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Advanced financial accounting by baker chapter 14

SEC Reporting


© 2009 The McGraw-Hill Companies, Inc. All rights reserved.


The Securities and Exchange Commission
(SEC) is an independent federal agency
created in 1934 responsible for regulating
securities markets
The ability of companies to raise capital in
the stock markets and the high trading
volumes are indications of the SEC’s
success in maintaining an effective

marketplace for companies issuing
securities and for investors seeking capital

History of Securities Regulation

Thirteenth century – King Edward
establishes a Court of Aldermen to regulate
security trades in London
Eighteenth century – England’s Parliament
passed several acts (the Bubble Acts), to
control questionable security schemes
1790 – Creation of the New York Stock


History of Securities Regulation

1911 – States began passing what were
called “blue sky laws” to regulate the
offering of securities by companies which
did not have a sound financial base
1920s – Era of heavy stock speculation by
many individuals
The Great Depression
The Federal Securities Acts of 1933 and

History of Securities Regulation

The Securities Act of 1933

Regulated the initial distribution of security issues by
requiring companies to make “full and fair” disclosure
of their financial affairs before their securities could be
offered to the public

The Securities Exchange Act of 1934

Required all companies whose stocks were traded on
a stock exchange to periodically update their financial
Created the Securities and Exchange Commission
and assigned it the responsibility of administering both
the 1933 and 1934 acts

History of Securities Regulation

The SEC has the legal responsibility to
regulate trades of securities and to
determine the types of financial disclosures
that a publicly held company must make
The SEC’s role is to ensure full and fair
disclosure; it does not guarantee the
investment merits of any security


EDGAR System

EDGAR (Electronic Data Gathering,
Analysis, and Retrieval)
– An electronic filing system developed by the
– Under this system, firms electronically file
directly by using computers, facilitating the
data transfer and making public data more
quickly available


International Harmonization of Accounting
Standards for Public Offerings

The International Accounting Standards
Board (IASB) is working with the Financial
Accounting Standards Board (FASB) to
converge on a uniform set of accounting
and financial reporting standards that can
be used by all companies seeking financing
through any of the world’s major stock
markets, including those of the United

International Harmonization of Accounting
Standards for Public Offerings

In 2007, the SEC published Securities Act Release
No. 33-8879

Under this, financial statements from foreign private
issuers will be accepted by the SEC without
reconciliation to U.S. GAAP, if they are prepared using
IFRSs as issued by the IASB

Securities Act Release No. 33-8831

A Concept Release
If U.S. issuers are allowed to use IFRSs in their filings
with the SEC, multinational U.S. companies operating
in several countries could use just one set of
accounting and financial reporting standards for all of
their global operations

Securities and Exchange Commission

Organizational structure

Division of Corporation Finance – Develops and
administers the disclosure requirements for the
securities acts and reviews all registration statements
and other issue-oriented disclosures
Division of Enforcement – Directs the SEC’s
enforcement actions
Division of Investment Management – Regulates
investment advisers and investment companies
Division of Market Regulation – Regulates national
securities exchanges, brokers, and dealers of

Securities and Exchange Commission

Organizational Structure of the SEC


Securities and Exchange Commission

Laws administered by the SEC

Public Utility Holding Company Act of 1935
Trust Indenture Act of 1939
Investment Company Act of 1940
Investment Advisors Act of 1940
Securities Investor Protection Act of 1970
Sarbanes-Oxley Act of 2002

The SEC is often asked for assistance in the
administration of two other major laws:

Foreign Corrupt Practices Act of 1977
Federal Bankruptcy Acts

Securities and Exchange Commission

The regulatory structure
– Regulation S-X and Regulation S-K, govern
the preparation of financial statements and
associated disclosures made in reports to the
– Regulation S-X presents the rules for
preparing financial statements, footnotes, and
the auditor’s report
– Regulation S-K covers all nonfinancial items,
such as management’s discussion and
analysis of the company’s operations and
financial position

Securities and Exchange Commission

The regulatory structure
– The Accounting and Auditing Enforcement
Releases (AAERs) present the results of
enforcement actions taken against
accountants, brokers, and other participants in
the filing process
– The Staff Accounting Bulletins (SABs) allow
the SEC staff to make announcements on
technical issues with which it is concerned as
a result of reviews of SEC filings

The Regulatory Structure


The Regulatory Structure


Issuing Securities: The Registration

Companies wishing to sell debt or stock securities
in interstate offerings to the general public are
generally required by the Securities Act of 1933 to
register those securities with the SEC

The basic financial statements required are:

Two years of balance sheets
Three years of statements of income,
Three years of statements of cash flows
Three years of statements of shareholders’ equity

Prior years’ statements are presented on a
comparative basis with those for the current period
The SEC requires at least five years of selected
financial information presenting key numbers

Issuing Securities: The Registration

A number of types of securities and securities transactions are
exempt from registration:
– Commercial paper with a maturity of nine months or less
– Intrastate issues in which the securities are offered and sold
only within one state
– Securities exchanged by an issuer exclusively with its existing
shareholders with no commission charged
– Issuances of securities by governments, banks, savings and
loan associations, farmers, co-ops, and common carriers
regulated by the Interstate Commerce Commission
– Securities of nonprofit religious, educational, or charitable
The antifraud provisions of the securities acts still apply


Issuing Securities: The Registration

Small issues under the SEC’s Regulation A
for issuances up to $5,000,000 within a 12month period can be exempt if there is a
notice filed with the SEC and an “offering
circular” containing financial and other
information provided to the persons to
whom the offer is made
Some required disclosures of financial
statements and other financial information
fall under Regulation A

Issuing Securities: The Registration

Regulation D presents three exemptions from full
registration requirements for private placements:

Rule 504 exempts small issuances up to $1,000,000
within a 12-month period to any number of investors
Rule 505 exempts issuances up to $5,000,000 within
a 12-month period

The sales can be made to up to 35 “unaccredited
investors” and to an unlimited number of “accredited

Rule 506 allows private placements of an unlimited
amount of securities and applies, in general, the same
rules of Rule 505 except the maximum of 35
unaccredited investors must be sophisticated

Issuing Securities: The Registration

Offering process begins with the selection
of an investment banker (“underwriter”)
– Underwriter provides marketing information
and directs the distribution of the securities
– The underwriting agreement specifies such
items as the underwriter’s responsibilities and
the final disposition of any unsold securities


Issuing Securities: The Registration

The Registration Statement

The process of public offerings of securities begins
with the preparation of the registration statement
The company must select one from among
approximately 20 different forms the SEC currently
has for registering securities
The most common are:

Form S-1: The most comprehensive registration statement
Form S-2: An abbreviated form for present registrants who
have other publicly traded stock
Form S-3: A brief form available for large, established
registrants whose stock has been trading for several years

Issuing Securities: The Registration
– Form S-1 has two different levels of disclosure

Part I: “Prospectus,” is intended primarily for
Part II includes more detailed information

– The statement must be signed by the principal
executive, financial, and accounting officers,
as well as a majority of the company’s board
of directors
– The company then submits its registration
statement to an SEC review by the Division of
Corporation Finance

Issuing Securities: The Registration

SEC review and public offering
– Most first-time registrants receive a
“customary review,” which is a thorough
examination by the SEC that may result in:

Acceptance, or
A comment letter specifying the deficiencies that
must be corrected

– Established companies that already have
stock widely traded generally are subject to a
summary review or a cursory review

Issuing Securities: The Registration

SEC review and public offering

Once the registration statement becomes effective,
the company may begin selling securities to the public
This review period is 20 days unless the company
receives a comment letter from the SEC
Between the time the registration statement is
presented to the SEC and its effective date, the
company may issue a preliminary prospectus (a red
herring prospectus), which provides tentative
information to investors about an upcoming issue


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