CH14MAN

7/27/2019 CH14MAN

1/20

7/27/2019 CH14MAN

2/20

Q14-7 The five classes of information comprising the Basic Information Package

(BIP) are as follows:

a. Market price of and dividends on common equity and security matters

b. Selected financial data

c. Management's discussion and analysis of financial condition and results

of operation (MDA)

d. Audited financial statements and supplementary data

e. Other information

Q14-8 Two types of public offerings of securities are exempted from the

comprehensive registration requirements of the SEC. The first type of offering

exempted from the full registration process is a small offering of less than

$1.5 million of stock sales during any 12-month period. The second type of

offering exempted from the full registration requirements is limited offerings

to accredited investors up to $5 million in securities within a 12-month period.

Q14-9 A company can use a Form S-1 registration form when the general

registration is for a first time offering and no other publicly-traded stock has

been issued. A company must use a Form S-3 registration form when the registrant

is large and established, possessing stock that has been trading for severalyears.

Q14-10 A customary review is a thorough examination by the SEC and may result

in acceptance of the registration or a comment letter from the SEC.

A comment letter is issued by the SEC specifying the deficiencies that must be

corrected before the securities may be offered for sale.

A red herring prospectus is a preliminary prospectus providing information to

investors about an upcoming issue. This type of prospectus has a cover printed

in red ink indicating it is not an offering statement and the securities being

discussed are not yet available for sale.

Shelf registration allows large, established companies with other issues of

stock already actively traded to file a registration statement with the SEC for

a stock issue which may be brought off the shelf and updated within a very short

time when the company wants to actually issue the stock.

Q14-11 Form 10-K is broken into four parts. Parts I, II, and III contain the

Basic Information Package, including the financial statements. Part IV contains

additional schedules and exhibits. Form 10-K must be filed with the SEC 90 days

after the end of the company's fiscal year-end.

Q14-12 Interim reports submitted to the SEC are not required to be audited. The

public accountant is expected to review, on an ex post basis, the information

provided in the company's Form 10-Qs as part of the annual, year-end audit.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

7/27/2019 CH14MAN

3/20

Q14-13 The types of items reported on in Form 8-K cover current events.

Current events include the following items:

a. A change in the control of the registrant

b. Acquisition or disposal of major assets

c. Bankruptcy or receivership of the registrant

d. Changes in the registrant's certifying accountants

e. Resignations of one or more of the registrant's directors

f. Any other events deemed to be of material importance to

security holders

Q14-14 A proxy is a request by the company, or by a stockholder, for a security

holder's vote on a corporate matter. Proxy solicitations must include a full

discussion of the matters to be voted on, and must also include the most recent

annual shareholders' report if the present management is making the solicitation

for a meeting at which directors will be elected. The SEC has established

requirements in the following four areas for proposals in opposition to

management: eligibility, attendance, timeliness, and rejected proposals.

Q14-15 Part I of the Foreign Corrupt Practices Act (FCPA) prohibits individuals

associated with United States companies from giving bribes to foreigngovernmental or political officials for the purpose of securing a contract or

otherwise increasing the company's business. Part II of the FCPA requires all

public companies, whether operating internationally or not, to keep detailed

records that accurately and fairly reflect the company's financial transactions,

and to develop and maintain an adequate internal control system. The impact of

this act is to require companies to establish and maintain an adequate internal

control system, to require public accountants to evaluate the company's internal

controls, and to communicate any material weaknesses in those controls to the

company's top management and board of directors.

Q14-16 The following information must be disclosed in the management discussion

and analysis (MDA):

Discussion of liquidity, capital resources, and results of operations

b. The impact of inflation and changing prices on net sales and income

c. Material changes in line items of the consolidated financial statements from

prior-period amounts

Known material events and uncertainties that may make historical financial

information not indicative of future operations or future condition

Any other information the company believes necessary for an understanding of

its financial condition, changes in financial condition, and results of

operations.


7/27/2019 CH14MAN

4/20

Q14-17* The SEC has taken the lead in requiring the independence of the auditor

from the client company and in defining the parameters of the audit function. The

SEC insists on strict independence of the auditor as the best protection of the

public investors' need for full and fair disclosure of a company's financial

position and performance. In addition, the SEC's Division of Enforcement has

actively investigated instances of possible false or misleading statements that may

have been caused by the failure of generally accepted auditing standards.


7/27/2019 CH14MAN

5/20

SOLUTIONS TO CASES

C14-1 Objectives of Securities Acts [CMA Adapted]

a. Investment practices of the 1920s that contributed to the erosion of the stock

market include the following:

- The prices of securities were manipulated through the use of "wash

sales" or "matched orders." Brokers or dealers engaged in prearranged buy

and sell orders that created the impression of activity and drove up

prices. When the public began buying, driving prices up even higher, the

brokers and dealers would sell, making huge profits before prices fell

back to market level.

- False or misleading financial statements were issued to lure unwary

investors.

- The excessive use of credit to finance speculative activities served to

undermine the market. There was no limit to the amount of credit or

"margin" that a broker could extend to a customer. As a result, a slight

decline in market prices often caused overextended customers to sell when

margins could not be covered, thus further reducing prices.

- Corporate officials and other "insiders" misused information about

corporate activities to take advantage of fluctuations in stock prices.

b. 1. The objectives of the Securities Act of 1933 are to

- provide investors with financial and other information concerning

the initial offering of securities for sale, thus ensuring full and

fair disclosure. Companies were required to file a registration

statement and prospectus for review.

- prohibit misrepresentation, deceit, and other fraudulent acts and

practices in the sale of securities.

2. The objectives of the Securities Exchange Act of 1934 are to

- regulate the trading of securities on secondary markets by requiring

the registration of securities traded on any national exchange.- create a regulatory agency, the Securities and Exchange Commission,

to administer the requirements of both the 1933 and 1934 acts.

c. The provisions of the Foreign Corrupt Practices Act of 1977 include the

requirement for public companies to devise and maintain a system of internal

accounting controls to provide reasonable assurance that transactions are

properly authorized, recorded, and accounted for.


7/27/2019 CH14MAN

6/20

C14-2 Roles of SEC and FASB [CMA Adapted]

a. The Securities and Exchange Commission (SEC) was created through the Securities

Exchange Act of 1934. As a result of this Act, the SEC has legal authority

over accounting practices. The U.S. Congress has given the SEC broad

regulatory power to control accounting principles and procedures in order to

fulfill its goal of full and fair disclosure. Specific responsibilities of

the SEC include:

- Regulating the sale of securities on secondary markets

- Regulating the initial offerings and actual sales of stock in interstate

commerce

- Prescribing the forms and reports to be used

- Prescribing the items or details to be shown in the financial statements and

the methods to be followed in preparing the accounts

b. The SEC was created by Congress, and the FASB was created by the private sector;

therefore, no direct relationship exists. However, the SEC historically has

followed a policy of relying on the private sector to establish financial

accounting and reporting standards. The SEC recognized the FASB as

authoritative in one of its Accounting Series Releases (ASR 150__Dec. 20,1973). There has been cooperation between the SEC and FASB, but at times the

relations between these bodies have become strained. In cases of unresolved

differences, the SEC rules take precedence over FASB rules for the companies

within SEC jurisdiction.


7/27/2019 CH14MAN

7/20

C14-3 SEC Organization and Responsibilities [CMA Adapted]

a. The SEC is an independent federal agency that receives its authority from

federal legislation. The Securities Exchange Act of 1934 created the SEC and

empowered it to administer compliance with provisions of that Act and the

Securities Act of 1933.

b. (1) The SEC supports fair securities markets by regulating brokers, exchanges,

and the publicly held companies themselves. The Commission monitors the

trading practices and financial condition of brokers. The Commission

oversees the activities and trading rules of securities exchanges. Finally,

the Commission requires registration and continuing public disclosure of

financial and other information by publicly held companies.

(2) The SEC fosters shareholders' participation in major corporate decisions

by requiring corporate management to keep stockholders informed by various

means. Management is required to issue proxy solicitations, file periodic

reports with the SEC, hold annual stockholders' meetings, and issue annual

reports to stockholders that include audited financial statements.

c. The SEC requires publicly held companies to file audited financial statements

and other disclosures in accordance with its regulations. The Commission

relies primarily on the integrity and legal responsibility of the reporting

entities and the external auditors for the material accuracy and

completeness of the filings. The Commission reviews filings on a selective

basis in an attempt to discover untrue, incomplete, or misleading

information.


7/27/2019 CH14MAN

8/20

C14-4 Proxy Solicitations [CMA Adapted]

a. The purpose of proxy statements is to provide full and fair disclosure of

significant events in order to allow shareholders to exercise a more

informed judgment before voting on corporate matters.

b. Events or actions for which proxy statements normally are solicited include

election of directors, change in corporate charters or by- laws, appointment

of auditors, issuance of securities or modification of outstanding

securities, or plans to merge, acquire, or dispose of property.

c. Conditions that must be met in order to have a shareholder proposal in

opposition to management incorporated in a proxy statement include:

- Eligibility The proponent must own a security with voting privileges.

- Attendance The proponent or his designated alternate shall agree to be

present at the annual meeting to present the proposal.

- Timeliness The proposal shall be received at least 90 days in advance

of the proxy statement mailing date.

- Rejected The proposal cannot relate to a similar proposal

Proposals that has been rejected within the past 5 years.


7/27/2019 CH14MAN

9/20

C14-5 Registration Process [CMA Adapted]

a. The Securities Act of 1933 requires a filing by any firm that raises capital in

the primary capital market through the initial sale of a new security,

whether by a public offering made directly by the firm or through an

underwriter. The registration applies only to the specific quantity of the

specific security being offered.

The Securities Exchange Act of 1934 requires a filing by any firm whose

securities are being traded publicly in the secondary capital market. These

securities are registered as an entire class with no amount specified. A

secondary offering of a firm's securities also requires the filing of a

registration statement.

b. An objective of the 1933 Act is to provide investors with material information

concerning the issuing firm, its management, the securities offered for

public sale, and the proposed use of the proceeds from the sale. The SEC

does not evaluate the creditworthiness of the firm or attest to the

potential of the security as an investment. The 1933 Act is an attempt to

ensure that investors are given full and fair disclosure of all pertinent

information about the issuing firm, including audited financial statements.

c. SEC Publication Explanation

Regulation S-X Instructions as to the form and content of the

required financial statements.

Regulation S-K Instructions as to the form and content of required

disclosures other than the required financial statements (i.e.,

supplementary financial information, summary financial data, and non-

financial information).

Financial Reporting Constitute part of Regulation S-X in the

Releases (formerly determination of the form and content ofAccounting Series the required financial statements.

Releases)

Staff Accounting Interpretations and practices followed by

Bulletins the Division of Corporation Finance and the Office

of the Chief Accountant in administering the disclosure requirements

of the federal securities laws.


7/27/2019 CH14MAN

10/20

C14-6 Form 10-K [CMA Adapted]

Part A

a. Form 10-K is an annual report companies are required to file with the SEC.

This report is required under the Securities and Exchange Act of 1934. The

phrase in bold type informs stockholders and other interested persons that

the additional information included in a 10-K is public knowledge and can

be obtained by writing to the company.

b. Possible additional information which might be ascertained from a firm's

10-K and which might not be in the company's annual report:

1. Remuneration of directors and officers

2. Indemnification arrangements for directors and officers

3. Principal holders of equity securities and holdings by directors and

officers

4. Interest of management in certain transactions

5. Number of equity security holders

6. Management analysis of material changes in revenue and expense.

c. Financial information which might be included in a firm's annual report

but not required for the 10-K includes:

1. Financial charts (bar graphs, pie charts, etc.)

2. Ratio analysis of operations and financial position

3. Ten-year summary of financial data

4. Market price by quarter for common stock for the current year

5. Analysis of operations and future prospects in president's letter.


7/27/2019 CH14MAN

11/20

C14-6 (continued)

Part B

Jerford Company must reveal the following information in Form 8-K to the SEC

regarding its change in auditors:

1. Date former auditor resigned or was dismissed.

2. A statement whether there were any disagreements with the former auditor on

any matter of accounting principles or practices, financial statement

disclosure, or auditing scope or procedure during the 24 months before the

change. Each disagreement, if any, would have to be fully described

whether or not it was resolved to the satisfaction of the former auditor.

In addition, those disagreements which would have caused the former

auditor to make reference to the subject matter of the disagreement in his

report had they not been resolved would have to be identified.

3. A statement whether the former auditor's report on the financial

statements was qualified in any way the past two years and the nature of

each qualification, if any.

4. A letter from the former auditor as an exhibit with Form 8-K which

states whether the former auditor agrees or disagrees (including reason

for disagreement) with the facts of the case as presented by the

registrant.

The Jerford Company would also have to provide a footnote to its 20X5

financial statements disclosing any disagreements with its former

independent auditor during the past 24 months regarding accounting

principles, financial statement disclosure, or audit procedure.


7/27/2019 CH14MAN

12/20

C14-7 Form 8-K [CMA Adapted]

a. 1. The purpose of Form 8-K, called the Current Report, is to ensure that any

significant event affecting a firm's policies or financial position is

immediately reported to the SEC. Covering the period since the filing of

the latest annual or quarterly report, Form 8-K provides a continuous

stream of material information concerning specified events between filings.

2. Form 8-K must be filed with the SEC within 15 days after the occurrence

of a reportable event. Violation of the 8-K filing requirement may

jeopardize a registrant's status.

3. Form 8-K is a narrative report with sufficient flexibility to permit

management to describe any significant events. The first page must contain

the standard 8-K heading identifying the reporting corporation, and the

body of the report details the specified event or events in accordance

with the disclosure requirements outlined in the regulations for each

event. The corporation may include any other information, financial or

otherwise, it deems appropriate for a complete description of the event.

The report must be signed by an officer of the corporation.

4. The inclusion of audited and pro forma financial statements is only

required when reporting the acquisition of a business. Financial

statements may be included in a Form 8-K in order to clarify the effect of

any event on the corporation. In general practice, financial statements

are included if an event is deemed to have a material financial impact.


7/27/2019 CH14MAN

13/20

C14-7 (continued)

b. Six circumstances under which the Securities and Exchange Commission requires

the filing of Form 8-K include:

- Changes in the control of the registrant

- Acquisitions or dispositions of assets

- Bankruptcy or receivership

- Changes in the registrant's certifying accountants

- Resignations of one or more of the registrant's directors

- Any other events deemed to be of material importance to security

holders

c. The role of the SEC is to regulate the issuance and trading of securities. By

requiring the disclosure of adequate information, it enables investors to

make informed judgments about securities. Form 8-K fosters this purpose by

requiring firms to report significant events as they occur to the investing

public.

d. The purpose of the securities laws is not to have the SEC judge the merits of

securities offered for sale. Through its strict disclosure and reportingrequirements, the SEC attempts to make certain that the investor has the

opportunity to judge the merits of securities on the basis of full

disclosure of the pertinent facts. The SEC does have the power to suspend

trading in securities of companies that fail to make full and accurate

reports; however, these actions are not based on the merits of the

securities but on the companies' failures to comply with reporting

regulations.


7/27/2019 CH14MAN

14/20

C14-8 Audit Committees [CMA Adapted]

a. The audit committee acts as an intermediary or communication link between the

external auditor and management during the external audit process. In

addition, the audit committee reviews the arrangements for the audit, the

scope of the audit, the progress and findings of the audit, and any

investigative matters related to financial reporting and internal control.

b. Duties which may be assigned to the audit committee by the board of directors,

other than those associated with the annual audit, may include:

- Monitoring the activities of the internal audit staff

- Seeing that any recommendations made by the external auditor are acted

upon by the internal auditors

- Reviewing the design of the company's control systems

c. The audit committee should act as an overseer of the company's internal audit

staff. The audit committee would be concerned with such matters as the scope

of internal audits, the completion of assignments, and discussion of the

results of reviews conducted by the internal audit staff.

d. Members appointed to serve on the audit committee should be outside board

members (independent of management) because the NYSE specifies that members

be independent of management. Outside members would be free from bias or

conflicts of interest, and outside members would be more objective in

settling disputes between management and the external auditor.


7/27/2019 CH14MAN

15/20

C14-9 Research Related to the SEC

a. A listing of recent SABs can be found at Internet URL:

http://www.sec.gov/rules/acctindx.htm.

The statements in Staff Accounting Bulletins are not rules or interpretations of

the Commission nor are they published as bearing the Commission's official

approval. Rather they reflect the Commission staffs views and provide

interpretations and practices followed by the Division of Corporation Finance and

the Office of the Chief Accountant in administering the disclosure requirements of

the Federal securities laws.

The SABs may be very narrowly written to describe the staff view of a particular

event or circumstance. The purpose of the SABs is to disseminate staff views on

particular matters for guidance in other situations where events and transactions

have similar accounting implications.

b. 1.& 2. Internet URL: http://www.sec.gov/enforce/abenf.htm

1) The Division of Enforcement was created in August 1972.

2) In general, the Commission's enforcement staff conducts investigations into

possible violations of the federal securities laws. The Commission will prosecute

the civil suits in the federal courts as well as conduct administrative proceedings.

In civil suits, the Commission seeks injunctions (i.e., an order that prohibits

future violations) and will often seek civil money penalties and the disgorgement

of illegal profits. In addition, the courts may also bar or suspend individuals

from acting as corporate officers or directors.

The Commission can bring a variety of administrative proceedings. These proceedings

are heard by administrative law judges and the Commission itself. There are many

types of proceedings, a few examples include: a cease and desist order, an order tothe respondent to disgorge ill-gotten funds, and an order to suspend employment.

3. A listing of recent litigation releases can be found at Internet URL:

http://www.sec.gov/enforce/litig.htm.

4. A listing of recent administrative proceedings can be found at Internet URL:

http://www.sec.gov/enforce/adm.htm.


7/27/2019 CH14MAN

16/20

C14-10 Research Related to the EDGAR Database

a. Internet URL: http://www.sec.gov/edgarhp.htm

The above Internet address provides access to the EDGAR database homepage. From

the homepage, the user is able to select Search the EDGAR Database, then Select

Quick Forms Lookup. The user can then select to search for a company form. Hint:

It is easiest to identify a company name prior to performing the search. Then

request all forms in the search. The search can provide a list of all forms on

EDGAR for the company using the data range of entire database available.


7/27/2019 CH14MAN

17/20

SOLUTIONS TO EXERCISES

E14-1 Organization Structure and Regulatory Authority of the SEC

[CMA Adapted]

1. c

2. b

3. b

4. d

5. a

6. d

7. d

E14-2 Role of SEC in Establishing Disclosure Standards [CMA Adapted]

1. e

2. d

3. a

4. c

5. c

6. e

7. b

8. a

9. c

10. e

E14-3 Registration of New Securities [CMA Adapted]

1. e

2. c

3. b


7/27/2019 CH14MAN

18/20

E14-4 Reporting Requirements of the SEC [CMA Adapted]

1. a

2. c

3. b

4. e

5. d

6. e

7. b

8. d

E14-5 Corporate Governance [CMA Adapted]

1. a

2. e

3. a

4. b

5. c

6. b

7. e


7/27/2019 CH14MAN

19/20

E14-6 Application of Securities Act of 1933 [CMA Adapted]

The impact of the registration requirements of the Securities Act of 1933 on each

of the proposals is as follows:

The offering of the participation units in the citrus groves, although ostensibly

the sale of an interest in land, constitutes an offer to sell, or the sale of,

securities within the meaning of section 2 of the Securities Act of 1933. Although

land itself is not a security, the offering of the land in conjunction with a

management contract has been held to constitute the offering of a security. Since

interstate commerce and communications are to be used and since there is no

apparent transactional exemption available, a registration under the 1933 act is

required. Whatever hope there was of an intrastate offering exclusion is dashed by

the fact that the units will be offered and sold in two states.

The short-term borrowings evidenced by the promissory notes of Various Enterprises

are exempt from registration. This exemption from categorization as a security for

purposes of registration under the act applies to commercial paper such as notes,

drafts, checks, and similar paper arising out of a current transaction that have a

maturity not exceeding nine months. In addition, the private placement exemption is

applicable.

If Various is deemed to be a controlling person insofar as Resistance is concerned,

it must register the securities in question before it can legally sell them. The

Securities Act of 1933 provides in connection with its definition of the term

underwriter, that, the term issuer shall include in addition to an issuer, any

person directly or indirectly controlling or controlled by the issuer, or any

person under direct or indirect common control with the issuer.

Securities Act rule 405(f) further defines the term control. It states that the

term control... means the possession, direct or indirect, of the power to direct

or cause the direction of the policies of a person, whether through the ownership

of voting securities, by contract, or otherwise. It is obvious that control as

defined is a question of fact. In general, a controlling person has the power toinfluence the management and policies of the issuer. If any individual is an

officer, director, or member of the executive committee, a low percentage of stock

would suffice. Actual or practical control is sufficient and the power to exercise

control will also be sufficient even if it is not exercised. Stock ownership is

looked to and majority ownership naturally constitutes control. Although ownership

of 17 percent of the stock is certainly not conclusive, it is a substantial block

of stock and, if any of the above factors is also present, it would be most likely

that Various would be a controlling person. Thus, although not the issuer of the

stock, it would need to register the securities. This resembles a secondary

offering of a large block by the owners of the corporation. This sale through the

brokers will in no way insulate the transaction from registration.


7/27/2019 CH14MAN

20/20

(Page Intentionally Left Blank)

McGraw-Hill/Irwin

Documents

CH14MAN