Chapter 14

SEC
Reporting
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 14-1

Understand the SEC’s

structure and regulatory
authority.

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 SEC

 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 investments
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 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
Exchange

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 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
1934

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 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
information
 Created the Securities and Exchange Commission and
assigned it the responsibility of administering both the
1933 and 1934 acts

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 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

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 EDGAR System

 EDGAR (Electronic Data Gathering,

Analysis, and Retrieval)
 An electronic filing system developed by the SEC
 Under this system, firms electronically file
directly by using computers, facilitating the data
transfer and making public data more quickly
available

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 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 States

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 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
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 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
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 Securities and Exchange Commission

 Organizational Structure of the SEC

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 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
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 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
SEC
 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
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 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

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The Regulatory Structure

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The Regulatory Structure

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Practice Quiz Question #1

Which of the following statements is true

about the SEC?
a. The SEC was created in response to the
Korean War in the mid-1950s.
b. The SEC has the legal responsibility to
regulate trades of securities
c. The SEC’s role is to ensure full and fair
disclosure and it guarantees investments.
d. The SEC is managed directly by the U.S.
Vice President.
e. Staff Accounting Bulletins (SABs) allow
the SEC staff to make announcements
regarding government social events.
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Learning Objective 14-2

Understand the process of

registering securities within
the SEC.

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 Issuing Securities: The Registration Process
 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
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 Issuing Securities: The Registration Process

 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
organizations
 The antifraud provisions of the securities acts
still apply
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 Issuing Securities: The Registration Process

 Small issues under the SEC’s Regulation A

for issuances up to $5,000,000 within a
12-month 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
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 Issuing Securities: The Registration Process

 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 investors”
 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 investors
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 Issuing Securities: The Registration Process

 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

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 Issuing Securities: The Registration Process

 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:
 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
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 Issuing Securities: The Registration Process

 The Registration Statement

 Form S-1 has two different levels of disclosure
 Part I: “Prospectus,” is intended primarily for
investors
 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
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 Issuing Securities: The Registration Process

 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

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 Issuing Securities: The Registration Process

 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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 Issuing Securities: The Registration Process

 SEC review and public offering

 The company prepares a “tombstone ad” in the
business press to inform investors of the
upcoming offering
 The time period between the initial decision to
offer securities and the actual sale may not
exceed 120 days

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 Issuing Securities: The Registration Process

 Shelf registration rule:

 For large, established companies with other
issues of stock already actively traded
 These companies may file a registration
statement with the SEC for a stock issue that may
be “brought off the shelf ” and, with the aid of an
underwriter, updated within a very short time,
usually two to three days

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 Issuing Securities: The Registration Process

 Accountants’ legal liability in the

registration process
 Under section 11 of the 1933 act, accountants are
liable for any materially false or misleading
information to the effective date of the registration
statement
 The underwriters handling the sale of the securities
often require a “comfort letter” from the registrant’s
public accountants for the period between the filing
date and the effective date
 This letter provides additional evidence that the
public accountant has not found any adverse
financial changes since the filing date
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Practice Quiz Question #2

Which of the following is not a step in the

registration process?
a. The company selects and underwriter.
b. The company prepares a registration
statement.
c. The SEC reviews the registration
statement.
d. The SEC’s Chief Accountant signs a
letter of attestation regarding the
offering.
e. The company begins selling securities.

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Learning Objective 14-3

Understand periodic
reporting requirements.

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 Periodic Reporting Requirements

 Companies with more than $10 million in

assets and whose securities are held by
more than 500 persons must file annual
and other periodic reports as updates on
their economic activities
 The three basic forms used for this
updating are
 Form 10-K,
 Form 10-Q, and
 Form 8-K
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 Periodic Reporting Requirements

 Form 10-K is the annual filing to the SEC

 “Accelerated filers” must file their Form 10-K
within 60 days after the end of the company’s
fiscal year
 Small businesses, and others who do not meet
the requirements for an accelerated filer, have
until 90 days after the end of their fiscal years

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 Periodic Reporting Requirements

 Form 10-K has four parts

 Parts I, II, and III include:
 The management’s discussion and analysis
 The audited financial statements and footnotes
 The report by management on the internal
control structure and the assessment of the
effectiveness of those controls
 The auditor’s opinion
 At least five years of condensed financial
information disclosures
 Part IV contains additional schedules and
exhibits
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 Periodic Reporting Requirements

 Form 10-Q is the quarterly report to the

SEC
 Accelerated filers must file a Form 10-Q within
35 days after the end of each of their first three
quarters
 Other companies must file within 45 days after
the end of each of their first three quarters
 No Form 10-Q is filed for the fourth quarter
because that is when the Form 10-K is filed

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 Periodic Reporting Requirements

 Form 10-Q has two parts

 Part I includes comparative financial statements
prepared in accordance with ASC 270 and ASC
740
 Part II is an update on significant matters
occurring since the last quarter
 Form 8-K is used to disclose unscheduled
material events
 Companies must file a Form 8-K within four
business days of the occurrence of a “triggering
event”
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 Periodic Reporting Requirements

 Schedule 13D
 Filed by those who acquire a beneficial ownership of
more than 5 percent of a class of registered equity
securities and must be filed within 10 days after such an
acquisition
 Beneficial ownership - Directly or indirectly having the
power to vote the shares or investment power to sell the
security
 Proxy statements
 Materials submitted to shareholders for votes on
corporate matters
 In many cases, voting on these matters takes place at the
annual meeting but it may also occur at a special meeting
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 Periodic Reporting Requirements

 Accountants’ legal liability in periodic

reporting
 The 1934 Securities Exchange Act provides for a
limited level of legal exposure from involvement
in the preparation and filing of periodic reports
 Civil liability is imposed for filing materially false
or misleading statements
 Accountants are provided with due diligence
defences

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Practice Quiz Question #3

Which of the following is not one of the

three required disclosures of publicly
traded companies?
a. Form 10-K
b. Form 10-Q
c. Form 8-K
d. Form 8-Q

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Learning Objective 14-4

Understand requirements for

management reporting laws.

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 Foreign Corrupt Practices Act of 1977

 Congress passed the Foreign Corrupt

Practices Act of 1977 (FCPA) as a major
amendment to the Securities Exchange
Act of 1934
 The FCPA has two major sections:
 Part I prohibits foreign bribes
 Part II requires publicly held companies to
maintain an adequate system of internal control
and accurate records

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 Sarbanes-Oxley Act of 2002

 Signed into law on July 30, 2002

 Gained impetus after the revelations about
accounting and financial mismanagement at
Enron, WorldCom, and others
 The legislation (broadly known as SOX) has a
number of major implications for accountants

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 Sarbanes-Oxley Act – Major Sections
 Title I: Public Company Accounting Oversight Board
 Title II: Auditor Independence
 Title III: Corporate Responsibility
 Title IV: Enhanced Financial Disclosures
 Title V: Analyst Conflicts of Interest
 Title VI: Commission Resources and Authority
 Title VII: Studies and Reports
 Title VIII: Corporate and Criminal Fraud Accountability
 Title IX: White-Collar Crime Penalty Enhancements
 Title X: Sense of Congress Regarding Corporate Tax
Returns
 Title XI: Corporate Fraud and Accountability

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Practice Quiz Question #4

Which of the following statements is NOT

true about management reporting laws?
a. The Foreign Corrupt Practices Act of
1977 (FCPA) is a major amendment to
the Securities Exchange Act of 1934.
b. The FCPA prohibits foreign bribes and
requires internal controls.
c. The Sarbanes-Oxley Act of 2002 (SOX)
was enacted due to suspected fraud of
Microsoft Inc. executives.
d. SOX requires regular, detailed internal
control testing.
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Learning Objective 14-5

Understand disclosure
requirements.

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 Disclosure Requirements

 Management Discussion and Analysis

 MD&A of a company’s financial condition and
results of operations is part of the basic
information package required in all major filings
with the SEC
 The items now required in the MD&A are:
liquidity, capital resources, results of operations,
off-balance sheet arrangements, tabular
disclosure of contractual obligations

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 Disclosure Requirements

 Pro forma disclosures

 Essentially “what-if ” financial presentations
often taking the form of summarized financial
statements
 They show the effects of major transactions that
occur after the end of the fiscal period or that
have occurred during the year but are not fully
reflected in the company’s historical cost
financial statements

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Practice Quiz Question #5

Which of the following is true about

additional financial disclosures?
a. MD&A stands for “Management Disclosure
and Admissions.”
b. MD&A is required in all major SEC filings.
c. Pro forma disclosures are “what-if ”
financial presentations often taking the
form of summarized financial statements .
d. Pro forma disclosures show the effects of
major transactions that have occurred
during the year but are not reflected in the
financial statements.
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Conclusion

The End

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