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Chapter 1: Q14CA. (page 26)

CA1-14 (Securities and Exchange Commission)

The U.S. Securities and Exchange Commission (SEC) was created in 1934 and consists of five commissioners and a large professional staff. The SEC professional staff is organised into five divisions and several principal offices. The primary objective of the SEC is to support fair securities markets. The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies. The SEC has a significant presence in financial markets, the development of accounting practices, and corporation-shareholder relations, and has the power to exert influence on entities whose actions lie within the scope of its authority.

Instructions

(a) Explain from where the Securities and Exchange Commission receives its authority

(b) Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices.

(c) Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices.

Short Answer

Expert verified

(a) The Securities and Exchange Commission (SEC) receives its authority from federal legislation enacted by Congress.

(b) The official role of the SEC in the development of financial accounting theory and practices is to set standards and enforce them under federal securities laws.

(c) The Standards issued by Financial Accounting Standards Board (FASB) are officially recognized as authoritative by the SEC as well as the American Institute of Certified Public Accountants (AICPA). It derives its authority to set standards from U.S. SEC.

Step by step solution

01

Financial Accounting Standards Board (FASB)

The term Financial Accounting Standards Board refers to the board that regulates the establishment, improvement, and revision of standards with the aim of facilitating companies for accounting and reporting. This helps them learn how to record business transactions and show them to users of financial statements.

02

Explanation for ‘a’

The SEC is an independent federal agency that receives its authority from federal legislation enacted by congress. The control is with the US SEC. It has the power to set standards and enforce them under Federal securities laws.

03

Explanation for ‘b’

The SEC has a unique position in the financial reporting process.

The main objective of the SEC is:

  • Protect investors
  • Maintain orderly, fair, and efficient markets
  • Facilitate capital formation

Official role in financial accounting:

  • To have control over the market
  • To establish accounting and auditing standards for publicly traded companies
  • To enforce laws over market manipulation
  • To ensure there are fair trade practices and investor protection
  • To take action against wrongdoers
  • To ensure our nation`s securities laws
  • To evaluate financial condition and operations
  • It monitors transactions as well as the activities of financial professionals.
04

Explanation for ‘c’

  • Both SEC and FASB are agencies that set the accounting and auditing standards.
  • SEC was created by Congress under federal securities laws while FASB is a private standard-setting body whose primary purpose is to set and improve GAAP (Generally accepted accounting principles)
  • Responsibility for enforcement and shaping of GAAP falls to 2 organizations: SEC & FASB.
  • The FASB sets and improves GAAP while SEC has authority to set and enforce the standards.

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Most popular questions from this chapter

The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?

GAAP is comprised of:

  1. FASB standards, interpretations, and concepts statements.
  2. FASB financial standards.
  3. FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations.
  4. any accounting guidance included in the FASB Codification.

What are the primary advantages of having a codification of generally accepted accounting principles?

Question: CA1-17 GROUPWORK (GAAP and Economic Consequences) The following letter was sent to the SEC and the FASB by the leaders of the business community.

Dear Sirs:

The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard. We understand that the

Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach.

As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies` ability to manage risk, and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the year 2000 issues and a single European currency. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress.

We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nation`s businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration. As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach.

We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies` risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commission`s oversight responsibilities.

We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S businesses in the international market

place.

Very truly yours, (this letter was signed by the chairs of 22 of the largest U.S companies.)

Instructions

Answer the following questions.

(a) Explain the "due process" procedures followed by the FASB in developing a financial reporting standard.

(b) What is meant by the term "economic consequences" in accounting standard-setting?

(c) What economic consequences arguments are used in this letter?

(d) What do you believe is the main point of the letter?

(e) Why do you believe a copy of this letter was sent by the business community to influential members of the U.S. Congress?

Briefly describe the FASB/ IASB convergence process and the principles that guide their convergence efforts.
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