Kế toán, kiểm toán - Chapter twelve: Financial reporting and the securities and exchange commission

Chapter TwelveFinancial Reporting and the Securities and Exchange CommissionCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objective 12-1Understand the origin andexpansive role of the securities and Exchange Commission.12-2Major Influence on the Development of US GAAPIndependent Agency of theFederal GovernmentEstablished by the Securities Exchange Act of 1934.Mandate is to ensure that complete and reliable information is available to investorsDirect authorityApplies to Publicly HeldCompaniesSECSecurities and Exchange Commission (SEC)12-3Deposited over $1.648 Billion of fees in U.S. Treasury in 2012Commissioners serve 5-year, staggered termsHeaded by 5 commissioners appointed by the President (with Senate consent)Only 3 of 5 can belong to the same political partyThe chairperson is usually from the same political party as the PresidentSecurities and Exchange Commission (SEC)SEC12-4Composed of four divisions and 23 offices including:Division of Corporation FinanceDivision of Investment Management Division of Trading and Markets Division of EnforcementOffice of Information Technology Office of Compliance Inspections and Examinations Office of the Chief Accountant Securities and Exchange Commission (SEC)12-5Learning Objective 12-2Describe the purpose(s) ofvarious federal securities laws.12-6Securities Exchange Act of 1934Securities Act of 1933Federal Securities LawsRegulates the initial offering of securities by a company or underwriter.Regulates the subsequent trading of securities through brokers and exchanges.The 1934 Act Established the SECSpurred by the Great Depression following the 1929 Stock Market Crash, Congress enacted:12-7Goals of the SECEnsuring full & fair disclosure to all investors.Prohibiting dissemination of materially misstated information.Preventing misuse of information by inside parties. Regulating the operation of securities markets.12-8Full and Fair DisclosureSecurities Act of 1933 New securities must be registered prior to public sale.Securities Exchange Act of 1934Requires continuous reporting by publicly traded companies. Prohibits fraudulent and unfair behavior.Public Utility Holding Company Act of 1935Requires registration of interstate holding companies of public utilities.12-9Full and Fair DisclosureTrust Indenture Act of 1939 Requires registration of indentures related to public issue of bonds, notes, etc.Investment Company Act of 1940Requires registration of investment companies.Investment Advisers Act of 1940 and Securities Investor Protection Act of 1970Requires registration of investment advisors and requires them to follow certain standards. 12-10Full and Fair DisclosureForeign Corrupt Practices Act of 1977Amends 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 increase penalties against persons who profit from illegal use of inside information.12-11Full and Fair DisclosureIn 2001 and 2002, corporate scandals shook the confidence of investors in the reliability of financial statement informationCauses included:Greed of corporate executivesFailure of corporate governanceAudit failuresUnreasonable market expectationsOverburdened SEC12-12The SEC’s Impact on Financial ReportingIn addition to audited financial statements, Rule 14c-3 of the 1934 Act requires the following to be included in proxy statements sent to shareholders: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 of the last 2 years.Restrictions on the company’s ability to pay dividends.MD&A12-13Information about the auditor to be disclosed:The SEC’s Impact on Financial ReportingAll nonaudit services provided by the independent audit firm.Whether the Board of Directors approved all nonaudit services and considered whether they would impair the auditor’s independence.The % of nonaudit fees to the total annual audit fee.Individual nonaudit fees > 3% of the annual audit fee.12-14Learning Objective 12-3Understand the Congressionalrationale for enacting theSarbanes-Oxley Act and theresponsibilities of the PublicAccounting Oversight Board.12-15Corporate Scandals Led to Sarbanes-Oxley in 2002Enron:Ken Lay received $152.7 million in the yearhis firm collapsed,zeroing out pensionsWorldCom:Improperly Added$9 Billion of IncomeAdelphia Communications’ founder “looted” the company ofover $2 Billion12-16Corporate Scandals Led to Sarbanes-Oxley in 2002Sarbanes-Oxley Act of 2002designed as a response to the corporate accounting scandals.The 2002 Act Established the Public Company Accounting Oversight Board12-17Creation of Public Company Accounting Oversight BoardSarbanes-Oxley Act of 2002 Section 101Under the oversight and enforcement authority of the SEC , the Board is charged with:Establishing auditing, quality control, and independence standards.Performing periodic inspections of registered public accounting firms.Could potentially replace the Auditing Standards Board of the AICPA.12-18Creation of Public Company Accounting Oversight BoardSarbanes-Oxley Act of 2002 Section 101 Five membersAllows only 2 of the 5 to be CPAs, past or present.Remaining 3 must NOT be accountants.The Board is funded through mandatory fees levied on all publicly traded companies.Accounting firms, domestic and foreign, must register with the Board and pay fees.Registered firms are subject to periodic inspections by the PCAOB.12-19Sarbanes-Oxley Act of 2002 Auditor IndependenceTo ensure future independence of audit firms, some previously common concurrent services are now prohibited.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.12-20Sarbanes-Oxley Act of 2002Audit CommitteesAudit Committees will also be expected to exercise more oversight in the future.The Committee is responsible for the appointment and compensation of the external auditor.The auditor now reports to the Committee instead of to management.The lead audit partner must be rotated off after five years.12-21Learning Objective 12-4Describe the SEC’s role inestablishing generally acceptedaccounting principles (GAAP).12-22SEC’s Authority over GAAPRegulation S-KEstablishes requirements for all nonfinancial information contained in SEC filings.Regulation S-XPrescribes the form and content of the financial statements, and the related notes and schedules.There are two basic documents which lay out the requirements of the SEC:12-23Congress has assigned GAAP-setting authority to the SEC.The SEC allows the FASB to set GAAP.The FASB’s standards can be overridden by the SEC.Authority only extends to publicly traded companies.SEC’s Authority Over GAAP12-24The SEC issues authoritative documents:Financial Reporting Releases (FRR’s) Supplements to Regulations S-K and S-XStaff Accounting Bulletins (SAB’s) Views on current accounting and disclosure matters.SEC’s Authority Over GAAP12-25Additional SEC AuthorityWhen deemed necessary, the SEC may:Require additional disclosureEstablish a moratorium on specific accounting practicesChallenge individual statements (forcing a specific registrant to change its filings)Overrule the FASB12-26Learning Objective 12-5Define and describe an issuer’sfilings with the Securities andExchange Commission.12-27Filings with the SECLegislation and regulations require registrants to make numerous filings including these two basic categories of filings Registration StatementsPeriodic Filings12-28SEC FeesThe SEC charges a registration fee based on the value of securities offered, $136.40 for each $1 million, a small fraction of the offering.The fees in excess of costs creates a surplus that is a source of debate:Is it a revenue source for the government?Are corporations being overcharged for registration?Is the SEC sufficiently funded?12-29Common SEC Registration Statement Forms12-30Learning Objective 12-6Describe an issuer’s registrationprocess, various formsused by the issuers, and theexemption(s) from registration.12-31Registration ProcessRegistration Statements delivered to SECReview by Div. Of Corp. FinanceA deficiency letter sent to registrantApproved after deficiencies are clearedOnce the registration is effective, the securities can be sold.Note: This process is both time-consuming and expensive.12-32Registration Requirements –General Contents ReportPART I – “Prospectus”Audited financial Statements.An explanation of the use of the proceeds.A description of the security risks.A description of the business.PART IIUsed by the SEC staff.Includes additional information about the company.12-33Offerings Exempt from SEC FilingSecurities issued by governments, banks, and S&L’sSecurities issued that are restricted to a company’s own existing shareholders.Offerings < $5 millionSecurities issued by non-profit organizationsOfferings < $1 million to be 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.12-34Form 10-QQuarterly report filed within 45 days of end of quarter.Financial statement are unaudited.Form 10-KAnnual report filed within 90 days of fiscal year-end.Includes audited financial statements.Form 8-KUsed to disclose a unique or significant happening, within 15 days of the event.Periodic Filings with the SEC12-35Proxy StatementsProxy Statements:Allow board of directors to vote on behalf of stockholders.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.Is usually accompanied by an annual report.12-36Electronic Data Gathering, Analysis, and Retrieval System - EDGARThe SEC’s “Electronic Data Gathering and Retrieval” System:Designed to reduce overwhelming paper flow into the SECAllows for public access to SEC filings and information through the Internet12-37