Deliverable 6 - Ethical and Legal Implications

Companies in the United States are broadly broken down into two categories: public and private. The distinction between the two types leads us into our discussion about the financial statements disclosures that are required based on U.S. regulations.

This type of company is large in size 

This can be either a public or private company. There is a misconception that private companies are small but there are actually a lot of large companies that are privately owned. 

Granted permission by the SEC to sell securities to the public 

This would be a public company. The SEC must grant a company permission to sell securities on the public stock exchange. 

Not required to disclose their financial information to anyone 

This would be a private company. They can decide if and how they would disclose their financial information. Public companies are required to provide full disclosure.

Traded on the stock exchange  

This would be a public company. Although private companies cannot trade on a public stock exchange they may still be able to sell a limited amount of shares without registering with the SEC. 

When we cover financial statement disclosures, we will focus on public companies, as private companies are not required by law or regulations to disclose financial or operating information.

Financial disclosures generally come from two sources: (1) SEC Disclosure Laws and Regulations and (2) Generally Accepted Accounting Principles (GAAP).

Security and Exchange Commission (SEC)

The Security and Exchange Commission is the main rule making body that affects public company financial disclosure. The SEC regulations have statutory authority and have changed over time. The most dramatic recent change was in 2002 when the Sarbanes Oxley Act (SOX) was passed as a result of a number of accounting scandals and the bankruptcy of Enron in 2001. SOX requires that public companies disclose specific financial and operational data to the SEC and shareholders.

Specific requirements include an annual report, called a Form 10K, where the content is strictly governed by federal statute. Form 10K includes detailed financial and operating disclosures as well as management’s answers to specific questions about the company’s operations.

In addition, the SEC requires that the financial statements are audited and attested to by an independent CPA firm. The financial statements include two years of balance sheets and three years of income statements and statement of cash flows. In addition, there must be five years of selected financial data.

Generally Accepted Accounting Principles (GAAP)

The Financial Accounting Standards Board (FASB) is the independent organization that establishes financial reporting standards companies must follow in preparing audited financial statements.

While the SEC and FASB are two separate independent organizations, FASB is recognized by the SEC as the designated accounting standard setting authority in the professional accounting profession. In other words, these two entities cooperate and rely upon each other.

Generally Accepted Accounting Principles require that certain financial and operating information be disclosed in a company’s audited financial information. While these required disclosures do not have the force of law as SEC regulations, they do in some cases exceed SEC requirements.

Resource(s)

Wiley GAAP 2019 : Interpretation and Application of Generally Accepted Accounting Principles