Problem
I. Origins and Objectives of Securities Legislation During the late 1920s, about 55 percent of all personal savings in the United States were used to purchase securities. Public confidence in the busi- ness community was extremely high as stock values doubled and tripled in short periods of time. People believed the road to wealth was through the stock market, and everyone who was able participated. Thus, the public was severely affected when the Dow Jones Industrial Average fell 89 percent between 1929 and 1933. The public outcry arising from this decline in stock prices motivated Congress to enact major federal laws regulating the securities industry.
Task
i. Research the 1929 stock market crash, and describe the investment practices of the 1920s that con- tributed to the erosion of the stock market.
ii. Explain the basic objectives of each of the following: 1. Securities Act of 1933. 2. Securities Exchange Act of 1934.
iii. Subsequent legislation resulted from abuses in the securities industry. Explain the major provisions of each of the following:
a. Foreign Corrupt Practices Act of 1977.
b. Insider Trading Sanctions Act of 1984.
II. Annual Reports to Shareholders and Form 10-K Public companies usually provide financial information in two formats: the 10-K and the annual report to shareholders.
Task
i. What is Form 10-K, and what legislation requires that it be completed? What regulations specify the requirements of Form 10-K?
ii. A company will usually provide an annual report to shareholders in addition to its Form 10-K filing.
iii. What is the difference in objectives between the two types of reports?
iv. Download the latest annual report and the 10-K for International Business Machines Corporation (IBM).
v. Identify major differences in format and content between the two reports.
vi. Which content areas are the same?
III. Quarterly Reports to the SEC The SEC sets forth specific guidelines as to what information must be included on Form 10-Q, the quarterly report to shareholders.
Task
i. Corporations are required by the SEC to file a Form 10-Q. 1. What is Form 10-Q, and how often is it filed with the SEC? 2. Explain why the SEC requires corporations to file Form 10-Q.
ii. Discuss the disclosure requirements pertaining to Form 10-Q with specific regard to the following:
a. Condensed balance sheet.
b. Statement of income and comprehensive income.
c. Statements of cash ?ows and changes in shareholders' equity.
d. Management's discussion and analysis of the interim period(s).
e. Footnote disclosures.
IV. Special Reports to the SEC To accomplish its regulatory objectives, the SEC requires that public companies register their securities and periodically prepare and file Forms 8-K, 10-K, and 10-Q.
Task
i. With regard to Form 8-K, discuss
a. the purpose of the report.
b. the timing of the report.
c. the role of financial statements in the filing of the report.
ii. Identify five circumstances under which the SEC requires the filing of Form 8-K.
iii. Discuss how the filing of Form 8-K fosters the purpose of the SEC.
iv. Explain whether the SEC passes judgment on securities based on information contained in periodic reports.
V. Audit Committees Although audit committees are now very much a part of the corporate governance landscape, their evolution spans many decades. Today's audit committees re?ect SEC recommendations, stock exchange listing requirements, and the mandates of Section 301 of SOX.
Task
i. Explain the role the audit committee generally assumes with respect to the annual audit conducted by the company's external auditors.
ii. Identify duties other than those associated with the annual audit that might be assigned to the audit committee by the board of directors.
iii. Discuss the relationship that should exist between the audit committee and a company's internal audit staff.
iv. Explain why board members appointed to serve on the audit committee should be outside (indepen- dent of management) board members.
VI. Role of the PCAOB The Sarbanes-Oxley Act of 2002 created a new entity, the PCAOB, to govern audit firms. Use information from the PCAOB website and the chapter to answer the questions below.
Task
i. When does an audit firm come under the jurisdiction of the PCAOB?
ii. What are the main activities of the PCAOB?
iii. What is the relationship between the PCAOB and the AICPA?
VII. Registration Statement Roku, Inc. the TV streaming platform, filed Form S-1 on September 1, 2017. The registration became effective September 28, 2017.
Task
i. What does Roku expect to do with the money raised in this IPO?
ii. According to the filing, what is the maximum amount that Roku expected to raise? What was the registration fee as a percent of the maximum offering amount?
iii. This offering involves Class A shares. What is the difference between Class A shares and Class B shares?
iv. What category of filer is Roku? What are the implications concerning SEC and SOX requirements?
v. What accounting firm was involved in this filing? What aspects of this filing are covered by its opinion?
VIII. JOBS Act Exemptions The JOBS Act of 2012 exempts all companies defined as emerging growth companies from certain SOX requirements.
Task
Research the JOBS Act and answer the following questions.
i. How is the term "emerging growth company" defined by the JOBS Act?
ii. Identify the major exemptions from SOX requirements.
IX. Audit Committee Responsibilities A company's audit committee performs duties that are essential to its corporate governance and reporting accuracy.
Task
Identify the major duties of the audit committee.
X. Audit Committees and Non-GAAP Disclosures In recent years, companies have increased their use of non-GAAP performance measures in press releases, periodic financial reports, and SEC filings.
Task
i. Define "non-GAAP performance measures" and provide an example.
ii. Explain why the SEC is concerned about non-GAAP disclosures.
iii. Discuss the appropriate role of the company's audit committee, if any, in monitoring its non-GAAP disclosures.