SEC & ACCOUNTING: What It Is & How It Works

sec accounting

Setting accounting standards is one of the various duties of the SEC. Furthermore, the SEC encourages full public transparency, protects investors against fraud and other market manipulation, and monitors corporate takeovers in the United States. Read on to learn about SEC and its role in safeguarding investors’ properties.

What Is SEC?

SEC is an acronym for the Securities and Exchange Commission.

The Securities and Exchange Commission (SEC) of the United States is an independent federal government regulatory organization. It is tasked with safeguarding investors, ensuring the fair and orderly operation of the securities markets, and enabling capital formation. It was established by Congress in 1934 as the first federal securities regulator. The SEC encourages full public transparency, protects investors from fraudulent and manipulative market activities, and monitors corporate takeovers in the United States. It also certifies registration statements for underwriting businesses’ bookrunners. In general, securities sold in interstate commerce, via mail, or over the Internet must be registered with the SEC before they can be sold to investors. To conduct business, financial services firms such as broker-dealers, advisory firms, and asset managers, as well as their professional representatives, must register with the SEC. For instance, they would be in charge of approving any formal bitcoin exchange.

Points To Note

The Securities and Exchange Commission (SEC) is a government organization in the United States that is in charge of regulating the securities markets and protecting investors.

The Securities and Exchange Commission (SEC) was founded by the passage of the United States Securities Act of 1933 and the Securities and Exchange Act of 1934. This is partly in response to the 1929 stock market crash, which precipitated the Great Depression.

The SEC has the authority to file civil lawsuits against lawbreakers and collaborates with the Justice Department on criminal prosecutions.

The Functions of the Securities and Exchange Commission (SEC)

The major mission of the SEC is to supervise businesses and individuals involved in the securities markets. These include stock exchanges, brokerage firms, dealers, investment advisors, and investment funds. The SEC fosters transparency and dissemination of market-related information, fair dealing, and fraud protection through established securities laws and regulations. It makes registration statements, periodic financial reports, and other securities filings available to investors via its electronic data-gathering, analysis, and retrieval database, known as EDGAR. The Securities and Exchange Commission (SEC) was established in 1934 to aid in the restoration of investor trust following the 1929 stock market crisis.

The SEC is led by five commissioners selected by the president, one of whom is the chair. Each commissioner’s tenure is five years long. However, they can remain for an additional 18 months if a replacement is not found. Gary Gensler is the current SEC chair, having taken office on April 17, 2021. The statute stipulates that no more than three of the five commissioners be from the same political party in order to encourage nonpartisanship. 

The SEC is divided into five divisions and has 24 offices. Their objectives are to interpret and enforce securities laws, create new rules, provide oversight of securities institutions, and coordinate regulation across multiple levels of government.

The Five Divisions Of SEC

The five divisions and their functions are as follows:

  • Division of Corporate Finance: Ensures that substantial information (information relevant to a company’s financial prospects or stock price) is supplied to investors in order for them to make informed investment decisions.
  • Division of Enforcement: In charge of enforcing SEC regulations through investigations, civil actions, and administrative proceedings.
  • Investment Management Division: Regulates investment firms, variable insurance products, and federally licensed investment advisors.
  • Economic and Risk Analysis Division: Integrates economics and data analytics with the SEC’s fundamental purpose.
  • Trading and Markets Division: Establishes and upholds standards for fair, orderly, and efficient markets.

The SEC may only file civil cases in federal court or before an administrative judge. Criminal cases are handled by law enforcement agencies within the Department of Justice; nevertheless, the SEC frequently collaborates with such agencies to provide evidence and aid in court procedures.

Civil Suits

The SEC pursues two major fines in civil suits:

Injunctions are court orders that prevent further offenses. If a person or company disregards an injunction, they may face fines or jail for contempt.

Civil monetary penalties as well as the confiscation of illicit profits. The SEC may also seek a court order prohibiting or suspending persons from operating as company officials or directors in certain situations. The SEC may also initiate a number of administrative proceedings. These proceedings are heard by internal officials as well as the commission. Common procedures include issuing cease and desist orders, cancelling or suspending registration, and imposing employment bans or suspensions.

The SEC also serves as the first level of appeal for measures sought by self-regulatory groups in the securities sector, such as FINRA or the New York Stock Exchange.

Among the SEC’s offices, the Office of the Whistleblower is one of the most effective tools of enforcing securities laws. As a result of the Dodd-Frank Act As part of the Wall Street Reform and Consumer Protection Act of 2010, the SEC’s whistleblower program awards qualifying persons with monetary sanctions in excess of $1 million for disclosing original information that leads to successful law enforcement actions. Individuals may get 10% to 30% of the overall proceeds of the sanctions. 6

The Securities and Exchange Commission’s History (SEC)

When the United States stock market fell in October 1929, many corporations’ securities became worthless. Because many people have previously submitted inaccurate or misleading information, public trust in the financial markets plummeted. To restore trust, Congress approved the Securities Act of 1933 and the Securities Exchange Act of 1934, which established the Securities and Exchange Commission (SEC). The SEC’s key responsibilities included ensuring that corporations made accurate claims about their operations and that brokers, dealers, and exchanges treated investors in an honest and fair manner. Since then, new laws have supported the SEC accomplish its mission:

  • The 1939 Trust Indenture Act
  • The Investment Company Act of 1940 was passed.
  • The 1940 Investment Advisers Act
  • 2002 Sarbanes-Oxley Act
  • Dodd-Frank Jumpstart Our Business Startups (JOBS) Act of 2012 Wall Street Reform and Consumer Protection Act of 2010

Every year, the SEC files several civil enforcement cases against corporations and individuals who violate securities laws. It is directly or indirectly involved in every major case of financial malfeasance, either directly or in collaboration with the Justice Department. Accounting fraud, the transmission of misleading or inaccurate information, and insider trading are some of the most common offenses prosecuted by the SEC.

Further Details

Following the 2008 Great Recession, the SEC played a key role in prosecuting the financial institutions that caused the crisis and repaying billions of dollars to investors. It charged 204 businesses or individuals in total, collecting about $4 billion in penalties, disgorgement, and other monetary compensation. Goldman Sachs, for example, paid $550 million. This is the highest penalty ever paid by a Wall Street corporation and the second-largest in SEC history, after only WorldCom’s $750 million payment. Nonetheless, many commentators have criticized the SEC for failing to do more to assist in the prosecution of the brokers and top management implicated in the crisis, almost all of whom were never found guilty of substantial crimes. So far, only one Wall Street executive has been imprisoned for crisis-related crimes. The rest either agreed to a monetary fine or accepted administrative penalties.

Does the SEC establish accounting standards?

Under securities law, the SEC has the jurisdiction to both develop and enforce accounting rules. Although, the FASB, an independent non-governmental body mandated by the SEC, can only set standards.

This is accomplished through the Accounting Standards Codification.

Points To Note

The Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) are in charge of enforcing and shaping widely accepted accounting standards (GAAP).

The Securities and Exchange Commission (SEC) has the jurisdiction to both develop and enforce accounting standards.

The FASB has the authority to establish standards, which it does through the Accounting Standards Codification.

GAAP is not law, but breaking it can have serious consequences.

The SEC has imposed numerous significant fines for GAAP violations, including several high-profile recent cases, such as Hertz and Monsanto.

Understanding GAAP Compliance With Respect To SEC

GAAP is not a law, but breaking it can have serious consequences. Errors and omissions can have a negative influence on a company’s reputation with lenders, investors, and other parties who rely on financial statements to get an accurate view of its finances. The SEC does not look kindly on corporations that do not follow GAAP. It penalized Hertz (HTZ) $16 million in 2019 for reporting items that were not in accordance with GAAP. 4

The SEC fined Monsanto $80 million in 2016 for failing to appropriately report the cost of rebates in accordance with GAAP requirements.

It has also penalized corporations that highlight non-GAAP financial measures “without affording equal or greater prominence” to equivalent GAAP financial measures in their earnings statements.

With its inception in 1973, the FASB was tasked with developing financial and reporting standards. Between 1959 and 1973, the Accounting Principles Board of the American Institute of Certified Public Accountants (AICPA) held the position. However, it was ceded as the SEC became more involved in creating accounting rules, particularly on contentious subjects where it differed from the board. From 1939 until 1959, the AICPA’s Committee on Accounting Procedure established accounting standards.

Accounting Fraud is an SEC Priority.

The United States Securities and Exchange Commission (SEC) was quickly reminded of the perils of accounting fraud after Enron and WorldCom failed within months of one another in the early 2000s. The SEC continued an aggressive enforcement regime in the years following these corporate accounting scandals. This they did with a focus on finding and rooting out similar corporate accounting scams.

The SEC has continued to focus its enforcement efforts in recent years on accounting fraud as well as other infractions affecting retail investors. Despite these attempts, businesses continue to “cook the books” in order to meet financial targets. Fortunately for investors, whistleblower tips have greatly benefited the SEC in detecting and preventing such frauds. Indeed, since the establishment of the SEC Whistleblower Program in 2011, whistleblower tips have consistently been one of the SEC’s most potent weapons in its legal arsenal against accounting fraud.

Whistleblower Program at the SEC

The SEC Whistleblower Program rewards whistleblowers who disclose original information, such as information on accounting fraud. This leads to enforcement actions with a total monetary penalty exceeding $1 million. A whistleblower may be awarded between 10% and 30% of the monetary penalty collected in successful SEC actions and related actions brought by other regulatory or law enforcement authorities.

If a whistleblower is represented by an attorney in connection with their tip, the SEC Whistleblower Program allows them to submit tips anonymously. An experienced SEC whistleblower lawyer can expertly lead whistleblowers through the procedure. Thus, increasing the possibility that their name will not be divulged to unauthorized parties.

Since 2011, the SEC has awarded whistleblowers more than $1.2 billion. To date, the SEC has awarded $114 million, $110 million, and $50 million in whistleblower awards. Take a look at some of the SEC whistleblower cases that have resulted in hefty payouts.

In Conclusion,

In accordance with the federal securities laws, the SEC issues guidance and regulations on the accounting methods that should be used in publicly traded companies’ financial statements. Rather than issuing standards, the SEC is concerned with enforcing accounting and auditing standards as they relate to financial statements it receives from public companies. In addition, the SEC oversees the Public Company Accounting Oversight Board. FASB’s Accounting Standards Codification has not replaced SEC regulations or guidance documents. 

Frequently Asked Questions

What is the SEC in accounting?

The SEC is the federal government agency in charge of the securities business in the United States. It keeps track of transactions and the operations of financial specialists.

Who funds the SEC?

The SEC gets its funds from transaction fees from self-regulatory groups. The SEC is the only independent federal agency whose sole mission is to safeguard investors.

Does the SEC hire accountants?

Yes, the SEC does hire accountants

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