SEC:

Independent Agency of the Federal Government

Established by the Securities Exchange Act of 1934.
Direct authority Applies to Publicly Held Companies
Mandate is to ensure that complete and reliable information is available to investors
Major Influence on the Development of US GAAP
Headed by 5 commissioners appointed by the President with Senate consent (3/5
from same political party)
chairperson is usually same political party as the President
Commissioners serve 5-year, staggered terms
Deposited over $2.8 Billion of fees in 2010
composed of four divisions and 23 offices including the following:
The Division of Corporation
The Division of Trading and Markets
The Division of Enforcement
The Division of Investment Management
The Office of Information Technology
The Office of Compliance Inspections and Examinations
The Office of the Chief Accountant
Spurred by the Great Depression following the
1929 Stock Market Crash, Congress enacted:
1. Securities Act of 1933 Regulates the initial offering of securities by a company or
underwriter.
2. Securities Exchange Act of 1934 Regulates the subsequent trading of securities
through brokers and exchanges. ESTABLISH the SEC

SEC Goals
Ensuring full & fair disclosure to all investors.
Prohibiting dissemination of materially misstated information.
Preventing misuse of information by inside parties.
Regulating the operation of securities markets.

Full and Fair Disclosure

Foreign Corrupt Practices Act of 1977 Amends Securities Exchange Act of 1934.
Requires maintenance of accounting records and adequate internal accounting controls.
Insider Trader Sanctions Act of 1984 & Insider Trader and Securities Fraud
Enforcement Act of 1988 Increase penalties against persons who profit from illegal use of
inside information.

The SECs Impact on Financial Reporting

In addition to audited financial statements, Rule 14c-3 of the 1934 Act requires the following
to be included in proxy statements sent to shareholders:
5-year summary of operations.
Description of the business activities.
3-year summary of industry segments.
Listing of company directors and executive officers.
Market price of the common stock for each quarter of the last 2 years.
Restrictions on the companys ability to pay dividends.
MD&A
Info about auditor to be disclosed:
All nonaudit services provided by the independent audit firm.
Whether the Board of Directors approved all nonaudit services and considered
whether they would impair the auditors independence.
The % of nonaudit fees to the total annual audit fee.
 Individual nonaudit fees > 3% of the annual audit fee.
Corporate Scandals led to SOX 2002
Enron: Ken Lay received $152.7 million in the year his firm collapsed, zeroing out pensions.
WorldCom: Improperly Added $9 Billion of Income
Adelphia Communications founder looted the company of over $2 Billion
Act established PCAOB
Creation of Public Company Accounting Oversight Board
Under the oversight and enforcement authority of the SEC , the Board is charged with:
Establishing auditing, quality control, and independence standards.
Performing periodic inspections of registered public accounting firms.
Could potentially replace the Auditing Standards Board of the AICPA.
Five members
Allows only 2 of the 5 to be CPAs, past or present.
Remaining 3 must NOT be accountants.
The Board is funded through mandatory fees levied on all publicly traded companies.
Accounting firms, domestic and foreign, must register with the Board and pay fees.
Registered firms are subject to periodic inspections by the PCAOB.
To ensure future independence of audit firms, some previously common concurrent services
are now prohibited.
Bookkeeping services.
AIS design and implementation.
Appraisal or valuation services.
Internal audit outsourcing.
Management functions/Human Resource Management.
Investment advising.
Legal services or expert services.
SOX Audit Committees
expected to exercise more oversight in the future.
responsible for the appointment and compensation of the external auditor.
The auditor now reports to the Committee instead of to management.
The lead audit partner must be rotated off after five years.

SECs authority over GAAP

There are two basic documents which lay out the requirements of the SEC:
1. Regulation S-K Establishes requirements for all nonfinancial information contained
in SEC filings.
2. Regulation S-X Prescribes the form and content of the financial statements, and the
related notes and schedules.
The SEC allows the FASB to set GAAP. The FASBs standards can be overridden by the SEC.
Congress has assigned GAAP-setting authority to the SEC. Authority only extends to
publicly traded companies.
The SEC issues authoritative documents:
Financial Reporting Releases (FRRs) Supplements to Regulations S-K and S-X
Staff Accounting Bulletins (SABs) Views on current accounting and disclosure matters.

When deemed necessary, the SEC may:

Require additional disclosure
Establish a moratorium on specific accounting practices
Challenge individual statements (forcing a specific registrant to change its filings)
Overrule the FASB

Filings with SEC

Legislation and regulations require registrants to make numerous filings including these two
basic categories of filings
 Registration Statements
Periodic Filings

Common SEC Registration Statement Forms

For Description
m
S-1 Usually used by new registrants when no other form is prescribed
S-3 Used by large companies with a significant following in the stock market. Has
reduced disclosure requirements
S-4 Used for securities issued in connection with business combination transactions
S-8 Used by employee stock plans
S- Used by certain real estate companies
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Registration Process
1. Registration Statements delivered to SEC
2. Review by Div. Of Corp. Finance
3. A deficiency letter sent to registrant
4. Approved after deficiencies are cleared
5. Once the registration is effective, the securities can be sold.
Note: This process is both time-consuming and expensive.

Registration Requirements General Contents Report

PART I Prospectus
Audited financial Statements.
An explanation of the use of the proceeds.
A description of the security risks.
A description of the business.
PART II
Used by the SEC staff.
Includes additional information about the company.

Periodic Filings with SEC

Form 10-K Annual report filed within 90 days of fiscal year-end. Includes audited financial
statements.
Form 10-Q Quarterly report filed within 45 days of end of quarter. Financial statement are
unaudited.
Form 8-K Used to disclose a unique or significant happening, within 15 days of the event.

Proxy Statements:
Allow board of directors to vote on behalf of stockholders.
Must be filed with SEC 10 days prior to distribution. Needs to indicate on whose
behalf the solicitation is made.
Must disclose fully all matters that are to be voted on at the meeting.
Is usually accompanied by an annual report.

EDGAR : The SECs Electronic Data Gathering and Retrieval System

Designed to reduce overwhelming paper flow into the SEC
Allows for public access to SEC filings and information through the Internet