Financial & Accounting Compliance Research Paper Starter

Financial & Accounting Compliance

Accurate financial information is critical for decision making within the business world and governments alike. The absence of honest and accurate financial reporting to support sound financial decisions can cause economic calamities, as evidenced by the Great Depression and the business collapses of the early 2000's. In the United States, the SEC compels financial disclosure from companies that seek funds from the investing public. The generally accepted accounting principles (GAAP), established by a number of public and private organizations, provides the language in which those statements must be delivered. This article discusses the sources and history of US financial reporting law and the organizations responsible for establishing the GAAP. The article concludes with a brief discussion of the rise of an international accounting standard that seems poised to become the new standard; possibly replacing the GAAP.

Keywords Accounting Standards; Audit; Bonds; Compliance; Debentures; Federal Register; Financial Reporting; GAAP; Note; Proxy; SEC; Tender Offer

Accounting: Financial Accounting


A business's financial condition can be summarized by the major and familiar financial statements including the balance sheet, income statement and statement of cash flow. Those statements provide valuable information to management for internal company decisions and are also important to parties outside the business such as lenders and investors. Businesses can be generally divided into two categories: Public and private. Publicly traded companies are corporations whose stock is held by the general public and openly traded as opposed to a privately owned or closely held corporation whose stock is not offered for public sale and is typically owned by a few individuals. Accurate financial information is, of course, valuable to every business but in the case of the publicly traded company, preparation and disclosure of financial statements are mandated by laws administered by the United States Securities and Exchange Commission (SEC). Financial statements for external distribution are prepared according to guidelines referred to as the generally accepted accounting principles (GAAP). An independent body called the Financial Accounting Standards Board (FASB) takes the lead in determining and promoting those practices. With that general introduction, the remainder of this article discusses the governmental and private bodies that determine financial and accounting standards and rules relevant to the company that seeks investment from the general public.

Public Finance Law

Formation of the SEC

The SEC was created by the Security Exchange Act of 1934 following the great stock market crash of 1929. Prior to 1929, there was little support for government regulation of the securities markets. In the post-World War I economic prosperity of the roaring twenties, many people turned to the stock markets to make their fortunes with little thought of the danger of investing in an unregulated market. It has been estimated that half of the $50 billion of new securities issued during that time became worthless. After the crash in 1929, many personal fortunes were lost and many banks, who also invested in the market, suffered heavy losses. As a result, depositors became concerned that their bank may not survive and withdrew their funds. This run on the banks caused many banks to close. The great depression followed and the consensus in government was that confidence in the capital markets needed to be restored for the economy to recover.

In response, Congress held hearings to identify solutions and based on their findings, passed the Security Exchange act of 1933 (often called the "truth in securities law") and the Security Exchange Act of 1934. The Securities Act of 1934 created the SEC and granted it broad authority over the securities industry. The essential purposes of the Acts were twofold.

  • First, to compel companies who offered their securities for public sale to be honest about their business, the securities for sale, and the risks involved in investments.
  • Second, the Acts sought to ensure that people selling those securities such as brokers, dealers and exchanges were treating investors justly and truthfully and put investor interests in a prioritized position.

SEC Regulations

The SEC is headquartered in Washington DC and is composed five presidentially appointed Commissioners, four divisions and eighteen offices. The SEC is charged with regulating the practice of selling securities (a document that indicates the ownership-such as a stock certificate or bond) to the general public. The laws that govern the securities are based on the idea that all investors, regardless of size, should have access to basic facts about a business or investment opportunity before they purchase that security and for the time period during which that investor may hold that security. Consequently, the SEC necessitates that public businesses reveal significant economic data to the public. All investors are therefore enabled to discover for themselves whether buying, selling or holding a certain security is worthwhile. To ensure that investors and other interested parties had the information upon which they could base a sound judgment, financial reporting to the SEC must be timely, comprehensive and accurate. Beyond the benefit to an individual investor, the SEC financial reporting requirements encourage economic growth because transparent and efficient capital markets facilitate capital formation.

The SEC also manages the most crucial players of the capital market (which includes securities markets, brokers and dealers, investment advisors and mutual funds) to make sure that the important market information is disclosed.

Four Divisions of SEC

  • The SEC Division of Market Regulation creates and carries on the standards for just, organized and effective markets, specifically through the regulation of brokers, dealers, stock exchanges and other major players in the securities industry.
  • The Division of Investment Management manages the $15 trillion investment management industry by administering security law relevant to investment advisors and mutual funds.
  • The Division of Enforcement investigates likely breaches of the law and recommends civil action to the Commission which brings civil enforcement lawsuits against individuals and companies for infractions such insider trading, accounting fraud and providing false or misleading information. Having only civil enforcement control, the Division also cooperates with various criminal law enforcement agencies when appropriate.
  • The Division of Corporation Finance is relevant to the accounting profession and compliance. The Division of Corporation Finance supervises the required business announcements of information to the public; both when a stock is initially offered for sale and then on continued periodic basis. Required documents include: Registration statements for new securities, annual and quarterly reports, proxy matters given to stockholders prior to an annual meeting, annual reports to stockholders, paperwork about tender proposals, and filing related to mergers and acquisitions. The Division reviews submissions, offers compliance assistance to companies and recommends new rules to the SEC Commission. The Division, in cooperation with SEC’s Office of the Chief Accountant, monitors the accounting profession. The Chief Accountant is the principal advisor to the Commission on accounting and auditing matters and consults with accounting bodies that set standards including the FASB, the International Accounting Standards Board (IASB), the American Institute of Certified Public Accountants (AICPA) and the Public Company Accounting Oversight Board...

(The entire section is 3526 words.)