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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

How are FASB preliminary views and FASB exposure drafts related to FASB 鈥渟tatements鈥�?

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.

The following comments were made at an Annual Conference of the Financial Executives Institutes (FEI). There is an irreversible movement toward the harmonization of financial reporting throughout the world. The international capital markets require an end to:

  1. The confusion caused by international companies announcing different results depending on the set of accounting standards applied.
  2. Companies in some countries obtaining unfair commercial advantages from the use of particular national accounting standards.
  3. The complications in negotiating commercial arrangements for international joint ventures caused by different accounting requirements.
  4. The inefficiency of international companies having to understand and use a myriad of different accounting standards depending on the countries in which they operate and the countries in which they raise capital and debt. Executive talent is wasted on keeping up to date with numerous sets of accounting standards and the never-ending changes to them.
  5. The inefficiency of investment managers, bankers, and financial analysts as they seek to compare financial reporting drawn up in accordance with different sets of accounting standards.

Instructions

  1. What is the International Accounting Standards Board?
  2. What stakeholders might benefit from the use of International Accounting Standards?
  3. What do you believe are some of the major obstacles to convergence?

CA1-7 WRITING (Need for GAAP) Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired.InstructionsComment on the appropriateness of this viewpoint.

(FASB Role in Rule-making) A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board (to be appointed by the trustees)鈥濃�ill become the established authority for setting accounting principles under which corporations report to the shareholders and others鈥� (AICPA news release July 20,1972).

Instructions

  1. Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard.
  2. Indicate the major types of pronouncements issued by the FASB and the purpose of each of these pronouncements.
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