14
SEC
SEC
Reporting
Reporting
McGraw-Hill/Irwin
Copyright Chapter 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1
Understand the SECs
structure and regulatory
authority.
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SEC
The Securities and Exchange Commission
(SEC) is an independent federal agency
created in 1934 responsible for regulating
securities markets
The ability of companies to raise capital in
the stock markets and the high trading
volumes are indications of the SECs success
in maintaining an effective marketplace for
companies issuing securities and for investors
seeking capital investments
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History of Securities Regulation
1911 States began passing what were called
blue sky laws to regulate the offering of
securities by companies which did not have a
sound financial base
1920s Era of heavy stock speculation by
many individuals
The Great Depression
The Federal Securities Acts of 1933 and 1934
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History of Securities Regulation
The Securities Act of 1933
Regulated the initial distribution of security issues by
requiring companies to make full and fair disclosure of
their financial affairs before their securities could be offered
to the public
The Securities Exchange Act of 1934
Required all companies whose stocks were traded on a stock
exchange to periodically update their financial information
Created the Securities and Exchange Commission and
assigned it the responsibility of administering both the 1933
and 1934 acts
14-5
History of Securities Regulation
The SEC has the legal responsibility to
regulate trades of securities and to determine
the types of financial disclosures that a
publicly held company must make
The SECs role is to ensure full and fair
disclosure; it does not guarantee the
investment merits of any security
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EDGAR System
EDGAR (Electronic Data Gathering,
Analysis, and Retrieval)
An electronic filing system developed by the SEC
Under this system, firms electronically file directly
by using computers, facilitating the data transfer
and making public data more quickly available
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International Harmonization of
International
Accounting
Accounting
Standards for Public Offerings
The International Accounting Standards
Board (IASB) is working with the Financial
Accounting Standards Board (FASB) to
converge on a uniform set of accounting and
financial reporting standards that can be
used by all companies seeking financing
through any of the worlds major stock
markets, including those of the United States
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International Harmonization of
International
Accounting
Accounting
Standards for Public Offerings
In 2007, the SEC published Securities Act
Release No. 33-8879
Under this, financial statements from foreign private issuers
will be accepted by the SEC without reconciliation to U.S.
GAAP, if they are prepared using IFRSs as issued by the
IASB
Securities Act Release No. 33-8831
A Concept Release
If U.S. issuers are allowed to use IFRSs in their filings with
the SEC, multinational U.S. companies operating in several
countries could use just one set of accounting and financial
reporting standards for all of their global operations
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Securities and Exchange Commission
Organizational structure
Division of Corporation Finance Develops and
administers the disclosure requirements for the
securities acts and reviews all registration
statements and other issue-oriented disclosures
Division of Enforcement Directs the SECs
enforcement actions
Division of Investment Management Regulates
investment advisers and investment companies
Division of Market Regulation Regulates national
securities exchanges, brokers, and dealers of
securities
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Securities and Exchange Commission
Organizational Structure of the SEC
14-11
Securities and Exchange Commission
Laws administered by the SEC
Public Utility Holding Company Act of 1935
Trust Indenture Act of 1939
Investment Company Act of 1940
Investment Advisors Act of 1940
Securities Investor Protection Act of 1970
Sarbanes-Oxley Act of 2002
The SEC is often asked for assistance in the
administration of two other major laws:
Foreign Corrupt Practices Act of 1977
Federal Bankruptcy Acts
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Securities and Exchange Commission
The regulatory structure
Regulation S-X and Regulation S-K, govern the
preparation of financial statements and associated
disclosures made in reports to the SEC
Regulation S-X presents the rules for preparing
financial statements, footnotes, and the auditors
report
Regulation S-K covers all nonfinancial items, such
as managements discussion and analysis of the
companys operations and financial position
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Securities and Exchange Commission
The regulatory structure
The Accounting and Auditing Enforcement
Releases (AAERs) present the results of
enforcement actions taken against accountants,
brokers, and other participants in the filing process
The Staff Accounting Bulletins (SABs) allow the
SEC staff to make announcements on technical
issues with which it is concerned as a result of
reviews of SEC filings
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The Regulatory Structure
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The Regulatory Structure
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Learning Objective 2
Understand the process of
registering securities within
the SEC.
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Issuing Securities: The Registration
Issuing
Process
Process
Companies wishing to sell debt or stock securities in
interstate offerings to the general public are generally
required by the Securities Act of 1933 to register those
securities with the SEC
The basic financial statements required are:
Two years of balance sheets
Three years of statements of income,
Three years of statements of cash flows
Three years of statements of shareholders equity
Prior years statements are presented on a comparative basis
with those for the current period
The SEC requires at least five years of selected financial
information presenting key numbers
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Issuing Securities: The Registration
Issuing
Process
Process
A number of types of securities and securities
transactions are exempt from registration:
Commercial paper with a maturity of nine months or less
Intrastate issues in which the securities are offered and sold only
within one state
Securities exchanged by an issuer exclusively with its existing
shareholders with no commission charged
Issuances of securities by governments, banks, savings and loan
associations, farmers, co-ops, and common carriers regulated by
the Interstate Commerce Commission
Securities of nonprofit religious, educational, or charitable
organizations
The antifraud provisions of the securities acts still
apply
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Issuing Securities: The Registration
Issuing
Process
Process
Small issues under the SECs Regulation A
for issuances up to $5,000,000 within a 12month period can be exempt if there is a
notice filed with the SEC and an offering
circular containing financial and other
information provided to the persons to whom
the offer is made
Some required disclosures of financial
statements and other financial information
fall under Regulation A
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Issuing Securities: The Registration
Issuing
Process
Process
Offering process begins with the selection of
an investment banker (underwriter)
Underwriter provides marketing information and
directs the distribution of the securities
The underwriting agreement specifies such items as
the underwriters responsibilities and the final
disposition of any unsold securities
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Issuing Securities: The Registration
Issuing
Process
Process
The Registration Statement
The process of public offerings of securities begins
with the preparation of the registration statement
The company must select one from among
approximately 20 different forms the SEC currently
has for registering most securities
The common:
Form S-1: The most comprehensive registration statement
Form S-2: An abbreviated form for present registrants who
have other publicly traded stock
Form S-3: A brief form available for large, established
registrants whose stock has been trading for several years
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Issuing Securities: The Registration
Issuing
Process
Process
The Registration Statement
Form S-1 has two different levels of disclosure
Part I: Prospectus, is intended primarily for
investors
Part II includes more detailed information
The statement must be signed by the principal
executive, financial, and accounting officers, as
well as a majority of the companys board of
directors
The company then submits its registration statement
to an SEC review by the Division of Corporation
Finance
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Issuing Securities: The Registration
Issuing
Process
Process
SEC review and public offering
Most first-time registrants receive a customary
review, which is a thorough examination by the
SEC that may result in:
Acceptance, or
A comment letter specifying the deficiencies that
must be corrected
Established companies that already have stock
widely traded generally are subject to a summary
review or a cursory review
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Issuing Securities: The Registration
Issuing
Process
Process
SEC review and public offering
Once the registration statement becomes effective,
the company may begin selling securities to the
public
This review period is 20 days unless the company
receives a comment letter from the SEC
Between the time the registration statement is
presented to the SEC and its effective date, the
company may issue a preliminary prospectus (a red
herring prospectus), which provides tentative
information to investors about an upcoming issue
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Issuing Securities: The Registration
Issuing
Process
Process
SEC review and public offering
The company prepares a tombstone ad in the
business press to inform investors of the upcoming
offering
The time period between the initial decision to offer
securities and the actual sale may not exceed 120
days
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Issuing Securities: The Registration
Issuing
Process
Process
Accountants legal liability in the registration
process
Under section 11 of the 1933 act, accountants are liable
for any materially false or misleading information to the
effective date of the registration statement
The underwriters handling the sale of the securities
often require a comfort letter from the registrants
public accountants for the period between the filing
date and the effective date
This letter provides additional evidence that the public
accountant has not found any adverse financial changes
since the filing date
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Learning Objective 3
Understand periodic reporting
requirements.
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Periodic Reporting Requirements
Companies with more than $10 million in
assets and whose securities are held by more
than 500 persons must file annual and other
periodic reports as updates on their
economic activities
The three basic forms used for this updating
are
Form 10-K,
Form 10-Q, and
Form 8-K
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Periodic Reporting Requirements
Form 10-K is the annual filing to the SEC
Accelerated filers must file their Form 10-K
within 60 days after the end of the companys fiscal
year
Small businesses, and others who do not meet the
requirements for an accelerated filer, have until 90
days after the end of their fiscal years
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Periodic Reporting Requirements
Form 10-K has four parts
Parts I, II, and III include:
The managements discussion and analysis
The audited financial statements and footnotes
The report by management on the internal control
structure and the assessment of the effectiveness of
those controls
The auditors opinion
At least five years of condensed financial information
disclosures
Part IV contains additional schedules and exhibits
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Periodic Reporting Requirements
Form 10-Q is the quarterly report to the SEC
Accelerated filers must file a Form 10-Q within 35
days after the end of each of their first three
quarters
Other companies must file within 45 days after the
end of each of their first three quarters
No Form 10-Q is filed for the fourth quarter
because that is when the Form 10-K is filed
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Periodic Reporting Requirements
Form 10-Q has two parts
Part I includes comparative financial statements
prepared in accordance with APB 28
Part II is an update on significant matters occurring
since the last quarter
Form 8-K is used to disclose unscheduled
material events
Companies must file a Form 8-K within four
business days of the occurrence of a triggering
event
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Periodic Reporting Requirements
Schedule 13D
Filed by those who acquire a beneficial ownership of more
than 5 percent of a class of registered equity securities and
must be filed within 10 days after such an acquisition
Beneficial ownership - Directly or indirectly having the
power to vote the shares or investment power to sell the
security
Proxy statements
Materials submitted to shareholders for votes on corporate
matters
In many cases, voting on these matters takes place at the
annual meeting but it may also occur at a special meeting
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Periodic Reporting Requirements
Accountants legal liability in periodic
reporting
The 1934 Securities Exchange Act provides for a
limited level of legal exposure from involvement in
the preparation and filing of periodic reports
Civil liability is imposed for filing materially false
or misleading statements
Accountants are provided with due diligence
defences
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Learning Objective 4
Understand requirements for
management reporting laws.
14-36
Foreign Corrupt Practices Act of 1977
Congress passed the Foreign Corrupt
Practices Act of 1977 (FCPA) as a major
amendment to the Securities Exchange Act of
1934
The FCPA has two major sections:
Part I prohibits foreign bribes
Part II requires publicly held companies to maintain
an adequate system of internal control and accurate
records
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Sarbanes-Oxley Act of 2002
Signed into law on July 30, 2002
Gained impetus after the revelations about
accounting and financial mismanagement at Enron,
WorldCom, and others
The legislation (broadly known as SOX) has a
number of major implications for accountants
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Sarbanes-Oxley Act Major Sections
Title I: Public Company Accounting Oversight Board
Title II: Auditor Independence
Title III: Corporate Responsibility
Title IV: Enhanced Financial Disclosures
Title V: Analyst Conflicts of Interest
Title VI: Commission Resources and Authority
Title VII: Studies and Reports
Title VIII: Corporate and Criminal Fraud Accountability
Title IX: White-Collar Crime Penalty Enhancements
Title X: Sense of Congress Regarding Corporate Tax
Returns
Title XI: Corporate Fraud and Accountability
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Learning Objective 5
Understand disclosure
requirements.
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Disclosure Requirements
Management Discussion and Analysis
MD&A of a companys financial condition and
results of operations is part of the basic information
package required in all major filings with the SEC
The items now required in the MD&A are:
liquidity, capital resources, results of operations,
off-balance sheet arrangements, tabular disclosure
of contractual obligations
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Disclosure Requirements
Pro forma disclosures
Essentially what-if financial presentations often
taking the form of summarized financial statements
They show the effects of major transactions that
occur after the end of the fiscal period or that have
occurred during the year but are not fully reflected
in the companys historical cost financial statements
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Conclusion
The End
The End
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