Question

Write a paper (2,000 to 2,500 words) regarding the regulation of financial reporting, as established through the Securities Act of 1933, Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, and the Public Company Accounting Oversight Board (PCAOB) auditing standards effective December 31, 2016. Discussion should include the following:

1. Summarize the main points for each act.
2. Compare and contrast the regulations and standards.
3. Discuss the importance of the current regulations with a focus on the PCAOB General Auditing Standards, not the audit procedures or reporting, as applicable to GAAP reporting.
4. Include a discussion of how the regulation of the accounting industry has changed since 1933 using these four regulations/standards as a timeline.

Answer 1

What is the Securities Act Of 1933

The Securities Act of 1933 was established as a result of the stock market crash of 1929. The legislation had two main goals: to ensure more transparency in financial statements so investors can make informed decisions about investments; and to establish laws against misrepresentation and fraudulent activities in the securities markets.

Main Objectives of Securities Act of 1933

The Securities Act of 1933 required that investors receive financial information from securities being offered for public sale. This means that prior to going public, companies had to submit information made readily available to investors. This prospectus is required and available on the Securities and Exchange Commission website. Information required includes a description of the company’s properties and business; a description of the security being offered; information about management running the company and financial statements that have been certified by independent accountants.

The other main point of the Securities Act of 1933 was to prohibit deceit and misrepresentations. The act aimed to eliminate fraud that happens during the sales of securities.

Legacy of Securities Act of 1933

The Securities Act of 1933 was the first federal legislation used to regulate the stock market. The act took power away from the states and into the hands of the federal government. The act more importantly created a uniform set of rules to protect investors against fraud.

The act is commonly referred to as the Truth in Securities law or act. This law is also known as the 1933 Act and The Securities Act. The Securities Act of 1933 was signed into law by President Franklin D. Roosevelt, and is considered part of the famous New Deal passed by Roosevelt.

The Securities Act of 1933 is governed by the Securities and Exchange Commission, which was created a year later by the Securities Act of 1934. Several amendments to the Securities Act of 1933 have passed since its creation. Amendments have been passed to update rules in 1934, 1954, 1959, 1960, 1970, 1980, 1982, 1987, 1996, 1998, 2000, 2010 and 2012.

What Is the Securities Exchange Act of 1934?

The Securities Exchange Act of 1934 (SEA) was created to govern securities transactions on the secondary market, after issue, ensuring greater financial transparency and accuracy and less fraud or manipulation.

The SEA authorized the formation of the Securities and Exchange Commission (SEC), the regulatory arm of the SEA. The SEC has the power to oversee securities—stocks, bonds, and over-the-counter securities—as well as markets and the conduct of financial professionals, including brokers, dealers, and investment advisors. It also monitors the financial reports that publicly traded companies are required to disclose.

Understanding the Securities Exchange Act of 1934 - All companies listed on stock exchanges must follow the requirements outlined in the Securities Exchange Act of 1934. Primary requirements include registration of any securities listed on stock exchanges, disclosure, proxy solicitations, and margin and audit requirements. The purpose of these requirements is to ensure an environment of fairness and investor confidence.

The SEA of 1934 granted the SEC broad authority to regulate all aspects of the securities industry. It is led by five commissioners, who are appointed by the president, and has five divisions: Division of Corporation Finance, Division of Trading and Markets, Division of Investment Management, Division of Enforcement and Division of Economic and Risk Analysis.

The SEC has the power and responsibility to lead investigations into potential violations of the SEA, such as insider trading, selling unregistered stocks, stealing customers' funds, manipulating market prices, disclosing false financial information, and breaching broker-customer integrity.

What is the Sarbanes-Oxley (SOX) Act of 2002?

The U.S. Congress passed the Sarbanes-Oxley Act of 2002 on July 30 of that year to help protect investors from fraudulent financial reporting by corporations. Also known as the SOX Act of 2002 and the Corporate Responsibility Act of 2002, it mandated strict reforms to existing securities regulations and imposed tough new penalties on lawbreakers.

The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s involving publicly traded companies such as Enron Corporation, Tyco International plc, and WorldCom. The high-profile frauds shook investor confidence in the trustworthiness of corporate financial statements and led many to demand an overhaul of decades-old regulatory standards.

Important points

• The Sarbanes-Oxley (SOX) Act of 2002 came in response to highly publicized corporate financial scandals earlier that decade.
• The act created strict new rules for accountants, auditors, and corporate officers and imposed more stringent recordkeeping requirements.
• The act also added new criminal penalties for violating securities laws.

  Understanding the Sarbanes-Oxley (SOX) Act

  The rules and enforcement policies outlined in the Sarbanes-Oxley Act of 2002 amended or supplemented existing laws dealing with security regulation, including the Securities Exchange Act of 1934 and other laws enforced by the Securities and Exchange Commission (SEC). The new law set out reforms and additions in four principal areas: Corporate responsibility ,Increased criminal punishment ,Accounting regulation & New protections.

What is the Public Company Accounting Oversight Board - PCAOB

The Public Company Accounting Oversight Board (PCAOB) is a non-profit organization that regulates auditors of publicly traded companies. The purpose of PCAOB is to minimize audit risk.

BREAKING DOWN Public Company Accounting Oversight Board - PCAOB

The Public Company Accounting Oversight Board (PCAOB) was established with the passage of the Sarbanes-Oxley Act of 2002. The act was passed in response to various accounting scandals of the late 1990s. The board's aim is to protect investors and other stakeholders of public companies by ensuring that the auditor of a company's financial statements has followed a set of strict guidelines. PCAOB is overseen by the Securities and Exchange Commission.

Firms that audit public companies, brokers and dealers must register with PCAOB. Registered firms are subject to inspection of the audits they have performed. PCAOB also is involved in setting standards aimed at improving the reliability of audits and may also enforce standards by imposing penalties for infractions. In 2016, PCAOB settled 54 disciplinary orders and levied one $8 million fine.

The goals of SOX were to enhance the transparency of financial information, reaffirm auditor independence, and define corporate governance – the responsibilities of corporate boards and audit committees. Accountants gained prominence and respect as guardians of investors and thousands of young people were drawn to the profession to fill the many new jobs that were created as a result of the law.

The most sweeping securities law since the Securities and Exchange Commission (SEC) was established in 1933 and the enactment of the Securities Exchange Act of 1934, SOX mandated specific SEC oversight and changed the self-regulatory, peer review environment in which accounting firms had operated. It mandated that the SEC set up the Public Companies Accounting Oversight Board (PCAOB) which would "establish auditing and related attestation, quality control, ethics, and independence standards and rules to be used by registered public accounting firms in the preparation and issuance of audit reports."

The PCAOB conducts annual inspections of firms that audit more than 100 issuers and firms that provide audit reports for fewer issuers at least every three years.

Preparing for a PCAOB inspection became so detailed and expensive for many companies that the Board issued Auditing Standard No. 5 in 2007, which replaced Auditing Standard No. 2 to make the whole process less burdensome for everyone. Documenting internal control involved a thorough review of systems and also meant additional employment opportunities for Information Technology professionals.

SOX also addresses corporate governance and executive fiduciary responsibility, such as loans to officers and directors, management oversight, director due diligence, and executive compensation

OX extended the statute of limitations on securities fraud. Auditors are required under the law to maintain "all audit or review work papers" for five years and employees of issuers and accounting firms are extended "whistleblower protection." Forensic accounting is a growing specialty in the accounting profession.

In June, the SEC agreed to provide small businesses with an additional one-year extension to comply with the Sarbanes-Oxley Section 404(b) auditor attestation requirements. Senator Olympia Snowe, a member of the Senate Committee on Small Business, applauded the decision but asked for further study. "I am also pleased that the SEC will complete a study on the costs and benefits of applying the law to small businesses. The SEC should refrain from implementing any new regulations until such an evaluation is complete."