Chapter 12 – Financial Reporting and the Securities and Exchange Commission
CHAPTER 12
FINANCIAL REPORTING AND THE SECURITIES AND
EXCHANGE COMMISSION
1. Assuring adequate disclosure of data before securities can be bought and sold,
2. Preventing the misuse of information by inside parties,
3. Regulating the operation of stock exchanges and other securities markets, and
4. Prohibiting the dissemination of materially misstated information.
C. Disclosure requirements of the SEC are contained primarily in two sets of regulations:
1. Regulation S-K establishes rules for all nonfinancial information, such as
management’s discussion of the issuer’s business activities.
2. Regulation S-X prescribes the form and content of the financial statements that are
included in the various SEC filings.
D. The ability to establish disclosure requirements gives the SEC the ultimate authority for
accounting principles in this country, although it has generally allowed the FASB to set
1. This five-member board is appointed by the SEC and funded by fees assessed
against publicly traded companies.
2. The board has been given the authority to enforce auditing, quality control, and
independence standards. Such power reduces the accounting profession’s ability to
1. This registration process allows the new board to gather considerable information
from the public accounting firms.
2. All registered firms are subject to inspection by the Public Company Accounting
Oversight Board as often as each year.
C. The Sarbanes-Oxley Act eliminates a number of consulting services that an accounting
firm can perform for an audit client. The goal of this approach is to strengthen the
A. Registration statements are required prior to the issuance of any new security.
1. Depending on specific circumstances, specified forms are required for this purpose
(including Forms S-1 and S-3).
2. After completing the appropriate registration form, a company will normally receive a
letter of comments from the SEC requesting changes and/or additional disclosures
Chapter 12 – Financial Reporting and the Securities and Exchange Commission
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3. Unless exempt from registration, securities cannot be sold until the registration
statement is made effective by the SEC.
B. Companies that have their securities publicly traded on an exchange must also make
regular periodic filings with the SEC. Some of the most common of these disclosure
documents are:
1. Form 10-K is an annual report presenting the company’s activities and financial
position.
2. Form 10-Q contains condensed interim financial statements.
3. Form 8-K discloses the occurrence of a unique or significant happening.
4. A proxy statement (Form 14A) solicits voting power to be used at stockholders’
meetings.
V. The SEC has developed a system that allows investors to gain access to filed information
electronically over the Internet. This system is known as EDGAR and contains extensive
information and documentation relating to practically every publicly traded security.
Answer to Discussion Question
Is the Disclosure Worth the Cost?
No ultimate answer exists to the question of how the SEC should weigh the costs of disclosure
versus the need for adequate information. Students often feel that the importance of the work of
This discussion question is intended to show the high cost to the American economy of ensuring
that adequate and fair information is available. The $400 million estimation that was made in
1975 (nearly forty (40) years ago) is a staggering figure. It shows this concern has existed for
One method of approaching this question is to ask students to envision what would result if the
SEC was simply to be dissolved. How would companies entice investors into contributing
funds? What methods would companies invent to provide assurance to investors? Would more
Chapter 12 – Financial Reporting and the Securities and Exchange Commission
Answers to Questions
1. Many of the federal securities laws were passed initially in hopes of putting an end to
abuses that were present in securities trading. These problems were first brought to the
2. The corporate accounting scandals of this period took several forms. Some were based on
manipulating loopholes in generally accepted accounting principles to allow companies to
avoid adequately disclosing risky ventures. Others were simply fraudulent reporting of
transactions; expenses, for example, were recorded as assets to make the company’s
3. The Sarbanes-Oxley Act has numerous provisions, almost all of which are designed in one
way or another to restore public confidence. Several of those provisions include:
▪ A Public Company Accounting Oversight Board has been created to enforce and
regulate auditing, quality control, and independence standards.
▪ All accounting firms that audit publicly-held issuers of securities must register with the
4. The Sarbanes-Oxley Act gives the SEC the power and responsibility to oversee the work of
5. According to the Sarbanes-Oxley Act, accounting firms are only required to register with the
Public Company Accounting Oversight Board if they prepare, issue, or participate in the
Chapter 12 – Financial Reporting and the Securities and Exchange Commission
6. Registration with the PCAOB forces the accounting firm to (a) provide a significant amount
7. The Sarbanes-Oxley Act gives the Public Company Accounting Oversight Board authority
over auditing independence rules. Therefore, all future changes made by this body will be
an indirect result of the legislation. Moreover, the Sarbanes-Oxley Act specifically
independent auditors.
8. Prior to the Sarbanes-Oxley Act, most accounting firms were required to undergo periodic
peer reviews of their audit documentation and their quality control procedures. However,
9. “Regulation S-K” establishes disclosure and other reporting requirements for the
nonfinancial information that is contained in filings with the SEC.
10. “Regulation S-X” prescribes the form and content of the financial statements, notes, related
11. The Securities and Exchange Commission is composed of more than two dozen divisions
and major offices. Some of these include the following:
— Division of Corporation Finance—ensures that standards for reporting and disclosure are
followed.
dealers, and investment companies.
12. The Securities Act of 1933 regulates the initial offering of securities by a company or its
underwriters. This Act is often referred to as the “truth in securities act” and it is the statute
13. The Securities Exchange Act of 1934 regulates the subsequent buying and selling of
14. The goals of the SEC are many. However, several prominent goals are as follows:
— Ensuring that full and fair information is disclosed to all investors before securities can be
exchanged.
15. Information to be included in proxy solicitation material includes the following data:
— Five-year summary of operations including sales, total assets, income from continuing
operations, and cash dividends per share.
— Description of business activities.
— Three-year summary of industry segments, export sales, and foreign and domestic
operations.
— Individual nonaudit fees that are larger than 3 percent of the annual audit fee.
16. A proxy statement is a request made to stockholders for the right to cast their votes at
17. Any change made by the SEC in its Regulation S-X, the financial reporting regulation, will
have a direct impact on the form and content of the financial reporting of the publicly-held
companies in this country. Thus, the Commission has the ability to dictate generally
accepted accounting principles. In addition, Financial Reporting Releases are issued by the
18. Financial Reporting Releases are issued by the SEC to explain desired changes in reporting
requirements. FRRs are used to supplement Regulations S-X and S-K. Staff Accounting
19. Prior to 1977, the SEC had restricted the use of its accounting authority primarily to
disclosure requirements and areas of financial reporting where authoritative guidance was
not available. The FASB (and its predecessors in the private sector) had been allowed to
establish generally accepted accounting principles in the U.S. The setting of accounting
20. Registration statements are designed to disclose and make available adequate relevant
21. Disclosure of sufficient information – Registration Statement disclosure – is required by the
Securities Act of 1933.
22. Part I of a registration statement is called a prospectus and must be furnished to every
potential buyer of the securities to be issued. It contains information such as financial
of the issuance, sales to special parties, and the like.
23. Revenues are raised by the SEC, in part, through a registration fee for shares being initially
issued. In 2016, this fee was $100.70 for each $1 million of security offering.
24. In the filing of registration statements, a number of different forms are available depending
upon the circumstances. Of these forms, these two are especially common:
— Form S-1 which is used by new registrants or by companies that have filed with the SEC
for less than 36 months;
25. Incorporation by reference is a process allowed when preparing filings with the SEC, and
often other governmental agencies. It is intended to reduce the quantity of redundant
26. A pre-filing conference is a meeting between a prospective registrant and the staff of the
SEC in hopes of resolving potential problems that may be expected to arise in an upcoming
filing. The reporting and disclosure of complicated financial transactions may be discussed
Chapter 12 – Financial Reporting and the Securities and Exchange Commission
27. A letter of comments (which is also known as a “deficiency letter”) is issued by the SEC to a
28. A prospectus is the first part of a registration statement, the portion that has to be furnished
to every potential buyer of a new security. The prospectus discloses a significant amount of
29. Certain new security issues are exempt from the registration requirements monitored by the
SEC. For example, securities sold within a single state are normally not subject to these
federal laws. In addition, the securities of banks, savings and loan associations, and
30. Private placements of securities under Regulation D: Rule 506 have become extremely
popular in recent years because they are exempt from the registration requirements of the
31. Blue sky laws are securities laws enforced by individual states. In contrast to federal
32. A wraparound filing is one in which a company uses its annual report to shareholders to
33. Form 8-K is not issued on a regular basis but only when disclosure of a unique or significant
occurrence is to be made. Thus, a company has some choice as to the necessity of issuing
a Form 8-K. The SEC does, however, list several events that require disclosure in this
manner:
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34. The Management’s Discussion and Analysis (MD&A) is a narrative description of the
company’s past, its present, and its future. The management describes its priorities,
35. The Form 10-K is an annual report (financial statements and related information) whereas
the Form 10-Q contains condensed interim financial statements and is filed quarterly.
Answers to Problems
4. A – Remember that the 1933 Act deals with Registration and the 1934 Act
deals with Regulation.
issuer. Issuers do incur additional fees as a result of SOX.
6. C – The SEC appoints the five (5) PCAOB members.
8. A – The 1933 Act deals with the requirements for registration of a security
prior to its initial offering.
11. C – Recall that the letter of comments / deficiency letter relate to the SEC’s
response subsequent to an issuer’s filing of a Registration Statement.
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15. D – A, B, and C are exempt: NFP organizations’ securities (debt) are exempt
from the registration requirement as are governmental securities (for instance
17. C – Shelf registrations consist of registering securities in advance so that a
large issuer may subsequently offer the securities without the need of additional
SEC approval.
19. (25 Minutes) (Series of questions about securities regulations).
a. Blue Sky Laws—Individual state laws that regulate the issuance of
securities when the transactions are limited to the residents of the state in
which the issuing company is organized and principally doing business.
Such securities are exempted from regulation by federal securities laws.
d. Public Company Accounting Oversight Board—This five (5) member Board
was created by the Sarbanes-Oxley Act of 2002 as a result of the corporate
accounting scandals that rocked the stock market and the investing
community during 2001 and 2002. This Board falls under the jurisdiction of
Chapter 12 – Financial Reporting and the Securities and Exchange Commission
20. (25 Minutes) (Discussion of the Securities Act of 1933 and the Securities
Exchange Act of 1934)
The Securities Act of 1933 and the Securities Exchange Act of 1934 were
passed to help rebuild confidence in the capital market system of the United
States. Economic development in this country is based on generating large
markets. Several aspects of these laws should be noted:
— Companies were required to supply adequate information to potential
buyers before a new security could be issued.
— Companies having publicly traded securities were required to maintain an
adequate and continual flow of information to the public.
was created to monitor the capital market system. For example, registration
statements had to be filed with the SEC before new stocks or bonds could be
issued to the public. These statements were reviewed and could not become
effective until all necessary disclosures and financial information were
21. (20 Minutes) (Description of the registration process)
In filing a registration statement for a new security, a company must first
select the appropriate SEC Registration form. For example, Form S-1 is used
by new registrants while Form S-3 is filed by large companies that already
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22. (15 Minutes) (Discussion of the SEC’s influence on generally accepted
accounting principles)
The SEC has far-ranging authority over the accounting principles in this
country. Through its ability to modify Regulation S-X, the SEC holds the power
to alter the financial reporting of publicly-traded companies. The SEC has
historically chosen to limit such changes to disclosure requirements with the
creation of accounting principles being left to the FASB (and its predecessors)
Thus, the private sector of the accounting profession had been given de facto
23. (20 Minutes) (Listing of forms that are filed with the SEC on a regular periodic
basis)
Numerous forms may have to be filed regularly with the SEC by a publicly-held
company. Four of these forms (Form 10-K, Form 10-Q, Form 8-K, and proxy
statements) are frequently encountered.
— Form 10-K is an annual report filed shortly after a company’s year-end.
— Form 10-Q contains condensed interim financial statements and must be
filed after the end of each quarter, other than the year-end quarter – because
the 10-K is filed after the year-end quarter.
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24. (10 Minutes) (Describe the forms used to file with SEC for registration
purposes)
Some of the most commonly used forms for registering securities to be
offered to the public are as follows:
— Form S-1—for new registrants or companies that have been filing with the
SEC for less than 36 months. This form is used when no other form is
prescribed.
25. (20 Minutes) (Discussions of the Form 8-K and proxy statements)
The Form 8-K is designed to ensure the immediate disclosure by a company of
any unique or significant event. Thus, any interested parties are able to obtain
needed information without having to wait for a quarterly or annual statement.
The filing of the Form 8-K must generally be made within 15 days of the
occurrence. Events that necessitate the filing of a Form 8-K are left to the
26. (20 Minutes) (Describe responsibilities of the Public Company Accounting
Oversight Board)
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The Sarbanes-Oxley Act of 2002 is a wide-ranging piece of legislation that
covers a large number of different areas of corporate financial reporting.
Much of this Act deals with the establishment of the Public Company
Accounting Oversight Board (PCAOB). The PCAOB is created / addressed in
Title I of the Act.
PCAOB in order to continue providing such services. This registration
provides the PCAOB with the ability to gather an almost unlimited amount of
information about the firms such as disagreements with audit clients, annual
fees from both audit and nonaudit services, and the like.
The PCAOB must periodically inspect the work of each of the registered
accounting firms. The depth and breadth of this inspection will ultimately
27. (30 Minutes) (Discussion of financial reporting and the SEC)
a. Staff Accounting Bulletins—According to the website (www.sec.gov) of the
Securities and Exchange Commission, “Staff Accounting Bulletins reflect
the Commission staff’s views regarding accounting-related disclosure
practices. They represent interpretations and policies followed by the
information (a process known as incorporation by reference) within the
annual report.
c. Incorporation by reference—using information in one document filed with
the SEC to fulfill other reporting requirements. In this manner, the amount of
redundant information being reported is reduced. This process is usually
e. Integrated disclosure system—the use of information that is being given to
stockholders to meet the filing requirements of the SEC.
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28. (10 Minutes) (Listing of organizations that are exempt from the registration
requirements of the SEC)
— Governments
— Banks
— Companies that make offerings of no more than $1 million to any number of
investors within a 12-month period under Regulation D: Rule 504.
— Companies that make small offerings of no more than $5 million to 35 or
fewer non-accredited purchasers and an unlimited number of accredited
investors.
Develop Your Skills
RESEARCH CASE 1 (45 Minutes)
The purpose of this question is to allow the student the opportunity of working
with the actual regulations posted on the SEC web site. The URL given in the
problem will take the student to the entire set of rules set out under Regulation A
Regulation A. There are a number of issues that the student might want to
address in connection with this question:
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— Where does the company have to be legally incorporated? (The U.S., Canada,
or one of the territories or possessions of the U.S.)
RESEARCH CASE 2 (30 Minutes)
The SEC v. Calvo case involves a situation similar to the fact pattern in this
research case. The student is directed to this case because of the many
similarities. Use of legal / case research is a very valuable skill for accounting
In the example, the Tasch Corporation will ‘manage’ the customer’s enterprise,
the customers are investing money, and the customers are expecting a profit –
i.e.: the guaranteed return. A court would very likely conclude that the “service
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ANALYSIS CASE 1 (45 Minutes)
This assignment requires the student to utilize the EDGAR database to find
recent company filings by any publicly-held company. The results that a student
gets will depend on the company name that is entered and the time frame for
when the student accesses the database. The student may actually be
just the first three (3) months of 2013.
1. A number of 8-K forms can be found for most companies. Companies now
tend to err on the side of over-disclosure with regard to 8-K filings, many of which
2. A further investigation of the Dell filings leads to a Form 10-K issued on March
12, 2013 (or later depending on when the student utilizes the database), that
Communication Case 1
Here, the student is asked to investigate and review that actual statutory
components of the Sarbanes-Oxley Act of 2002. This Act encompasses
approximately seventy (70) pages and contains an extensive list of requirements
for auditors covered by the Statute.
The first issue to consider for the Wojtysiak firm is whether it is presently
required to register with the Public Company Accounting Oversight Board
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The student will most likely wish to consider and incorporate the following
provisions of the Act.
▪ Section 102 – Registration with the Board.
▪ Section 103 – Auditing, quality control, and independence standards and