Advanced Chapter 12

Accounting firms required to register with the PCAOB must provide

- A list of their audit clients that qualify as an issuer - a List of all accountants participating in the audit report of any client qualifying as an issuer - annual fees received from each issuer with the amounts separated as to the audit and nonaudit services - Information about any criminal, civil, or administrative actions pending aganst the firm or any person associated with the firm. - Information regarding disagreements between the issuer and the auditing firm during the previous year.

Foreign Corrupt Practices Act (1977)

- Affects registration indirectly through amendment to the Securities Exchange Act of 1934. - This act requires the maintenance of accounting records and adequate internal accounting controls.

Information regarding the external auditor that must be disclosed

- All nonaudit services provided by the independent audit firm - A statement as to whether the board of directors or its audit committee approves all nonaudit services after considering the possibility that such services might impair the external auditors independence - The percentage of nonaudit fees to the total annual audit fee. This disclosure helps indicate the importance of the audit work to the firm versus the reward from any other services provided to the registrant - Individual nonaudit fees that are more than 3 percent of the annual audit fee.

The PCAOB

- Allows only 2 members to be accountants, past or present - Has 5 members appointed to staggered 5-year terms - Is funded from fees levied on all publicly traded companies - Enforces auditing, quality control, and independence standards and rules - Is under the oversight and enforcement authority of the SEC

Insider Trading Sanctions Act of 1984 and Insider Trading and Securities Enforcement Act of 1988

- Also affect registration indirectly. - - Increase the penalties against persons who profit from illegal use of inside information and who are associated with market manipulation and securities fraud.

Sarbanes-Oxley Act of 2002

- Designed as an answer to the numerous corporate accounting scandals that came to light in 2001 and 2002. - mandated a number of reforms to bolster corporate responsibility, strengthen disclosure, and combat fraud. - The Public Company Accounting Oversight Board (PCAOB) to oversee the accounting profession.

What is included in a prospectus

- Financial statements for the issuing company audited by an independent CPA along with appropriate supplementary date - an explanation of the intended use of the proceeds to be generated by the sale of the new securities - a description of the risks associated with the securities - A description of the business and the properties owned by the issuer

Which of the following is included in a proxy statement

- Five-year summary of operations including sales, total assets, income from continuing operations, and cash dividends per share - Description of the business activities including principal products and sources and availability of raw materials. - Three-year summary of industry segments, export sales, and foreign and domestic operations - list of company directors and executive officers - Market price of the company's common stock for each quarterly period within the two most recent fiscal years. - Any restrictions on the company's ability to continue paying dividends - Management's discussion and analysis of financial condition, changes in financial condition, and results of operations. This discussion should include liquidity, trends and significant events, causes of material changes in the financial statements, and the impact of inflation on the company.

Regulation D—Rule 505:

- Offerings of no more than $5 million made to 35 or fewer non-accredited and an unlimited number of accredited purchasers in a 12-month period. - No general solicitation is allowed for securities issued in this manner. - Unaccredited investors must still be furnished an audited balance sheet and other specified information. - Parties making purchases have to hold the securities for at least two years or lose the filing exemption.

10-Q

- Quarterly report - None needed for quarter 4 bc of 10-K - Does not have to be audited by an independent CPA - Includes Income statements, Statement of cash flow for the Y2D, Balance sheets, and MD&A

Public Utility Holding Company Act of 1935

- Requires registration of interstate holding companies of public utilities covered by this law. - This act was passed because of abuses in the 1920s in which huge, complex utility empires were created to minimize the need for equity financing.

Investment Company Act of 1940

- Requires registration of investment companies, including mutual funds, that engage in investing and trading in securities. - This act is designed in part to minimize conflicts of interest that arise with fund management.

Trust Indenture Act of 1939

- Requires registration of trust indenture documents and supporting data in connection with the public sale of bonds, debentures, notes, and other debt securities.

Regulation D—Rule 506:

- The private placement of any dollar amount of issuance to unlimited non-accredited investors and no more than 35 sophisticated investors (having knowledge and experience in financial matters) who already have sufficient information available to them about the issuing company. - General solicitation is not permitted, although solicitation is permitted if the entire issuance is to accredited investors.

Which of the following are considered securities: -Tressury stock - Inventory - Evidence of Indebetedness - Debenture

- Treasury stock - Evidence of Indebtedness - Debenture

10- K

- annual report filled with the SEC to provide information and disclosures required by regulation S-K and S-X

Integrated Disclosure System

- approach that requires that much of the reported information that goes to the SEC must also go to the shareholder - Simplifies reporting process

The Securities Exchange Act of 1934

- created the SEC - Empowered the SEC to require reporting by publicly owned companies and registration of securities, security exchanges, and certain brokers and dealers. - prohibits fraudulent or unfair behavior such as sales practice abuses and insider trading

Regulation S-K

- established requirements for all nonfinancial information contained in filings with the SEC. Descriptions of the registrant's business and its securities are just two items covered by these regulations. - A partial list of other nonfinancial data to be disclosed includes specified data about the company's directors, officers, and other management; management's discussion and analysis of the current financial condition and the results of operations; and descriptions of both legal proceedings and the company's properties.

Who has to register with the PCAOB

- firms that prepare, issue, or participate in preparing an audit report for an issuer: basically an entity that issues securities on a publicly traded exchange. - Virtually all public accounting firms of significant size must register, but most small firms do not. - Foreign firms that play a substantial role in the audit of an organization that has securities registered in the United States

Regulation S-X

- prescribed the form and content of the financial statements (and the accompanying notes and related schedules) included in the various reports filed with the SEC. - Thus, before being accepted, all financial information must meet a number of clearly specified requirements established by Regulation S-X.

Part 2

- primarily for the informational needs of the SEC staff. - Additional data should be disclosed about the company and the securities being issued such as marketing arrangements, expenses of issuance, sales to special parties, and the like. - The registrant is not required to provide this information to prospective buyers, although the entire registration statement is available to the public through the SEC.

registration exemptions

- securities sold to the residents of the state in which the issuing company is chartered and principally doing business - Securities issued by governments, banks, and savings and loan associations. - Securities issued that are restricted to a company's own existing stockholders for which no commission is paid to solicit the exchange. - Securities, such as bonds, issued by nonprofit organizations such as religious, educational, or charitable groups.

The securities act of 1933

- truth in securities law - regulates the initial offering of securities by a company or underwriter. (must have adequate information) - Intended to prevent deceit and misrepresentation in connection with the sale of securities.

The Division of Corporation Finance

-makes sure that publicly held companies meet disclosure requirements - Reviews registration statements, annual and quarterly filings, proxy materials, annual reports, and tender offers

Registration Procedures

1- select appropriate form 2- Accumulate information accoriding to the requirements of Regulation S-K and S-X 3- Analyst determines if all nonfinancial information complies with the SEC's disclosure requirements (S-K) 4- An accountant verifies that the financial statement data included int he filings meet S-X standards 5- SEC's Lawyer reviews registration statement. 6- When the Division of Corporation Finance is satisfied, the registration statement is made effective an securities can be sold.

Any firm that has over _______ Issuers per year will be inspected annually by the ______

100, PCAOB

The SEC is headed by

5 commissioners

A form _____-______ is used to disclose a unique or significant happening

8-k

What grants the legal authority to cast votes for the owners at stockholders' meetings?

A proxy statement

Financial Reporting standards for most publicly held companies can be changed by

Amending regulation S-X

Rule 14c-3

Annual reports of publicly held companies should include financial statements that have been audited. - Additional information, as specified in regulation S-K, should be included in this annual report.

The Division of Economic Risk Analysis

Assists the SEC in efforts to protect investors, maintain efficient markets, and facilitate capital creation - Interacts with every division and office and provides access to sophisticated economic and risk analysis to help advise and inform policy and rule makers

What is issued to a company to request clarifications, changes, or additional information, especially for filings involving an initial registration

Deficiency Letter

The Office of Compliance Inspections and Examinations

Determines whether brokers, dealers and investment companies and advisers comply with federal securities laws - one of the most important goals is the quick and often informal correction of compliance problems

Electronic Data Gathering Analysis and Retrieval (EDGAR)

Electronically receives, processes, and disseminates more that half a million financial statements every year

S-8

Employee stock plan

What is the responsibility of the SEC?

Ensuring that complete an reliable information is available to investors - Protect Investors, maintain fair, orderly, and efficient markets, and facilitate capital formation

How often will registered firms with less than 100 issuers annually be inspected by the PCAOB?

Every 3 years

The PCAOB was granted ______ Powers by ________

Extensive, Congress

Shelf Registration

File once and are allowed to offer those securities at anytime over the next 2 years without having to go back to the SEC

A letter of Comments or Deficiency letter

Issued to the company to communicate Clarifications, changes, or additional information.

S-3

Large companies with at least $75 million n voting stock held by non-affiliates - Disclosure is reduced because the public is assumed to already have access to a considerable amount of Information

The _________ section of a registrants filings is a candid narrative to provide statement readers with a sense of management's priorities and concerns.

MD&A

MD&A

Management should describe the companies, past, present, and future.

In order to ensure true independence, a company's board of directors or its audit committee must approve all _______ Services

Nonaudit

Regulation D—Rule 504:

Offerings of no more than $1 million made to any number of investors within a 12-month period. - No specific disclosure of information is required. - General solicitations are allowed - The issuer must give notice of the offering to the SEC within 15 days of the first sale.

The Division of Investment Management

Oversees the $66.8 Trillion management industry and administers the securities laws affecting investment companies including mutual funds and investment advisers. - Also interprets lase and regulations for the public and the SEC staff.

Which part of the registration statement need not be provided to prospective buyers of a company's securities?

Part 2

Part 1

Prospectus - Financial statements for the issuing company audited by an independent CPA along with appropriate supplementary data. - An explanation of the intended use of the proceeds to be generated by the sale of the new securities. - A description of the risks associated with the securities. - A description of the business and the properties owned by the issuer.

SEC authority applies mainly to

Publicly held companies, thought it influences GAAP

Examples of 8-K events

Resignation of a director. Changes in control of the registrant. Acquisition or disposition of assets. Changes in the registrant's certified public accountants (independent auditors). Bankruptcy or receivership.

S-11

Securities issued by certain real estate companies

S-4

Securities issued in connestion with a business combination transaction

The Dodd-Frank Act

Strengthens the SEC's role in challenging or questioning financial statements.

Moratorium

The SEC can declare a moratorium on the use of specific accounting practices when no authoritative guidance is present.

Who appoints and determines the compensation for the external auditor

The audit committee

Who appoints the commissioners of the SEC

The president of the US, with the consent of the Senate

The Office of the Chief Accountant

The principal adviser to the commission on accounting and auditing matters that arise in connection with the securities laws. - Also works closely with private sector bodies such as the FASB and the AICPA that set various accounting standards

The evaluation of the quality of the investment is done by

The public

Who gets a copy of the prospectus?

The registrant must furnish every potential buyer of the securities with a copy of this prospectus, thus ensuring the adequate availability of information for their investment analysis.

What is the political party of the Chairman of the SEC

The same as the president

The public accounting profession's self regulation was difficult to maintain due to

The size of many of the international audit firms it sought to control

F-3

Used by a foreign issuer

S-1

Usually used by new registrants - Used when no other form is prescribed

The Division of Enforcement

helps to ensure compliance with federal securities laws. - Investigates possible violations of securities laws and recommends appropriate remedies. - Most common issues are insider trading, misrepresentation or omission of important information, manipulation of the market price of a security, Issuance of securities without proper registration.

Regulation A

is an exemption from the requirement to register public offerings. - Tier 1 provides exemption for up to $20 million of securities in a 12-month period. - Tier 2 provides exemption for up to $50 million of securities in a 12-month period. - Both Tier 1 and Tier 2 securities may be offered publicly utilizing general solicitation and advertising and offered to unaccredited investors.

The audit committee is made up of

members of the company's board of directors who are independent of management

A registration statements

must be filed with the SEC before a company can offer a security publicly

The Division of Trading and Markets

oversees the securities markets in this country and is responsible for registering and regulating brokerage firms. - Also oversees the Securities Investor Protection Corporation

The Office of Information Technology

supports the SEC and its staff in all aspects. - operates EDGAR - maintains a very active website that contains a tremendous amount of data about the SEC and the securities industry and Free access to EDGAR

Who picks the chairpeople of the PCAOB

the SEC

8-K

used by publicly traded companies to disclose any material event not previously reported that is important to investors - filed within 15 days of event