ISMChap012

Chapter 12 - Financial Reporting and the Securities and Exchange Commission
CHAPTER 12
FINANCIAL REPORTING AND THE SECURITIES AND
EXCHANGE COMMISSION
Chapter Outline
I. In the United States, the Securities and Exchange Commission (SEC), created by Act of
Congress, is responsible for ensuring that complete and reliable information concerning
publicly traded securities is available to investors.
A. Although the SEC regulates requirements created by many legislative acts, the most
significant are the Securities Act of 1933, the Securities Exchange Act of 1934, and the
Sarbanes-Oxley Act of 2002.
B. The SEC has sought to accomplish its objectives by working to achieve several goals
that include:
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

managements discussion of the issuers 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
official guidance.
E. The SEC's integrated disclosure system requires that most information that is reported to
the SEC must also go to the company's stockholders at various times throughout the
year.
II. As a direct result of the corporate accounting scandals exposed in 2001 and 2002,
Congress passed the Sarbanes-Oxley Act of 2002. This legislation has had a wide-
ranging impact on corporate financial reporting and the accounting profession as a
whole.
A. One of the most important results of this act is the creation of the Public Company
Accounting Oversight Board.
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1. This five-member board is appointed by the SEC and funded by fees assessed
against publicly traded companies.
2.
3. The board has been given the authority to enforce auditing, quality control, and
independence standards. Such power reduces the accounting professions ability to
regulate itself as it has done in the past seven decades.
4.
B. All accounting firms that audit companies with securities that are publicly traded must
register with the Public Company Accounting Oversight Board.
1.
2. This registration process allows the new board to gather considerable information
from the public accounting firms.
3.
4. All registered firms are subject to inspection by the Public Company Accounting
Oversight Board as often as each year.
5.
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
independence of the auditing profession.
1.
D. The Sarbanes-Oxley Act also requires the audit committee of a companys Board of
Directors to be made up of individuals who are independent of the management. The
audit committee is now responsible for the appointment and compensation of the
independent auditors.
1.
E. Due to additional financial scandals, Congress supplemented Sarbanes-Oxley with The
Wall Street Reform and Consumer Protection Act of 2010 to expand the federal
governments role in regulating corporate governance.
1.
III. Several methods can be used by the SEC to affect generally accepted accounting
principles in the United States.
2.
3.
4. A. Additional disclosure requirements.
5.
6.
7. B. Moratorium on specific accounting practices.
8.
9.
10. C. Challenging individual statements and other reporting by companies filing
with the SEC.
11.
12.
13. D. Overruling the FASB (as shown by the rejection of SFAS 19).
14.
IV. Companies that offer securities for sale to the public must meet a number of filing
requirements monitored by the SEC.
15.
16. A. Registration statements are required prior to the issuance of any new
security.
17.
18.
1. Depending on specific circumstances, specified forms are required for this purpose
(including Forms S-1 and S-3).
19.
20.
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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
that the SEC deems necessary.
21. 22.
3. Unless exempt from registration, securities cannot be sold until the registration
statement is made effective by the SEC.
23.
24.
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:
25.
26.
1. Form 10-K is an annual report presenting the company's activities and financial
position.
27.
28.
2. Form 10-Q contains condensed interim financial statements.
29.
30.
3. Form 8-K discloses the occurrence of a unique or significant happening.
31.
32.
4. A proxy statement (Form 14A) solicits voting power to be used at stockholders'
meetings.
33.
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.
34.
35.
36. Answer to Discussion Question
37.
38. Is the Disclosure Worth the Cost?
39.
40. 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 the SEC is unquestioned. That is far from reality, as
many business owners and investors will advise. Businesses often resist all
demands for additional disclosure as being unimportant and not worth the cost of
gathering the data. This is also far from reality.
41.
42. 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 decades. Could investors
have been appropriately protected for a smaller amount? This question becomes
especially relevant when coupled with the quotation from George Bentson that "I
found that there was little evidence of fraud related to financial statements in the
period prior to the enactment of the Securities Acts." The question is even more
interesting considering the accounting scandals that were discovered in 2001
and 2002. These problems took place despite the presence of the SEC. On the
other hand, perhaps the disclosure and compliance is still inadequate and the
cost of additional compliance will result in future unknown benefits.
43.
44. 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 or less money be invested? Would
the allocation of resources to the various companies throughout the country be
changed? Would investors be adequately protected? How would a new start up
company attract investors? In other words, does the work of the SEC have an
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actual impact on the amount of investments that are made and the distribution of
these funds to the companies in the country?
45.
46. Once the benefits of having an authority like the SEC are established, how
should these benefits be weighed against the cost of disclosure? Although $400
million (which was the estimated cost forty (40) years ago, is an extremely large
amount, it is a very small number in comparison to the dollars that are invested
each year in the United States. Is this just the price that must be paid to provide
comfort to the investing public? Although no resolution can be made of this
question, it should provide for a good deal of class discussion.
47.
48. Answers to Questions
49.
50. 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
public's attention by the stock market crash in 1929. Two special concerns were the
manipulation of stock market prices in part through the dissemination of inaccurate financial
data and the misuse of information by insiders, such as corporate officers and directors.
However, the passage of legislative actions also was intended to help restore public
confidence in the capital market system that was and is so essential to the American
economy.
51.
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 companys
balance sheet(s) look better. Even others were based on the use of corporate funds for
personal benefit. The reasons for such behavior can be many and varied. Personal greed
is always a motivator. However, the need of a company to report ever-increasing profits in a
stock market that was rising at an amazing speed during the mid and late 1990s put
significant pressure on many executives. In hindsight, the lack of adequate safeguards in
place at corporations, at accounting firms, and even at the SEC must also be considered as
playing a role in creating an environment where such practices were allowed to take place.
52.
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:
53.
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
Oversight Board and provide detailed information about their operations.
All registered firms must be inspected by the Oversight Board to ensure adequate quality
control in their audit work.
Registered firms are prohibited from providing certain consulting services to audit clients.
Corporate audit committees must be composed of members of the Board of Directors
who are independent of management.
Audit committees must have authority to employ and compensate the independent
auditors.
54.
4. The Sarbanes-Oxley Act gives the SEC the power and responsibility to oversee the work of
the Public Company Accounting Oversight Board. For example, the five board members are
appointed by the SEC.
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55.
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
preparation of an audit report for an issuer. An issuer is defined by the Act but normally
refers to any organization issuing securities to the public.
56.
6. Registration with the PCAOB forces the accounting firm to (a) provide a significant amount
of information about its operations, (b) have its activities open to inspection by the Public
Company Accounting Oversight Board, and (c) be subject to the rulings and authority of this
Board.
57.
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 eliminated
the accounting firms ability to provide certain non-attestation services to their audit clients.
It further required that audit committees be made up of members of an organizations Board
of Directors who are independent of management. The audit committee must then be
responsible for the appointment and compensation of the independent auditors.
58.
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,
those reviews were largely done by one firm on another and, given the accounting scandals
discovered during 2001 and 2002, apparently did not do enough to ensure the quality of
audit work. The new inspection process will be carried out under the authority of the Public
Company Accounting Oversight Board. That inspection process will attempt to create a
process that goes further in making certain that every firm does quality work on every
engagement.
59.
9. "Regulation S-K" establishes disclosure and other reporting requirements for the
nonfinancial information that is contained in filings with the SEC.
60.
61. 10. "Regulation S-X" prescribes the form and content of the financial statements, notes,
related schedules, and any other financial information included in the various reports filed
with the SEC.
62.
63. 11. The Securities and Exchange Commission is composed of more than two dozen
divisions and major offices. Some of these include the following:
64. Division of Corporation Financeensures that standards for reporting and disclosure
are followed.
65. Division of Market Regulationregulates national securities exchanges and
investment brokers and dealers.
66. Division of Enforcementsupervises investigations and directs enforcement
activities.
67. Office of the Chief Accountantresponsible for accounting and auditing matters in
connection with the securities laws.
68. Office of Compliance Inspections and Examinationsverifies compliance by brokers,
dealers, and investment companies.
69.
70. 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
that now governs the issuers registration statements.
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71.
72. 13. The Securities Exchange Act of 1934 regulates the subsequent buying and selling of
securities through brokers and exchanges. This regulation extends to virtually all aspects of
the resale of non-exempt securities.
73.
74. 14. The goals of the SEC are many. However, several prominent goals are as follows:
75. Ensuring that full and fair information is disclosed to all investors before securities
can be exchanged.
76. Prohibiting the use of materially misstated information.
77. Preventing the misuse of information, especially by parties inside of the company.
78. Regulating the operation of securities markets.
79.
80. 15. Information to be included in proxy solicitation material includes the following data:
81. Five-year summary of operations including sales, total assets, income from
continuing operations, and cash dividends per share.
82. Description of business activities.
83. Three-year summary of industry segments, export sales, and foreign and
domestic operations.
84. A list of the directors of the company and its executive officers.
85. Market price of the company's common stock for each quarterly period within the
two most recent years.
86. Restrictions on the company's ability to continue dividend payments.
87. Management's discussion and analysis of financial conditions, changes in
financial condition, and results of operations.
88. All nonaudit services provided by the company's independent auditors.
89. Statement as to whether the board of directors approved all nonaudit work of the
independent auditors.
90. Percentage of nonaudit fees paid to the independent auditors in relation to total
annual audit fees.
91. Individual nonaudit fees that are larger than 3 percent of the annual audit fee.
92.
93. 16. A proxy statement is a request made to stockholders for the right to cast their votes at
stockholders' meetings. Obviously, the control of the entire company will rest with any group
that is able to get a majority of votes through proxy agreements. Thus, the proxy statements
are important because they are used in determining the control and direction of the company.
94.
95. 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 SEC to explain changes to be made in accounting. Staff Accounting Bulletins
are also prepared to explain views on current reporting matters.
96.
97. The SEC has historically limited the use of its authority over generally accepted
accounting principles to (1) disclosure issues and (2) areas of accounting where
authoritative guidance was thought to be lacking. For example, additional disclosure of
specified matters may be required in areas deemed important by the SEC. The Commission
can also prohibit practices that are not thought to be appropriate, especially where official
guidance is not available.
98.
99. 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 Bulletins inform the financial community of views on current matters relating to
accounting and disclosure issues.
100.
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101. 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
standards was viewed as a process that should be based on theory and research rather
than being subjected to government edict. However, when the SEC overruled the FASB's
method of reporting unsuccessful exploration costs incurred by gas and oil producing
companies, several important precedents were set. The government (through the SEC)
showed that it was willing to become a more active participant in setting rules for the
accounting profession. The FASB (and other authoritative bodies) then had to be more
concerned about pleasing the government prior to establishing standards. Many concerns
were raised at the time (as well as since then) as to whether the development of generally
accepted accounting principles should be at the mercy of the federal government.
102.
103. 20. Registration statements are designed to disclose and make available adequate
relevant data about both a company and its new stock or bond (security) before the security
can be issued to the public.
104.
105. 21. Disclosure of sufficient information Registration Statement disclosure - is required
by the Securities Act of 1933.
106.
107. 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
statements and supplementary data, an explanation of the intended use of the money being
raised, a description of the capital structure of the company, and a description of the
business and the properties that it holds.
108.
109. Part II of the registration statement provides information that is needed by the SEC
staff. Part II includes data such as marketing arrangements for the new securities, the
expenses of the issuance, sales to special parties, and the like.
110.
111. 23. Revenues are raised by the SEC, in part, through a registration fee for shares being
initially issued. In 2013, this fee was $136.40 for each $1 million of security offering.
112.
113. 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:
114.
115. Form S-1 which is used by new registrants or by companies that have filed with
the SEC for less than 36 months;
116. Form S-3 which is completed by larger companies, including foreign issuers that
have filed with the SEC for a considerable length of time and have a significant following
in the stock market. Form S-3 permits incorporation of other documents by reference.
This permits inclusion of significant data concerning the Issuer, where the data has
appeared in other filings.
117.
118. 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
information that must be processed. When data is required that has already appeared in a
previous filing, the company need only refer to the earlier disclosure rather than repeat the
information.
119.
120. 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 by the parties. The conference may also be used to determine the appropriate
handling of unusual problems.
121.
122. 27. A letter of comments (which is also known as a "deficiency letter") is issued by the
SEC to a filing company after a registration statement has been reviewed. The letter lists
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changes and additional disclosures that the SEC feels are necessary before the registration
statement can be made effective.
123.
124. 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 specified information about the issuing company as well as about the new
security. For example, the financial statements of the company must be included along with
a description of current business operations. The prospectus also informs potential buyers of
the intended use of the new funds and the capital structure of the company.
125.
126. 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
governments do not come under the Securities Act of 1933. Several other offerings are also
exempt from completing formal registration statements although other legal filings may be
required:
127.
128. Private placements to a limited number of sophisticated investors;
129. Securities issued to current stockholders without a commission being paid
(usually a stock dividend or stock split);
130. Securities issued by nonprofit organizations;
131. Small offerings of no more than $5 million;
132. Offerings of no more than $5 million made to 35 or fewer purchasers
133.
134. 30. Private placements of securities have become extremely popular in recent years
because they are exempt from the registration requirements of the SEC. The securities are
issued to no more than 35 sophisticated investors (identified as having knowledge and
experience in financial matters) who already have sufficient information available to them
about the issuing company. General solicitation is not permitted.
135.
136. 31. Blue sky laws are securities laws enforced by individual states. In contrast to federal
securities laws, blue sky laws usually apply only to sales that are restricted to a particular
state.
137.
138. 32. A wraparound filing is one in which a company uses its annual report to shareholders
to fulfill reporting requirements of the SEC in a Form 10-K. Rather than repeat the
information within the Form 10-K, incorporation by reference is used to direct the SEC to the
location of the required data in the annual report.
139.
140. 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:
141. resignation of a director;
142. change in control of the company;
143. acquisition or disposition of assets;
144. changes in independent accountants;
145. bankruptcy or receivership.
146.
147. 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,
accomplishments, and concerns. In many cases, the MD&A allows the management to
share information with owners and other interested parties that would not otherwise be
conveyed.
148.
149. 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.
150.
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151. 36. The EDGAR system is intended to allow companies to file information with the SEC
in an electronic format and then make that information available on-line to all interested
parties.
152.
153. Answers to Problems
154.
155. 1. D A is false because intrastate offerings are typically exempt
from registration; B is false because the 1934 Securities Act
regulates post-issuance trading of securities; and C is false because
blue sky legislation is state law.
156.
157. 2. B Remember that regulation S-X is the regulation that

focuses upon financial information disclosure.
158.
159. 3. C Regulation S-K addresses non-financial information filed

with the SEC while Regulation S-X addresses the form and content of
financial documentation filed with the SEC.
160.
161. 4. A Remember that the 1933 Act deals with Registration and
the 1934 Act deals with Regulation.
162.
163. 5. C Not all auditing firms are required to register with the
PCAOB, only those firms that prepare, issue, or participate in the
preparation of an audit report for an issuer. Issuers do incur
additional fees as a result of SOX.
164.
165. 6. C The SEC appoints the five (5) PCAOB members.

166.
167. 7. B Selection of the auditor and approval of the related

contract, including the fees, is done by the firms audit committee.
This committee must be composed of members of the clients board
who are independent of management.
168.
169. 8. A The 1933 Act deals with the requirements for registration
of a security prior to its initial offering.
170.
171. 9. D S-3 is the form for registering securities if / when the

issuer already has a significant public market following. The issuer
will likely also file forms 8-K and 10-K, but those are not registration
statements.
172.
173. 10. D The SECs 1977 stand vis--vis oil and gas accounting
principles was a unique situation wherein the SEC overruled the
FASB as far as proper accounting treatment.
174.
175. 11. C Recall that the letter of comments / deficiency letter relate
to the SECs response subsequent to an issuers filing of a
Registration Statement.
176.
177. 12. B This is a useful approach to referencing data which has

already been provided to the SEC, or other agency, so that the data is
not redundantly produced.
178.
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179. 13. A - Recall that the letter of comments / deficiency letter relate
to the SECs response subsequent to an issuers filing of a
Registration Statement.
180.
181. 14. D The prospectus must be furnished to all potential new

security buyers and is provided to the SEC as part of the registration
statement filing.
182.
183. 15. C Smaller public offerings of less than $5 million made

within a 12-month period may be exempt from registration, however,
$5.9 million exceeds this threshold.
184.
185. 16. B A prospectus is filed only in connection with the initial

offering of a security. Therefore it is not regularly filed with the
SEC, unless the issuer is regularly issuing new securities.
186.
187. 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.
188.
189. 18. C EDGAR = Electronic Data Gathering Analysis and Retrieval

system.
190.
191. 19. (25 Minutes) (Series of questions about securities regulations).

192.
193. a. Blue Sky LawsIndividual 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.
194. b. S-8 StatementA registration statement that must be filed with the
SEC and made effective by that body before a company can issue securities
in connection with employee stock plans.
195. c. Letter of Deficiencies (also known as Deficiency Letters)A request
by the SEC for changes, explanations, or more information before a
registration statement is made effective. The Division of Corporation
Finance of the SEC reviews the registration statement and provides the
company with a letter of deficiencies so that the company will be able to
furnish the additional data needed or make the appropriate changes. This is
also referred to as a Letter of Comment or Comment Letter.
196. d. Public Company Accounting Oversight BoardThis 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 the SEC and has wide-ranging responsibilities from the
registration of accounting firms and the inspection of these same firms to
the establishment of auditing, quality control, and independence standards.
197. e. Prospectus The prospectus is the first part of a registration
statement that contains financial statements for the company and indicates
the use to be made of the money received from the sale of the securities,
the capital structure of the company, and a description of the business and
its properties. Every potential buyer of the new security must be furnished
with a prospectus.
198.
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199.
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200. 20. (25 Minutes) (Discussion of the Securities Act of 1933 and the Securities
Exchange Act of 1934)
201.
202. 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
amounts of monetary capital through the issuance of stocks and bonds. To
entice sufficient investment, public trust in the integrity of the system must be
maintained. Following the stock market crash of 1929, public confidence
reached a low level. Federal securities laws were subsequently passed in
hopes of achieving several objectives designed to restore trust in the capital
markets. Several aspects of these laws should be noted:
203.
204. Companies were required to supply adequate information to
potential buyers before a new security could be issued.
205. Companies having publicly traded securities were required to
maintain an adequate and continual flow of information to the public.
206. Stock markets were to be regulated.
207. Manipulation of stock market prices was to be eliminated.
208. The use of inside information by corporate officials and directors
was made Illegal.
209.
210. To help achieve these goals, the Securities and Exchange Commission
(SEC) 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 properly presented. Periodic filings (such as Form 10-K and
Form 10-Q) were also required of companies having securities that were
publicly traded. Because of its ability to require specific types of financial
information, the SEC has the ultimate authority to develop generally accepted
accounting principles in this country. The SEC also has the power to
investigate possible misconduct in connection with corporate reporting and to
seek prosecution where necessary.
211.
212. 21. (20 Minutes) (Description of the registration process)
213.
214. 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
have a significant following in the securities markets. Appropriate disclosures
and other required data are then prepared in accordance with Regulation S-K
and Regulation S-X. When the SEC receives the completed form, it is put
through a review. All nonfinancial and financial information are verified against
various standards. Legal aspects of the document are also checked along with
the report of the independent auditor. A letter of comments (commonly
referred to as a "deficiency letter") is prepared by the SEC to indicate changes
and added disclosures that are considered necessary. The registrant has the
right to discuss these issues with the SEC staff if company officials disagree
with any part of the letter of comments. After the SEC is satisfied that the
registration statement fulfills all rules, it is made effective. The first part of this
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document, the prospectus, must be made available to any potential buyer of

the new security.
215.
216. 22. (15 Minutes) (Discussion of the SEC's influence on generally accepted
accounting principles)
217.
218. 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
responsibility for developing generally accepted accounting principles.
Although occasionally the object of criticism, this system (theoretically)
allows accounting standards to be the result of research and study rather than
government edict. However, the SEC has often acted in accounting areas
where clear authoritative guidance was not available. In such cases, additional
disclosure may be required or the Commission can decide to restrict or even
prohibit a particular accounting procedure. The SEC did overrule in 1977 the
FASB's method of accounting for unsuccessful exploration and drilling costs
incurred by gas and oil producing companies. This action set several
important precedents. First, it reaffirmed the SEC's ability to be involved in the
standards-setting process. Second, notice was served to the FASB that the
private sector needed to make certain that the SEC was satisfied prior to
issuing new pronouncements.
219.
220. 23. (20 Minutes) (Listing of forms that are filed with the SEC on a regular
periodic basis)
221.
222. 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.
223.
224. Form 10-K is an annual report filed shortly after a company's year-
end.
225. 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.
226. Form 8-K is only filed when needed to disclose the occurrence of a
unique or significant event such as the resignation of a director, changes in
control, acquisition or disposition of assets, changes in independent
accountants, and bankruptcy. Depending upon the frequency of these
unique events, the Form 8-K may not actually be filed regularly or
periodically.
227. Proxy statements, called Schedule 14A are requests for the right to
case a stockholder's votes at annual (or other) meetings. Included in the
12-13
Education.
information that must be provided are financial statements, disclosure of

matters that are to be voted on, and an identification of the party making the
solicitation.
228.
229. 24. (10 Minutes) (Describe the forms used to file with SEC for registration
purposes)
230.
231. Some of the most commonly used forms for registering securities to be
offered to the public are as follows:
232.
233. Form S-1for 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.
234. Form S-3for larger companies that already have a significant
following in the stock market.
235. Form S-4for securities issued in connection with business
combinations.
236. Form S-8for securities issued in connection with employee
stock plans.
237. Form S-11for securities issued by various real estate
companies.
238. Form F-3for a foreign issuer.
239.
240. 25. (20 Minutes) (Discussions of the Form 8-K and proxy
statements)
241.
242. 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 discretion of the company and its management. However, the SEC does
list several circumstances that require such disclosure including the
resignation of a director, change in control of the company, acquisition or
disposition of assets, change in independent auditors, and bankruptcy.
243.
244. A proxy statement is the package of information that must accompany
the request made to a stockholder for the right to cast that owner's votes at a
stockholders' meeting. Since obtaining a significant number of proxies would
allow an individual or company to influence or control an organization, the
request for proxy rights is closely monitored by the SEC. The proxy statement
has to be filed with the SEC before being distributed and must include
specified information such as:
245. an annual report,
246. a disclosure of all matters that will be voted upon at the meeting,
and
247. an identification of the party or parties making the solicitation.
248.
249.
250. 26. (20 Minutes) (Describe responsibilities of the Public Company
Accounting Oversight Board)
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Education.
251.
252. 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.
253.
254. The PCAOB is in charge of all auditing, independence, and quality
control standards for the accounting profession. PCAOB has the legal
authority to write such rules and / or to simply oversee the work done by the
profession (through the Auditing Standards Board and the AICPA). The
ultimate authority for such rules now lies clearly with the PCAOB as illustrated
at Title I, Sec. 103(a)(1) of the Act.
255.
256. All accounting firms that prepare, issue, or participate in the
preparation of an audit report for an issuing organization will now have to
register with the 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.
257.
258. The PCAOB must periodically inspect the work of each of the registered
accounting firms. The depth and breadth of this inspection will ultimately
encompass both audit documentation and compliance with quality control
standards. Large firms may undergo annual inspection whereas smaller firms
will only be inspected every three years.
259.
260. 27. (30 Minutes) (Discussion of financial reporting and the SEC)
261.
262. a. Staff Accounting BulletinsAccording to the website (www.sec.gov)
of the Securities and Exchange Commission, Staff Accounting Bulletins
reflect the Commission staffs views regarding accounting-related
disclosure practices. They represent interpretations and policies followed
by the Division of Corporation Finance and the Office of the Chief
Accountant in administering the disclosure requirements of the federal
securities laws.
263. b. Wraparound filingthe process of using the annual report furnished
to shareholders to fulfill many of the requirements of the Form 10-K to be
filed with SEC. The company simply indicates the location of the required
information (a process known as incorporation by reference) within the
annual report.
264. c. Incorporation by referenceusing 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 part and parcel of a wrap around filing.
265. d. Division of Corporation Financea division of the SEC that
establishes standards of reporting and disclosure. This division also
reviews the registration statements that are filed with the SEC and issues
any needed letters of comments.
266. e. Integrated disclosure systemthe use of information that is being
given to stockholders to meet the filing requirements of the SEC.
12-15
Education.
267. f. Management's discussion and analysisan inclusion in the Form 10-

K that serves as the management's description of its priorities,
accomplishments, and concerns. The narrative describes the company's
past performance, present condition, and future direction.
268. g. Chief accountant of the SECthe office of the SEC that is ultimately
responsible for all accounting and auditing matters that involve the
securities laws.
269.
270. 28. (10 Minutes) (Listing of organizations that are exempt from the
registration requirements of the SEC)
271.
272. Governments
273. Banks
274. Savings and loan associations
275. Companies that restrict the exchange of their securities to within one
state
276. Companies that restrict an issuance to its own stockholders where
no commission is paid to solicit the exchange
277. Nonprofit organizations
278. Companies that make small offerings of no more than $5 million
(although a Regulation A offering circular must still be filed)
279. Companies that make offerings of no more than $1 million to any
number of investors within a 12-month period.
280. Companies that make small offerings of no more than $5 million to
35 or fewer purchasers and an unlimited number of accredited investors.
281. Companies making private placements to no more than 35
sophisticated investors.
282.
283. Develop Your Skills
284.
285. RESEARCH CASE 1 (45 Minutes)
286.
287. 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 for Conditional Small
Issue(s) Exemptions. This information covers topics such as
offering statements, offering circulars, and the filing of sales
material. The student can literally read through the entirety of
Regulation A in about fifteen (15) minutes.
288.
289. For this assignment, the student should probably focus on the
heading Scope of Exemption. This reference provides several
pages of information on the exemption from filing a registration
statement that is provided to companies by Regulation A. There are
a number of issues that the student might want to address in
connection with this question:
290.
12-16
Education.
291. Where does the company have to be legally incorporated?

(The U.S., Canada, or one of the territories or possessions of the U.S.)
292. What is the total amount that can be received for the securities
being issued? (Not more than $5 million)
293. When both cash and non-cash consideration are received,
how is the total amount of consideration determined? (It is based on the cash
price).
294. What filing must be made with the SEC? (In most cases, a
Form 1-A. Can advertisements of the securities be made? (Yes,
published ads as well as radio and television ads are allowed as long as only
specified information is included).
295.
296. If Domer Corporation is a development stage company, the
exempt provisions of Regulation A may not apply. Specifically, Reg.
Sec. 230.251 (a) (3) provides that the exemption is not available to a
development stage company that either has no specific business
plan or purpose, or has indicated that its business plan is to merge
with an unidentified company or companies. Thus Domers status
as a development stage company, depending upon the status of its
business plan, may preclude its use of the Regulation A exemption.
297.
298.
299. RESEARCH CASE 2 (30 Minutes)
300.
301. 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 students and practitioners as
courts ultimately interpret vague rules, regulations, statutes, and
definitions. As was suggested in the text, the definition of security
is very broad.
302.
303. The 1933 Securities Act defines security very broadly to
include investment contracts. Investment contracts involve: (i) an
investment of money or other consideration; (ii) for a common
enterprise or undertaking; and (iii) with the expectation of profits to
be derived from the efforts of others.
304.
305. In the instant example, the Tasch Corporation will manage the
customers enterprise, the customers are investing money, and the
customers are expecting a profit ie: the guaranteed return. A court
would very likely conclude that the service agreements constitute
an investment contract and thus a security. The next issue /
question to address is whether the Tasch Corporation can / will be
able to structure the issuance of these securities in a manner to
avoid the registration requirements.
12-17
Education.
306.
307.
308.
309.
310.
311.
312.
313. ANALYSIS CASE 1 (45 Minutes)
314.
315. 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
overwhelmed by the amount of filings that a company must make
with the SEC. For example, a search for Dell would display more
than thirty-eight (38) filings in just the first three (3) months of 2013.
316.
317. 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 merely incorporate by reference
various press releases or other publicity-related filings. The specific
content of the 8-K each student locates will depend on when the
student completes the case analysis.
318.
319. 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 contains many attachments including the
annual report for 2012. This Form 10-K provides extensive
information to supplement the data normally reported to
shareholders.
320.
321. 3. Finally, a definitive proxy statement can be located for Dell
(DEFA 14A), as of April 1, 2013.
322. This is the kind of information that students often have not
had the opportunity to access unless they have explored the SEC
web site.
323.
324.
325. Communication Case 1
326.
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Education.
327. 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.
328.
329. The first issue to consider for the Wojtysiak firm is whether it
is presently required to register with the Public Company Accounting
Oversight Board (PCAOB). It is not, however, if the Wojtysiak firm
becomes the audit firm for the new publicly traded client (and
issuer) then the firm will likely be required to register and then be
subjected to additional disclosures and inspections, most likely on a
triennial basis. Additionally, the Wojtysiak firm will need to carefully
consider what services it can offer to the new client in light of the
Sarbanes-Oxley independence requirements.
330.
331. The student will most likely wish to consider and incorporate
the following provisions of the Act.
332.
Section 102 Registration with the Board.
Section 103 Auditing, quality control, and independence standards and
rules.
Section 104 Inspections of registered public accounting firms.
Section 108 Accounting standards.
Section 201 Services outside the scope of practice of auditors.
Section 203 Audit partner rotation.
333.
334. The student should be able to write an extensive report on the impact of
Sarbanes-Oxley on the Wojtysiak firm, based on these and other provisions of the
Act.
12-19
Education.
335.
336.
337.
338.
339.
340.
341.
342.
343.
344.

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Chapter 12 - Financial Reporting and the Securities and Exchange Commission

2. Preventing the misuse of information by inside parties,

4. Prohibiting the dissemination of materially misstated information.

1. Regulation S-K establishes rules for all nonfinancial information, such as

157. 2. B Remember that regulation S-X is the regulation that

159. 3. C Regulation S-K addresses non-financial information filed

165. 6. C The SEC appoints the five (5) PCAOB members.

167. 7. B Selection of the auditor and approval of the related

171. 9. D S-3 is the form for registering securities if / when the

177. 12. B This is a useful approach to referencing data which has

181. 14. D The prospectus must be furnished to all potential new

183. 15. C Smaller public offerings of less than $5 million made

185. 16. B A prospectus is filed only in connection with the initial

187. 17. C Shelf registrations consist of registering securities in

189. 18. C EDGAR = Electronic Data Gathering Analysis and Retrieval

191. 19. (25 Minutes) (Series of questions about securities regulations).

document, the prospectus, must be made available to any potential buyer of

information that must be provided are financial statements, disclosure of

267. f. Management's discussion and analysisan inclusion in the Form 10-

291. Where does the company have to be legally incorporated?

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