Chapter 5 Notes

Chapter 5 Notes - Chapter 5 Study Notes A Regulators 1 SEC(Securities and Exchange Commission a Government agency charged with the responsibility

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A. Regulators 1. SEC (Securities and Exchange Commission) a. Government agency charged with the responsibility to determine the requirements for financial statement and other disclosure reporting for publicly traded companies. b. Sanctions are enforced on companies and auditors who do not properly comply with the established standards. 2. FASB (Financial Accounting Standards Board) establishes the rules – GAAP (Generally Accepted Accounting Principles). 3. PCAOB (Public Companies Accounting Oversight Board, created by the Sarbanes-Oxley Act of 2002) sets auditing standards for independent auditors and the stock exchanges. B. Managers 1. Management of a company has the primary responsibility for the financial statements and related disclosures. 2. The highest officers in the company have the ultimate responsibility for financial information. They sign the statement of management responsibility for reports filed with the SEC. a. CEO – Chairman and Chief Executive Officer b. CFO – Chief Financial officer 3. Officers as well as accounting staff are bound by GAAP in the reports they communicate to external users. C. Board of Directors (Audit Committee) 1. Responsible for ensuring that processes are in place for maintaining the integrity of the company’s accounting, financial statement preparation, and financial reporting. 2. Audit committee must be composed of independent directors with financial knowledge. 3. Responsible for hiring the company’s independent auditors. D. Auditors 1. Independent auditors (CPAs) are engaged to attest to the fairness of financial statements. a. Publicly traded companies are required by SEC to have “audits”. b. Many privately owned companies also have audits performed in order to meet agreements with their lenders and investors. c. The presence of the audit report should reduce risk to creditors and owners. 2. The “Big 4” CPA firms audit the majority of publicly traded companies as well as many privately held companies. Other CPA firms perform the remainder of the audits. 3. An unqualified (clean) audit attests to the fairness of financial statements and related disclosures. 4. The audit lends credibility to the statements and disclosures. E. Information Intermediaries: Financial Analysts and Information Services 1. Financial analysts use modern technology to gather and analyze information about companies and industries. Analysts consider annual reports, personal contacts, the overall economic environment, and various trends to make predictions about expected future earnings and stock prices. Analysts then make “buy/sell/hold” recommendations to investors. 2. Analysts are financial researchers who often work for brokerage firms, investment banks, mutual fund companies, bank trust departments, and investment advisory companies. 3.
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This note was uploaded on 04/22/2008 for the course ACCT 2251 taught by Professor Lilysieux during the Winter '07 term at CSU East Bay.

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Chapter 5 Notes - Chapter 5 Study Notes A Regulators 1 SEC(Securities and Exchange Commission a Government agency charged with the responsibility

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