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© The McGraw-Hill Companies, Inc., 2004
Slide 12-1
McGraw-Hill/Irwin
Chapter Twelve
Financial Financial Reporting and Reporting and the Securities the Securities and Exchange and Exchange CommissionCommission
© The McGraw-Hill Companies, Inc., 2004
Slide 12-2
McGraw-Hill/Irwin
5 commissioners appointed by the
President.
5 commissioners appointed by the
President.
Commissioners serve 5-year,
staggered terms.
Commissioners serve 5-year,
staggered terms.
Established by the Securities
Exchange Act of 1934.
Established by the Securities
Exchange Act of 1934.
Only 3 of 5 can come from the same political
party.
Only 3 of 5 can come from the same political
party.
The chairperson is from the same
political party as the President.
The chairperson is from the same
political party as the President.
SECSEC
Securities and Exchange Commission (SEC)
© The McGraw-Hill Companies, Inc., 2004
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Division of Market
Regulation
Division of Market
Regulation
Division of Enforcement
Division of Investment
Management
Office of Compliance
Inspections and Examinations
Division of Corporate Finance
Division of Corporate Finance
SECSEC
Office of Information Technology
Office of Information Technology
Office of the Chief
Accountant
Office of the Chief
Accountant
© The McGraw-Hill Companies, Inc., 2004
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McGraw-Hill/Irwin
Securities Exchange Act of 1934
Securities Exchange Act of 1934Securities Act of 1933Securities Act of 1933
Federal Securities Laws
Regulates the initial offering of securities by a company or
underwriter.
Regulates the initial offering of securities by a company or
underwriter.
Regulates the subsequent trading of securities through
brokers and exchanges.
Regulates the subsequent trading of securities through
brokers and exchanges.
The 1934 Act
Established the SEC
The Stock Market Crash of 1929 …..The Stock Market Crash of 1929 …..led to the……led to the……
© The McGraw-Hill Companies, Inc., 2004
Slide 12-5
McGraw-Hill/Irwin
Goals of the SEC
To ensure full & fair disclosure to
all investors.
To ensure full & fair disclosure to
all investors.
To prohibit dissemination of
materially misstated information.
To prohibit dissemination of
materially misstated information.
To prevent misuse of
information by inside parties.
To prevent misuse of
information by inside parties.
To regulate the operation of
securities markets.
To regulate the operation of
securities markets.
© The McGraw-Hill Companies, Inc., 2004
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Securities Exchange Act of 1934
Securities Exchange Act of 1934Securities Act of 1933Securities Act of 1933
Public Utility Holding Company Act of 1935
Public Utility Holding Company Act of 1935
Full and Fair Disclosure
Requires continuous reporting by publicly traded
companies.
Requires continuous reporting by publicly traded
companies.
New securities must be registered prior to public
sale.
New securities must be registered prior to public
sale.
Requires registration of interstate holding companies
of public utilities.
Requires registration of interstate holding companies
of public utilities.
Prohibits fraudulent and unfair behavior.
Prohibits fraudulent and unfair behavior.
© The McGraw-Hill Companies, Inc., 2004
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McGraw-Hill/Irwin
Trust Indenture Act of 1939
Trust Indenture Act of 1939
Requires registration of indentures related to public issue of bonds, notes, etc.
Requires registration of indentures related to public issue of bonds, notes, etc.
Investment Company Act of 1940
Investment Company Act of 1940
Requires registration of investment companies.
Requires registration of investment companies.
Investment Advisers Act of 1940 and Securities Investor Protection Act
of 1970
Investment Advisers Act of 1940 and Securities Investor Protection Act
of 1970
Requires registration of investment advisors and requires them to follow
certain standards.
Requires registration of investment advisors and requires them to follow
certain standards.
Full and Fair Disclosure
© The McGraw-Hill Companies, Inc., 2004
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Foreign Corrupt Practices Act of 1977
Foreign Corrupt Practices Act of 1977
Amends Securities Exchange Act of 1934. Requires
maintenance of accounting records and adequate
internal accounting controls.
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
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.
Increase penalties against persons who profit from
illegal use of inside information.
Full and Fair Disclosure
© The McGraw-Hill Companies, Inc., 2004
Slide 12-9
McGraw-Hill/Irwin
Sarbanes-Oxley Act of 2002
Sarbanes-Oxley Act of 2002
Designed as a response and answer to the
numerous corporate accounting scandals that came to light in
2001 and 2002.
Designed as a response and answer to the
numerous corporate accounting scandals that came to light in
2001 and 2002.
Full and Fair Disclosure
© The McGraw-Hill Companies, Inc., 2004
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In addition to audited financial
statements, Rule 14c-3 of the 1934 Act requires the following:
The SEC’s Impact on Financial Reporting
5-year summary of operations. Description of the business
activities. 3-year summary of industry
segments. Listing of company directors
and executive officers. Market price of the common
stock for each quarter on the last 2 years.
Restrictions on the company’s ability to pay dividends.
MD&A
5-year summary of operations. Description of the business
activities. 3-year summary of industry
segments. Listing of company directors
and executive officers. Market price of the common
stock for each quarter on the last 2 years.
Restrictions on the company’s ability to pay dividends.
MD&A
© The McGraw-Hill Companies, Inc., 2004
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Certain information about the
auditor must also be
disclosed.
The SEC’s Impact on Financial Reporting
All non-audit services provided by the independent auditing firm.
Whether the Board of Directors approved all non-audit services and considered whether they would impair the auditor’s independence.
The % of non-audit fees to the total annual audit fee.
Individual non-audit fees > 3% of the annual audit fee.
All non-audit services provided by the independent auditing firm.
Whether the Board of Directors approved all non-audit services and considered whether they would impair the auditor’s independence.
The % of non-audit fees to the total annual audit fee.
Individual non-audit fees > 3% of the annual audit fee.
© The McGraw-Hill Companies, Inc., 2004
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McGraw-Hill/Irwin
Creation of Public Company Accounting Oversight Board
Creation of Public Company Accounting Oversight Board
Sarbanes-Oxley Act of 2002 Section 101
Board charged with:
Establishing auditing, quality control, and independence standards.
Performing periodic inspections of registered public accounting firms.
Could have potentially replaced the Auditing Standards Board of the AICPA.
Board charged with:
Establishing auditing, quality control, and independence standards.
Performing periodic inspections of registered public accounting firms.
Could have potentially replaced the Auditing Standards Board of the AICPA.
© The McGraw-Hill Companies, Inc., 2004
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McGraw-Hill/Irwin
Creation of Public Company Accounting Oversight Board
Creation of Public Company Accounting Oversight Board
Sarbanes-Oxley Act of 2002 Section 101
Five membersFive members 2 of the 5 must be or have been CPAs.2 of the 5 must be or have been CPAs. Remaining 3 must NOT be CPAs.Remaining 3 must NOT be CPAs. The Board will be funded through mandatory The Board will be funded through mandatory
fees.fees.
FundingFunding Accounting firms must register with the
Board and pay fees. Applies to foreign firms as well.
Five membersFive members 2 of the 5 must be or have been CPAs.2 of the 5 must be or have been CPAs. Remaining 3 must NOT be CPAs.Remaining 3 must NOT be CPAs. The Board will be funded through mandatory The Board will be funded through mandatory
fees.fees.
FundingFunding Accounting firms must register with the
Board and pay fees. Applies to foreign firms as well.
© The McGraw-Hill Companies, Inc., 2004
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To ensure future independence of audit firms, some previously common concurrent services
are now prohibited.
To ensure future independence of audit firms, some previously common concurrent services
are now prohibited.
Sarbanes-Oxley Act of 2002 Auditor Independence
Bookkeeping services. AIS design and implementation. Appraisal or valuation services. Internal audit outsourcing. Management functions/Human Resource
Management. Investment advising. Legal services or expert services.
Bookkeeping services. AIS design and implementation. Appraisal or valuation services. Internal audit outsourcing. Management functions/Human Resource
Management. Investment advising. Legal services or expert services.
© The McGraw-Hill Companies, Inc., 2004
Slide 12-15
McGraw-Hill/Irwin
Audit Committees will also be expected to exercise more oversight in the future.
Audit Committees will also be expected to exercise more oversight in the future.
Sarbanes-Oxley Act of 2002Audit Committees
Financial Experts on the BOD must be Financial Experts on the BOD must be identified in the annual report. identified in the annual report. Experience with accounting matters like the ones Experience with accounting matters like the ones
used in the company.used in the company. Must have served as an auditor, CFO, controller, Must have served as an auditor, CFO, controller,
or Chief Accounting Officer of a public company.or Chief Accounting Officer of a public company. Independence of “financial experts” must be Independence of “financial experts” must be
disclosed.disclosed.
The Committee hires the external auditor.The Committee hires the external auditor. The auditor now reports to the Committee instead The auditor now reports to the Committee instead
of to management.of to management.
Financial Experts on the BOD must be Financial Experts on the BOD must be identified in the annual report. identified in the annual report. Experience with accounting matters like the ones Experience with accounting matters like the ones
used in the company.used in the company. Must have served as an auditor, CFO, controller, Must have served as an auditor, CFO, controller,
or Chief Accounting Officer of a public company.or Chief Accounting Officer of a public company. Independence of “financial experts” must be Independence of “financial experts” must be
disclosed.disclosed.
The Committee hires the external auditor.The Committee hires the external auditor. The auditor now reports to the Committee instead The auditor now reports to the Committee instead
of to management.of to management.
© The McGraw-Hill Companies, Inc., 2004
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McGraw-Hill/Irwin
E s ta b lishe s re q u ire m e n tsfo r a ll n o n fin a n c ia l
in fo rm a tio n co n ta in edin S E C filin g s.
Regulation S-K
P re scrib e s th e fo rm a ndco n ten t o f th e f in an c ia l
s ta tem en ts.
Regulation S-X
2 B asic D ocum ents
SEC Requirements
© The McGraw-Hill Companies, Inc., 2004
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Congress has assigned GAAP-setting authority
to the SEC.
The SEC allows the FASB to set
GAAP.
The FASB’s standards can always be (and
was once) overridden by the SEC. (See Oil &
GAS – best efforts)Authority only extends to
publicly traded companies.
Authority only extends to publicly traded companies.
The SEC’s Authority Over GAAP
© The McGraw-Hill Companies, Inc., 2004
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The SEC does issue authoritative documents.
Financial Reporting Releases (FRR’s)
Financial Reporting Releases (FRR’s)
Staff Accounting Bulletins (SAB’s)
Staff Accounting Bulletins (SAB’s)
Supplements to Regulations S-K and
S-X
Supplements to Regulations S-K and
S-X
Views on current accounting and
disclosure matters.
Views on current accounting and
disclosure matters.
The SEC’s Authority Over GAAP
© The McGraw-Hill Companies, Inc., 2004
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Filings with the SEC
Two basic categories of Two basic categories of filings filings
Two basic categories of Two basic categories of filings filings
Registration Registration StatementsStatements
Registration Registration StatementsStatements
Periodic Periodic FilingsFilings
Periodic Periodic FilingsFilings
© The McGraw-Hill Companies, Inc., 2004
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Common SEC Registration Statement Forms
© The McGraw-Hill Companies, Inc., 2004
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Registration Process
Registration Statements
delivered to SEC
Review by Div. Of Corp. Finance
Deficiency letter sent to registrant
Approved after deficiencies are
cleared
Once the registration is effective, the securities
can be sold.
Note: This Note: This process is both process is both
time-time-consuming consuming
and expen$ive.and expen$ive.
© The McGraw-Hill Companies, Inc., 2004
Slide 12-22
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General contents of
SEC registration
reports.
Registration Requirements
PART IPART I Audited financial Statements. An explanation of the use of
the proceeds. A description of the security
risks. A description of the business.
PART IPART I Audited financial Statements. An explanation of the use of
the proceeds. A description of the security
risks. A description of the business.
PART IIPART II Used by the SEC staff. Includes additional information
about the company.
PART IIPART II Used by the SEC staff. Includes additional information
about the company.
© The McGraw-Hill Companies, Inc., 2004
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Offerings Exempt from SEC Filing
Securities issued by governments, banks, and S&L’s
Securities issued that are restricted to a company’s own existing shareholders.
Offerings < $5 million
Offerings < $1 million made to made within a 12-month period.
Offerings < $5 million made to 35 or fewer investors within a 12-month period.
Private placement of securities to < 36 investors who already have knowledge of the company.
© The McGraw-Hill Companies, Inc., 2004
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Form 10-QForm 10-Q
Quarterly report filed within 45 days of end of
quarter.Financial statement are
un-audited.
Quarterly report filed within 45 days of end of
quarter.Financial statement are
un-audited.
Form 10-KForm 10-K
Annual report filed within 90 days of fiscal
year-end.Includes audited
financial statements.
Annual report filed within 90 days of fiscal
year-end.Includes audited
financial statements.
Form 8-KForm 8-K
Used to disclose a unique or significant
happening.
Used to disclose a unique or significant
happening.
Periodic Filings with the SEC
© The McGraw-Hill Companies, Inc., 2004
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Proxy Statements
A document that allows the board of directors to vote on behalf of a stockholder.
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
Has to be accompanied by an annual report (usually)
Needs to indicate on whose behalf the solicitation is made.
Must disclose fully all matters that are to be voted on at the meeting
Has to be accompanied by an annual report (usually)
© The McGraw-Hill Companies, Inc., 2004
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That was fun!
Can we do it again?
End of Chapter 12