduced disclosure requirements.
Used for securities issued in connection with business
S-4
combination transactions.
S-8 Used for employee stock plans
S-11 Used by certain real estate companies
Form
12-17
Learning Objective 12-6
Describe an issuer’s registration
process, various forms
used by the issuers, and the
exemption(s) from registration.
12-18
Registration Process
1. Registration Statements delivered to SEC
2. Review by Div. Of Corp. Finance
3. A deficiency letter sent to registrant
4. Approved after deficiencies are cleared
5. Once the registration is effective,
the securities can be sold.
Note: This process is both
time-consuming and expensive.
12-19
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.
12-20
Periodic Filings with the SEC
Form 10-K
Annual report filed within
90 days of fiscal year-end.
Includes audited financial
statements.
Form 10-Q
Quarterly report filed
within 45 days of end of
quarter.
Financial statement are
unaudited.
Form 8-K
Used to disclose a unique or
significant happening,
within 15 days of the event.
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.
12-22