Question

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

(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

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.

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.

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.

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.