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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. 2. Regulation S-X prescribes the form and content of the financial statements that are included in the various 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 is having a wideranging 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. 1. This five-member board is appointed by the SEC and funded by fees assessed against publicly traded companies.
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2. 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. B. All accounting firms that audit companies with securities that are publicly traded must register with the Public Company Accounting Oversight Board. 1. This registration process allows the new board to gather considerable information from the public accounting firms. 2. All registered firms are subject to inspection by the Public Company Accounting Oversight Board as often as each year. 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. 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. III. Several methods can be used by the SEC to affect generally accepted accounting principles in the United States. A. Additional disclosure requirements. B. Moratorium on specific accounting practices. C. Challenging individual statements and other reporting by companies filing with the SEC. D. Overruling the FASB (as shown by the rejection of SFAS 19). IV. Companies that offer securities for sale to the public must meet a number of filing requirements monitored by the SEC. A. Registration statements are required prior to the issuance of any new security. 1. Depending on specific circumstances, specified forms are required for this purpose (including Forms S-1, S-3, and SB-2). 2. After completing the appropriate registration form, a company will normally receive a letter of comments from the SEC indicating changes or explanations that are requested. 3. Unless exempt from registration, securities cannot be sold until the registration statement is made effective by the SEC. 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: 1. Form 10-K is an annual report presenting the company's activities and financial position.
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2. Form 10-Q contains condensed interim financial statements. 3. Form 8-K discloses the occurrence of a unique or significant happening. 4. A proxy statement (Form 14A) solicits voting power to be used at stockholders' meetings. 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.

Learning Objectives
Having completed Chapter 12 of this textbook, "Financial Reporting and the Securities and Exchange Commission," students should be able to fulfill each of the following learning objectives: 1. Understand the essential role that the availability of information plays in stimulating the capital markets in the United States. 2. Describe the responsibilities and objectives of the Securities and Exchange Commission (SEC). 3. Briefly identify the various securities laws currently enforced by the SEC. 4. Indicate the purposes of Regulation S-K and Regulation S-X. 5. Discuss the methods by which the SEC has applied its authority over financial reporting in this country. 6. Identify the major provisions of the Sarbanes-Oxley Act of 2002 and describe how this legislation is impacting and will continue to impact the public accounting profession in the future. 7. Describe the purpose and general content of requiring registration statements. 8. Identify the role of a letter of comments within the registration process. 9. List several types of securities that are normally exempt from formal SEC registration requirements. 10. Indicate the contents and purpose of a prospectus. 11. Identify the following periodic filings made with the SEC: Form 10-Q, Form 10-K, Form 8-K, and proxy statements. 12. Understand how EDGAR can be utilized by investors. 13. Locate a companys latest financial statements and SEC filings using EDGAR.

Answer to Discussion Question

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Is the Disclosure Worth the Cost? 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. 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 is a staggering figure. 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. 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 actual impact on the amount of investments that are made and the distribution of these funds to the companies in the country? 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 thirty (30) 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.

Answers to Questions
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. 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
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as playing a role in creating an environment where such practices were allowed to take place. 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: 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.

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. 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. 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. 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. 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.

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9. "Regulation S-K" establishes disclosure and other reporting requirements for the nonfinancial information that is contained in filings with the SEC. 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. 11. The Securities and Exchange Commission is composed of more than a dozen divisions and major offices. These include the following: Division of Corporation Financeensures that standards for reporting and disclosure are followed. Division of Market Regulationregulates national securities exchanges and investment brokers and dealers. Division of Enforcementsupervises investigations and directs enforcement activities. Office of the Chief Accountantresponsible for accounting and auditing matters in connection with the securities laws. Office of Compliance Inspections and Examinationsverifies compliance by brokers, dealers, and investment companies. 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. 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. 14. The goals of the SEC are many. However, the most prominent goals are as follows: Ensuring that full and fair information is disclosed to all investors before securities can be exchanged. Prohibiting the use of materially misstated information. Preventing the misuse of information, especially by parties inside of the company. Regulating the operation of securities markets. 15. Information to be included in proxy solicitation material includes the following data: Five-year summary of operations including sales, total assets, income from continuing operations, and cash dividends per share. Description of business activities. Three-year summary of industry segments, export sales, and foreign and domestic operations. A list of the directors of the company and its executive officers. Market price of the company's common stock for each quarterly period within the two most recent years. Restrictions on the company's ability to continue dividend payments. Management's discussion and analysis of financial conditions, changes in financial condition, and results of operations. All nonaudit services provided by the company's independent auditors. Statement as to whether the board of directors approved all nonaudit work of the independent auditors. Percentage of nonaudit fees paid to the independent auditors in relation to total annual audit fees.
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Individual nonaudit fees that are larger than 3 percent of the annual audit fee. 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. 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. 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. 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. 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. 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. 21. Disclosure of sufficient information Registration Statement disclosure - is required by the Securities Act of 1933.

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.

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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. 23. Revenues are raised by the SEC through a registration fee for shares being initially issued. In 1999, this fee was .0264 of 1 percent of the value of the securities offered. 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: Form S-1 which is used by new registrants or by companies that have filed with the SEC for less than 36 months; 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. 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. 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. 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 changes and additional disclosures that the SEC feels are necessary before the registration statement can be made effective. 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. 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: Private placements to a limited number of sophisticated investors; Securities issued to current stockholders without a commission being paid (usually a stock dividend); Securities issued by nonprofit organizations; Small offerings of no more than $5 million; Offerings of no more than $5 million made to 35 or fewer purchasers (and an unlimited number of accredited investors). 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
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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. The securities can also be issued to an unlimited number of accredited investors (such as banks, insurance companies, and individuals with a net worth of more than $1 million). General solicitation is not permitted. 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. 32. A wrap around 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. 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: resignation of a director; change in control of the company; acquisition or disposition of assets; changes in independent accountants; bankruptcy or receivership. 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. 35. The Form 10-K is an annual report (financial statements and related information) whereas the Form 10-Q contains condensed interim financial statements. 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.

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Answers to Problems 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. 2. B Remember that regulation S-X focuses upon financial information disclosure. 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. 4. A Remember that the 1933 Act deals with Registration and the 1934 Act deals with Regulation. 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. 6. C The SEC appoints the five (5) PCAOB members. 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. 8. A The 1933 Act deals with the requirements for registration of a security prior to its initial offering. 9. D S-3 is the form for registering securities if / when the issuer already has a significant public market following. 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. 11. C Recall that the letter of comments / deficiency letter relate to the SECs response subsequent to an issuers filing of a Registration Statement. 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. 13. A - Recall that the letter of comments / deficiency letter relate to the SECs response subsequent to an issuers filing of a Registration Statement. 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. 15. C Smaller public offerings of less than $5 million may be exempt from registration, however, $5.9 million exceeds this threshold. 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.
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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. 18. C EDGAR = Electronic Data Gathering Analysis and Retrieval system. 19. (20 Minutes) (Series of questions about securities regulations). 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. 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. c. Letter of DeficienciesA 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. 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. 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. 20. (20 Minutes) (Discussion of the Securities Act of 1933 and the Securities Exchange Act of 1934) 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: Companies were required to supply adequate information to potential buyers before a new security could be issued. Companies having publicly traded securities were required to maintain an adequate and continual flow of information to the public. Stock markets were to be regulated.
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Manipulation of stock market prices was to be eliminated. The use of inside information by corporate officials and directors was made Illegal. 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. 21. (15 Minutes) (Description of the registration process) 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 document, the prospectus, must be made available to any potential buyer of the new security. 22. (10 Minutes) (Discussion of the SEC's influence on generally accepted accounting principles) 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
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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. 23. (10 Minutes) (Listing of forms that are filed with the SEC on a regular periodic basis) 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 most commonly encountered. Form 10-K is an annual report filed shortly after a company's year-end. 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. 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. Proxy statements (Form 14A) are requests for the right to cast a stockholder's votes at annual (or other) meetings. Included in the 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. 24. (5 Minutes) (Describe the forms used to file with SEC for registration purposes) Some of the most commonly used forms for registering securities to be offered to the public are as follows: 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. Form S-3for larger companies that already have a significant following in the stock market. Form S-4for securities issued in connection with business combinations. Form S-8for securities issued in connection with employee stock plans. Form S-11for securities issued by various real estate companies. Form SB-1used by small businesses to register up to $10 million of securities.
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Form SB-2for small businesses. Form F-3for a foreign issuer. 25. (10 Minutes) (Discussions of the Form 8-K and proxy statements) 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. 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: an annual report, a disclosure of all matters that will be voted upon at the meeting, and an identification of the party or parties making the solicitation. 26. (10 Minutes) (Describe responsibilities of the Public Company Accounting Oversight Board) 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. The PCAOB will now be 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. 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. The PCAOB must periodically inspect the work of each of the registered accounting firms. The depth and breadth of this inspection will ultimately
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probably 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. 27. (20 Minutes) (Discussion of financial reporting and the SEC) 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. b. Wrap around 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. 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. 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. e. Integrated disclosure systemthe use of information that is being given to stockholders to meet the filing requirements of the SEC. 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. 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. 28. (10 Minutes) (Listing of organizations that are exempt from the registration requirements of the SEC) Governments Banks Savings and loan associations Companies that restrict the exchange of their securities to within one state Companies that restrict an issuance to its own stockholders where no commission is paid to solicit the exchange Nonprofit organizations Companies that make small offerings of no more than $5 million (although a Regulation A offering circular must still be filed) Companies that make offerings of no more than $1 million to any number of investors within a 12-month period. Companies that make small offerings of no more than $5 million to 35 or fewer purchasers and an unlimited number of accredited investors. Companies making private placements to no more than 35 sophisticated investors.
McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e The McGraw-Hill Companies, Inc., 2009 12-15

Develop Your Skills RESEARCH CASE 1 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 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 report on in connection with this question: Where does the company have to be legally incorporated? (The U.S., Canada, or one of the territories or possessions of the U.S.) What is the total amount that can be received for the securities being issued? (Not more than $5 million) When both cash and non-cash consideration are received, how is the total amount of consideration determined? (It is based on the cash price) What filing must be made with the SEC? (In most cases, a Form 1-A. The student can click on the link and see a complete copy of 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) 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. RESEARCH CASE 2 The Alpha Telcom 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.
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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. 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.

ANALYSIS CASE 1 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. The student may actually be overwhelmed by the amount of filings that a company must make with the SEC. For example, a search for Ford Motor Company would display more than fifty (50) filings in just the first three (3) months of 2007. a. 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 publicityrelated filings. The specific content of the 8-K each student locates will depend on when the student completes the case analysis. b. A further investigation of the Ford filings leads to a Form 10-K issued on February 28, 2007, that contains many attachments including the annual report for 2006. This Form 10-K provides extensive information to supplement the data normally reported to shareholders. c. Finally, a definitive proxy statement can be located for Ford (DEF 14-A), as of April 7, 2006) that contains (among other information) the following letter:

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April 7, 2006 DEAR SHAREHOLDERS: Our 2006 annual meeting of shareholders will be held at the Hotel du Pont, 100 W. 11th Street, Wilmington, Delaware, on Thursday, May 11, 2006. The annual meeting will begin promptly at 9:00 a.m., Eastern Time. If you plan to attend the meeting, please see the instructions on page 4. Please read these materials so that youll know what we plan to do at the meeting. Also, please either sign and return the accompanying proxy card in the postage-paid envelope or instruct us by telephone or via the Internet as to how you would like your shares voted. This way, your shares will be voted as you direct even if you cant attend the meeting. Instructions on how to vote your shares by telephone or via the Internet are on the proxy card enclosed with this proxy statement.

WILLIAM CLAY FORD, JR. Chairman of the Board Whether or not you plan to attend the meeting, please provide your proxy by calling the toll-free telephone number, using the Internet, or filling in, signing, dating, and promptly mailing the accompanying proxy card in the enclosed envelope. This is the kind of information that students often have not had the opportunity to access unless they have explored the SEC web site. Communication Case 1 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. 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
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consider what services it can offer to the new client in light of the SarbanesOxley independence requirements. The student will most likely wish to consider and incorporate the following provisions of the Act. 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.

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.

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