Regulation S-X
Encyclopedia
Regulation S-X is a prescribed regulation that lays out the specific format and content of financial reports. It is cited as Title 17:Commodity and Securities Exchanges, Part 210—Form and Content of and Requirements for Financial Statements, Securities Act of 1933
, Securities Exchange Act of 1934
, Public Utility Holding Company Act of 1935
, Investment Company Act of 1940
, Investment Advisers Act of 1940
, and Energy Policy and Conservation Act of 1975.
Regulation S-X and the Financial Reporting Releases ( Staff Accounting Bulletins) set forth the form and content of and requirements for financial statements
required to be filed as a part of (a) registration statements under the Securities Act of 1933 and (b) registration statements under section 12, annual or other reports under sections 13 and 15(d) and proxy and information statements under section 14 of the Securities Exchange Act of 1934; except as otherwise specifically provided in the forms.
Regulation S-X is seen less frequently but equally validly for (c) registration statements, annual reports and shareholder reports filed under the Public Utility Holding Company Act of 1935 and likewise for (d) the Investment Company Act of 1940.
Regulation S-X extends the meaning of the term 'financial statements' to include all notes to the statements and all related schedules. Regulation S-X is closely related to Regulation S-K
, which lays out reporting requirements for various SEC filings and registrations used by public companies. Regulation S-X profoundly affects internal and external accountants and auditors, and directors and officers and numerous officials, employees and contractors of publicly reporting companies and because of the need for accurate reporting of monies and other data, any operation of a company may be affected to require ultimate compliance
with Regulation S-X and the Sarbanes–Oxley Act.
There is no levity in Regulation S-X and it does not make for light reading; it is commonly viewed at Securities Lawyers Deskbook: Regulation S-X. There is lots more to read to be thoroughly familiar with Regulation S-X and the SEC Division of Corporation Finance provides an unofficial 329-page (as of April 2, 2009) tome - with no pictures - named the Financial Reporting Manual.
Also available from the SEC are:
Selected Staff Accounting Bulletins and
Compliance and Disclosure Interpretations.
Regulation S-X generally implicitly discusses US GAAP and intends to implement
it widely, while increasingly permitting more non-GAAP measures where they may seem to have validity and relevance.
Regulation S-X was not developed in a vacuum but was rather devised by the SEC staff with copious input from accounting-related entities. Major entities are such as:
and to get it right from the beginning so that words and phrases have the same meaning throughout. Among other terms, certain basic terms are assigned meanings. For examples: Accountant's report, Amount, Certified, Control, Fiscal Year, Share, Wholly Owned Subsidiary, and so on.
A specific meaning is also given for "Summarized financial information".
A specific meaning is not given for the complex term Internal control over financial reporting, but reference is made to Rule 13a-15(f). As the failure to have such controls or properly implement them or use/provide their disclosure may come with penalties
and since this phrase pervades thinking and rule-making in the securities industry, it is worth viewing this definition, a definition that requires management to be pro-active:
After laying out some basic and important definitions in Rule 1-02, Regulation S-X kicks off in Rule 2-01 (Qualifications of Accountants) by considering accountants and auditors and states who is acceptable to the SEC to act as such. Accountants and auditors must be properly registered in their own jurisdiction: “The Commission will not recognize any person as a certified public accountant who is not duly registered and in good standing as such under the laws of the place of his residence or principal office.”
Further, one issue that matters critically is independence of the auditor from the client company. Final Rule 33-8183, (http://www.sec.gov/rules/final/33-8183.htm, January 28, 2003) while discussing audit services, non-audit services and auditor/accountant independence,
“The Commission's principles of independence with respect to services provided by auditors are largely predicated on three basic principles, violations of which would impair the auditor's independence:
(1) an auditor cannot function in the role of management,
(2) an auditor cannot audit his or her own work, and
(3) an auditor cannot serve in an advocacy role for his or her client.”
To be extra clear about it Sarbanes-Oxley lays out the nine impermissibles—that is the nine categories of prohibited non-audit services for auditors:
1. Bookkeeping
or other services related to the accounting records or financial statements of the audit client;
2. Financial information systems design
and implementation;
3. Appraisal
or valuation services, fairness opinion
s, or contribution-in-kind reports;
4. Actuarial services;
5. Internal audit
outsourcing services;
6. Management functions or human resources;
7. Broker or dealer, investment adviser, or investment banking
services;
8. Legal services and expert services unrelated to the audit; and
9. Any other service that the company’s Board determines, by regulation, is impermissible.
Here is where the SEC places the corporate onus: “The final rules recognize the critical role played by audit committees in the financial reporting process and the unique position of audit committees in assuring auditor independence ” ... because of “the unique ability and responsibility of the audit committee to insulate the auditor from the pressures that may be exerted by management.”
The result of Final Rule 33-8183 was to add Rule 2-07 to Regulation S-X and to amend Rule 2-01 of Regulation S-X, as well as affect several other regulations, rules and forms.
These changes were triggered mainly by the Sarbanes-Oxley Act
of 2002 ("Sarbanes-Oxley"), enacted on July 30, 2002. Title II of the Sarbanes-Oxley Act, entitled "Auditor Independence" required the Commission to adopt, by January 26, 2003, final rules such as 33-8183.
Section 201 of Sarbanes-Oxley require that non-audit services that are not prohibited under the Sarbanes-Oxley Act and the Commission's rules be subject to pre-approval by the registrant's audit committee. These rules specify the requirements for obtaining such pre-approval from the registrant's audit committee. Section 202 of Sarbanes-Oxley requires an audit committee to pre-approve allowable non-audit services and specifies certain exceptions to the requirement to obtain pre-approval. These rules specify the requirements of the registrant's audit committee for pre-approving non-audit services by the auditor of the registrant's financial statements.
Thus it can be seen that the audit committee membership is not a reward for good behavior or a sinecure
but rather a weighty responsibility flowing from the Sarbanes-Oxley Act, various SEC regulations, rules and Final Rules, to also discharge the responsibilities of Regulations S-X and Regulation S-K.
Qualifications and Reports of Accountants
After this initial section where the SEC lays out the requirements and limitations on interaction between company, management, audit committee, accountants and the auditor, Regulation S-X is then free to carry on and discuss the form and content of financial statements and financial reporting. Among other things Rule 210.2-06 (Retention of audit and review records) imposes a period of seven years after an accountant concludes an audit or review of an issuer's financial statements, during which the accountant shall retain records relevant to the audit or review, including work-papers and other documents that form the basis of the audit or review, and memoranda, correspondence, communications, other documents, and records (including electronic records).
Although referred to as "General Instructions" they are usually quite specific.
All financial statements shall be audited unless otherwise indicated.
Rules 3-01 to 3-20 specify the balance sheets and statements of income and cash flows to be included in disclosure documents when prepared in accordance with Regulation S-X.
Other portions of Regulation S-X govern the examination, form and content of such financial statements, including the basis of consolidation and the schedules to be filed.
Registrants must file audited balance sheets as of the end of each of the two most recent fiscal years for the registrant and its consolidated subsidiaries. Any interim balance sheet provided in accordance with the requirements of this section may be unaudited but shall be at least as current as the most recent balance sheet filed with the Commission on Form 10-Q. Where filings must be made yet year-end balance sheets are not yet available, provision is made for use of interim balance sheets, including time limits on large and accelerated filers.
Registrants must file audited statements of income and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet for the registrant and its consolidated subsidiaries and predecessors. In addition, for any interim period between the latest audited balance sheet and the date of the most recent interim balance sheet being filed, interim statements of income and cash flows shall be provided. Such interim financial statements may be unaudited.
The instructions note that any unaudited interim financial statements furnished shall reflect all adjustments which are necessary to a fair statement of the results; and a statement to that effect shall be included. Such adjustments shall include, for example, appropriate estimated provisions for bonus and profit sharing arrangements normally determined or settled at year-end. If all such adjustments are of a normal recurring nature, a statement to that effect shall be made. Otherwise, there shall be furnished information describing in appropriate detail the nature and amount of any adjustments other than normal recurring adjustments.
Also, disclosures regarding segments
required by generally accepted accounting principles shall be provided for each year for which an audited statement of income is provided.
It is not a law of nature that statements of related or subsidiary entities must be consolidated, however the presumption is that unless there is a good reason not to consolidate, consolidated statements should provide a better picture of overall operations and therefore should be provided.
The degree of ownership of one entity by its parent; foreign subsidiaries; differing fiscal reporting periods - are among the factors management must consider in deciding if or to what extent to consolidate income statements. Rule 3-04 requires that inter-company items and transactions in the consolidated financial statements being filed and unrealized inter-company profits and losses shall be eliminated.
The Rule also includes "The information required with respect to any statement shall be furnished as a minimum requirement to which shall be added such further material information as is necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." No limit is specified here as to the amount of further information that might be required.
The other Rules here are of little interest with the notable exceptions of Rule 4-08 General Notes to Financial Statements and Rule 4-10 Financial Accounting and Reporting for Oil and Gas Producing Activities. Rule 4-10 must be carefully followed only by oil and gas producers and those who search for raw petroleum sources, but Rule 4-08 is of universal applicability.
1. Principles of consolidation or combination.
2. Assets subject to lien.
3. Defaults.
4. Preferred shares.
5. Restrictions which limit the payment of dividends by the registrant.
6. Significant changes in bonds, mortgages and similar debt.
7. Summarized financial information of subsidiaries not consolidated and 50 percent or less owned persons.
8. Income tax expense.
9. Warrants or rights outstanding.
10. [Reserved]
11. Related party transactions which affect the financial statements.
12. [Reserved.]
13. Repurchase and reverse repurchase agreements.
14. Accounting policies for certain derivative instruments.
For example, #8 (Income Tax Expense) is only four modest paragraphs but must be complied with in the light of FAS 109 Summary- Accounting for Income Taxes, a 116-page document.
"Commercial and Industrial Companies" is a very general category comprising most trading or potentially tradable companies. Rule 5 applies to all entities except for those covered by Rule 6, Rule 6A, Rule 7 and Rule 9. Rule 5 'keeps everybody on the same page' by requiring the minimum acceptable disclosure for Balance Sheets and Income Statements.
Investment companies, mainly mutual funds, with any interstate presence and above a certain size, must register with the SEC under The Investment Company Act of 1940.
Investment companies are considered to be an industry with special reporting requirements, outlined in Rules 6-01 to 6-10 .
Rule 6A-01—Application of Rule 6A-01 to Rule 6A-05
Rule 6A-02—Special Rules Applicable to Employee Stock Purchase, Savings and Similar Plans
Rule 6A-03—Statements of Financial Condition
Rule 6A-04—Statements of Income and Changes in Plan Equity
Rule 6A-05—What Schedules Are to Be Filed
Rule 7-01—Application of Rule 7-01 to Rule 7-05
Rule 7-02—General Requirement
Rule 7-03—Balance Sheets
Rule 7-04—Income Statements
Rule 7-05—What Schedules Are to Be Filed
Rule 8-01—Preliminary Notes to Article 8
Rule 8-02—Annual Financial Statements
Rule 8-03—Interim Financial Statements
Rule 8-04—Financial Statements of Businesses Acquired or to be Acquired
Rule 8-05—Pro Forma Financial Information
Rule 8-06—Real Estate Operations Acquired or to be Acquired
Rule 8-07—Limited Partnerships
Rule 8-08—Age of Financial Statements
Rule 9-01—Application of Rule 9-01 to Rule 9-07
Rule 9-02—General Requirement
Rule 9-03—Balance Sheets
Rule 9-04—Income Statements
Rule 9-05—Foreign Activities
Rule 9-06—Condensed Financial Information of Registrant
Rule 9-07 -- [Reserved]
Rule 10-01—Interim Financial Statements
GENERAL
Rule 12-01—Application of Rule 12-01 to Rule 12-29
Rule 12-02—to Rule 12-03 [Reserved]
Rule 12-04—Condensed Financial Information of Registrant
Rule 12-05—to Rule 12-08 [Reserved]
Rule 12-09—Valuation and Qualifying Accounts
Rule 12-10—to Rule 12-11 [Reserved]
FOR MANAGEMENT INVESTMENT COMPANIES
Rule 12-12—Investments in Securities of Unaffiliated Issuers
Rule 12-12A—Investments—Securities Sold Short
Rule 12-12B—Open Option Contracts Written
Rule 12-12C—Summary Schedule of Investments in Securities of Unaffiliated Issuers
Rule 12-13—Investments Other than Securities
Rule 12-14—Investments In and Advances To Affiliates
Rule 12-15—Summary of Investments—Other than Investments in Related Parties
Rule 12-16—Supplementary Insurance Information
Rule 12-17—Reinsurance
Rule 12-18—Supplemental Information (for Property-Casualty Insurance Underwriters)
FOR FACE AMOUNT CERTIFICATE INVESTMENT COMPANIES
Rule 12-21—Investments in Securities of Unaffiliated Issuers
Rule 12-22—Investments In and Advances To Affiliates and Income Thereon
Rule 12-23—Mortgage Loans on Real Estate and Interest Earned on Mortgages
Rule 12-24—Real Estate Owned and Rental Income
Rule 12-25—Supplementary Profit and Loss Information
Rule 12-26—Certificate Reserves
Rule 12-27—Qualified Assets on Deposit
FOR CERTAIN REAL ESTATE COMPANIES
Rule 12-28—Real Estate and Accumulated Depreciation
Rule 12-29—Mortgage Loans on Real Estate
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
, Securities Exchange Act of 1934
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...
, Public Utility Holding Company Act of 1935
Public Utility Holding Company Act of 1935
The Public Utility Holding Company Act of 1935 , , also known as the Wheeler-Rayburn Act, was a law that was passed by the United States Congress to facilitate regulation of electric utilities, by either limiting their operations to a single state, and thus subjecting them to effective state...
, Investment Company Act of 1940
Investment Company Act of 1940
The Investment Company Act of 1940 is an act of Congress. It was passed as a United States Public Law on August 22, 1940, and is codified at through . Along with the Securities Exchange Act of 1934 and Investment Advisers Act of 1940, and extensive rules issued by the Securities and Exchange...
, Investment Advisers Act of 1940
Investment Advisers Act of 1940
The Investment Advisers Act of 1940, codified at through , is a United States federal law that was created to regulate the actions of investment advisers as defined by the law.-Overview:The law provides in part:-Contents:...
, and Energy Policy and Conservation Act of 1975.
Regulation S-X and the Financial Reporting Releases ( Staff Accounting Bulletins) set forth the form and content of and requirements for financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
required to be filed as a part of (a) registration statements under the Securities Act of 1933 and (b) registration statements under section 12, annual or other reports under sections 13 and 15(d) and proxy and information statements under section 14 of the Securities Exchange Act of 1934; except as otherwise specifically provided in the forms.
Regulation S-X is seen less frequently but equally validly for (c) registration statements, annual reports and shareholder reports filed under the Public Utility Holding Company Act of 1935 and likewise for (d) the Investment Company Act of 1940.
Regulation S-X extends the meaning of the term 'financial statements' to include all notes to the statements and all related schedules. Regulation S-X is closely related to Regulation S-K
Regulation S-K
Regulation S-K is a prescribed regulation under the US Securities Act of 1933 that lays out reporting requirements for various SEC filings used by public companies...
, which lays out reporting requirements for various SEC filings and registrations used by public companies. Regulation S-X profoundly affects internal and external accountants and auditors, and directors and officers and numerous officials, employees and contractors of publicly reporting companies and because of the need for accurate reporting of monies and other data, any operation of a company may be affected to require ultimate compliance
Compliance (regulation)
In general, compliance means conforming to a rule, such as a specification, policy, standard or law. Regulatory compliance describes the goal that corporations or public agencies aspire to in their efforts to ensure that personnel are aware of and take steps to comply with relevant laws and...
with Regulation S-X and the Sarbanes–Oxley Act.
There is no levity in Regulation S-X and it does not make for light reading; it is commonly viewed at Securities Lawyers Deskbook: Regulation S-X. There is lots more to read to be thoroughly familiar with Regulation S-X and the SEC Division of Corporation Finance provides an unofficial 329-page (as of April 2, 2009) tome - with no pictures - named the Financial Reporting Manual.
Also available from the SEC are:
Selected Staff Accounting Bulletins and
Compliance and Disclosure Interpretations.
Regulation S-X generally implicitly discusses US GAAP and intends to implement
Implement
Implement may refer to:* Implementation — the process for putting a design, plan or policy into effect.* A class of tools — such as farm implements or writing implements....
it widely, while increasingly permitting more non-GAAP measures where they may seem to have validity and relevance.
Regulation S-X was not developed in a vacuum but was rather devised by the SEC staff with copious input from accounting-related entities. Major entities are such as:
- House Committee on Financial ServicesUnited States House Committee on Financial ServicesThe United States House Committee on Financial Services is the committee of the United States House of Representatives that oversees the entire financial services industry, including the securities, insurance, banking, and housing industries...
; - Financial Accounting StandardsFinancial Accounting Standards BoardThe Financial Accounting Standards Board is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles within the United States in the public's interest...
with FASB Accounting Pronouncements;
- Federal Accounting Standards Advisory Board ;
- Public Company Accounting Oversight BoardPublic Company Accounting Oversight BoardThe Public Company Accounting Oversight Board is a private-sector, non-profit corporation created by the Sarbanes–Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. Its stated purpose is to 'protect the interests of investors and further the public interest...
;
- (AICPA) American Institute of Certified Public AccountantsAmerican Institute of Certified Public AccountantsFounded in 1887, the American Institute of Certified Public Accountants is the national professional organization of Certified Public Accountants in the United States, with more than 370,000 CPA members in 128 countries in business and industry, public practice, government, education, student...
; and - (IASB) International Accounting Standards BoardInternational Accounting Standards BoardThe International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...
and IFRS pronouncements.
Application of Regulation S-X (Rules 1-01, 1-02)
Because Regulation S-X is large and its impact on financial report is so pervasive, it is important to have a consistent terminologyTerminology
Terminology is the study of terms and their use. Terms are words and compound words that in specific contexts are given specific meanings, meanings that may deviate from the meaning the same words have in other contexts and in everyday language. The discipline Terminology studies among other...
and to get it right from the beginning so that words and phrases have the same meaning throughout. Among other terms, certain basic terms are assigned meanings. For examples: Accountant's report, Amount, Certified, Control, Fiscal Year, Share, Wholly Owned Subsidiary, and so on.
A specific meaning is also given for "Summarized financial information".
A specific meaning is not given for the complex term Internal control over financial reporting, but reference is made to Rule 13a-15(f). As the failure to have such controls or properly implement them or use/provide their disclosure may come with penalties
Sanctions (law)
Sanctions are penalties or other means of enforcement used to provide incentives for obedience with the law, or with rules and regulations. Criminal sanctions can take the form of serious punishment, such as corporal or capital punishment, incarceration, or severe fines...
and since this phrase pervades thinking and rule-making in the securities industry, it is worth viewing this definition, a definition that requires management to be pro-active:
- "The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principlesGenerally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards...
and includes those policies and procedures that:
- 1. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
- 2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
- 3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements."
Qualifications and Reports of Accountants
Qualifications and Reports of Accountants (Rules 2-01 to 2-07)http://taft.law.uc.edu/CCL/regS-X/art2.htmlAfter laying out some basic and important definitions in Rule 1-02, Regulation S-X kicks off in Rule 2-01 (Qualifications of Accountants) by considering accountants and auditors and states who is acceptable to the SEC to act as such. Accountants and auditors must be properly registered in their own jurisdiction: “The Commission will not recognize any person as a certified public accountant who is not duly registered and in good standing as such under the laws of the place of his residence or principal office.”
Further, one issue that matters critically is independence of the auditor from the client company. Final Rule 33-8183, (http://www.sec.gov/rules/final/33-8183.htm, January 28, 2003) while discussing audit services, non-audit services and auditor/accountant independence,
- revised the Commission's regulations related to the non-audit services that, if provided to an audit client, would impair an accounting firm's independence;
- required that an issuer's audit committeeAudit committeeIn a U.S. publicly-traded company, an audit committee is an operating committee of the Board of Directors charged with oversight of financial reporting and disclosure. Committee members are drawn from members of the company's board of directors, with a Chairperson selected from among the committee...
pre-approve all audit and non-audit services provided to the issuer by the auditor of an issuer's financial statements; - prohibited certain partners on the audit engagement team from providing audit services to the issuer for more than *five or seven consecutive years, depending on the partner's involvement in the audit, except that certain small accounting firms may be exempted from this requirement;
- prohibited an accounting firm from auditing an issuer's financial statements if certain members of management of that issuer had been members of the accounting firm's audit engagement team within the one-year period preceding the commencement of audit procedures;
- require that the auditor of an issuer's financial statements report certain matters to the issuer's audit committee, including "critical" accounting policies used by the issuer; and require disclosures to investors of information related to audit and non-audit services provided by, and fees paid to, the auditor of the issuer's financial statements.
- In addition, under the final rules, an accountant would not be independent from an audit client if an audit partner received compensation based on selling engagements to that client for services other than audit, review and attest services.
“The Commission's principles of independence with respect to services provided by auditors are largely predicated on three basic principles, violations of which would impair the auditor's independence:
(1) an auditor cannot function in the role of management,
(2) an auditor cannot audit his or her own work, and
(3) an auditor cannot serve in an advocacy role for his or her client.”
To be extra clear about it Sarbanes-Oxley lays out the nine impermissibles—that is the nine categories of prohibited non-audit services for auditors:
1. Bookkeeping
Bookkeeping
Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, receipts and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting. The accounting process is usually...
or other services related to the accounting records or financial statements of the audit client;
2. Financial information systems design
Systems design
Systems design is the process of defining the architecture, components, modules, interfaces, and data for a system to satisfy specified requirements. One could see it as the application of systems theory to product development...
and implementation;
3. Appraisal
Appraisal
Economic appraisal is a type of decision method applied to a project, programme or policy that takes into account a wide range of costs and benefits, denominated in monetary terms or for which a monetary equivalent can be estimated. Economic Appraisal is a key tool for achieving value for money and...
or valuation services, fairness opinion
Fairness opinion
A fairness opinion is a professional evaluation by an investment bank or other third party as to whether the terms of a merger, acquisition, buyback, spin-off, or going private are fair...
s, or contribution-in-kind reports;
4. Actuarial services;
5. Internal audit
Internal audit
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk...
outsourcing services;
6. Management functions or human resources;
7. Broker or dealer, investment adviser, or investment banking
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
services;
8. Legal services and expert services unrelated to the audit; and
9. Any other service that the company’s Board determines, by regulation, is impermissible.
Here is where the SEC places the corporate onus: “The final rules recognize the critical role played by audit committees in the financial reporting process and the unique position of audit committees in assuring auditor independence ” ... because of “the unique ability and responsibility of the audit committee to insulate the auditor from the pressures that may be exerted by management.”
The result of Final Rule 33-8183 was to add Rule 2-07 to Regulation S-X and to amend Rule 2-01 of Regulation S-X, as well as affect several other regulations, rules and forms.
These changes were triggered mainly by the Sarbanes-Oxley Act
Sarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
of 2002 ("Sarbanes-Oxley"), enacted on July 30, 2002. Title II of the Sarbanes-Oxley Act, entitled "Auditor Independence" required the Commission to adopt, by January 26, 2003, final rules such as 33-8183.
Section 201 of Sarbanes-Oxley require that non-audit services that are not prohibited under the Sarbanes-Oxley Act and the Commission's rules be subject to pre-approval by the registrant's audit committee. These rules specify the requirements for obtaining such pre-approval from the registrant's audit committee. Section 202 of Sarbanes-Oxley requires an audit committee to pre-approve allowable non-audit services and specifies certain exceptions to the requirement to obtain pre-approval. These rules specify the requirements of the registrant's audit committee for pre-approving non-audit services by the auditor of the registrant's financial statements.
Thus it can be seen that the audit committee membership is not a reward for good behavior or a sinecure
Sinecure
A sinecure means an office that requires or involves little or no responsibility, labour, or active service...
but rather a weighty responsibility flowing from the Sarbanes-Oxley Act, various SEC regulations, rules and Final Rules, to also discharge the responsibilities of Regulations S-X and Regulation S-K.
Qualifications and Reports of Accountants
- 210.2-01 Qualifications of accountants.
- 210.2-02 Accountants' reports and attestation reports.
- 210.2-02T Accountants' reports and attestation reports on internal control over financial reporting.
- 210.2-03 Examination of financial statements by foreign government auditors.
- 210.2-04 Examination of financial statements of persons other than the registrant.
- 210.2-05 Examination of financial statements by more than one accountant.
- 210.2-06 Retention of audit and review records.
- 210.2-07 Communication with audit committees.
After this initial section where the SEC lays out the requirements and limitations on interaction between company, management, audit committee, accountants and the auditor, Regulation S-X is then free to carry on and discuss the form and content of financial statements and financial reporting. Among other things Rule 210.2-06 (Retention of audit and review records) imposes a period of seven years after an accountant concludes an audit or review of an issuer's financial statements, during which the accountant shall retain records relevant to the audit or review, including work-papers and other documents that form the basis of the audit or review, and memoranda, correspondence, communications, other documents, and records (including electronic records).
General Instructions as to Financial Statements
General Instructions as to Financial Statements (Rules 3-01 to 3-20)http://taft.law.uc.edu/CCL/regS-X/art3.htmlAlthough referred to as "General Instructions" they are usually quite specific.
All financial statements shall be audited unless otherwise indicated.
Rules 3-01 to 3-20 specify the balance sheets and statements of income and cash flows to be included in disclosure documents when prepared in accordance with Regulation S-X.
Other portions of Regulation S-X govern the examination, form and content of such financial statements, including the basis of consolidation and the schedules to be filed.
- Rule 3-01—Consolidated Balance Sheets http://taft.law.uc.edu/CCL/regS-X/SX3-01.html
Registrants must file audited balance sheets as of the end of each of the two most recent fiscal years for the registrant and its consolidated subsidiaries. Any interim balance sheet provided in accordance with the requirements of this section may be unaudited but shall be at least as current as the most recent balance sheet filed with the Commission on Form 10-Q. Where filings must be made yet year-end balance sheets are not yet available, provision is made for use of interim balance sheets, including time limits on large and accelerated filers.
- Rule 3-02—Consolidated Statements of Income and Changes in Financial Position http://taft.law.uc.edu/CCL/regS-X/SX3-02.html
Registrants must file audited statements of income and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet for the registrant and its consolidated subsidiaries and predecessors. In addition, for any interim period between the latest audited balance sheet and the date of the most recent interim balance sheet being filed, interim statements of income and cash flows shall be provided. Such interim financial statements may be unaudited.
- Rule 3-03—Instructions to Income Statement Requirements http://taft.law.uc.edu/CCL/regS-X/SX3-03.html
The instructions note that any unaudited interim financial statements furnished shall reflect all adjustments which are necessary to a fair statement of the results; and a statement to that effect shall be included. Such adjustments shall include, for example, appropriate estimated provisions for bonus and profit sharing arrangements normally determined or settled at year-end. If all such adjustments are of a normal recurring nature, a statement to that effect shall be made. Otherwise, there shall be furnished information describing in appropriate detail the nature and amount of any adjustments other than normal recurring adjustments.
Also, disclosures regarding segments
Market segment
Market segmentation is a concept in economics and marketing. A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function...
required by generally accepted accounting principles shall be provided for each year for which an audited statement of income is provided.
Consolidated and Combined Financial Statements
Consolidated and Combined Financial Statements (Rules 3A-01 to 3A-05)http://taft.law.uc.edu/CCL/regS-X/art3A.htmlIt is not a law of nature that statements of related or subsidiary entities must be consolidated, however the presumption is that unless there is a good reason not to consolidate, consolidated statements should provide a better picture of overall operations and therefore should be provided.
The degree of ownership of one entity by its parent; foreign subsidiaries; differing fiscal reporting periods - are among the factors management must consider in deciding if or to what extent to consolidate income statements. Rule 3-04 requires that inter-company items and transactions in the consolidated financial statements being filed and unrealized inter-company profits and losses shall be eliminated.
Rules of General Application
Rules of General Application (Rules 4-01 to 4-10)http://taft.law.uc.edu/CCL/regS-X/art4.html- Rule 4-01 requires that financial statement be prepared according to US GAAP or 'translated' to US GAAP, with few exceptions.
The Rule also includes "The information required with respect to any statement shall be furnished as a minimum requirement to which shall be added such further material information as is necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." No limit is specified here as to the amount of further information that might be required.
The other Rules here are of little interest with the notable exceptions of Rule 4-08 General Notes to Financial Statements and Rule 4-10 Financial Accounting and Reporting for Oil and Gas Producing Activities. Rule 4-10 must be carefully followed only by oil and gas producers and those who search for raw petroleum sources, but Rule 4-08 is of universal applicability.
- Rule 4-08 requires that the notes to financial statements (modern financial statements 'always' have notes) contain certain information and are presented in a certain way.
1. Principles of consolidation or combination.
2. Assets subject to lien.
3. Defaults.
4. Preferred shares.
5. Restrictions which limit the payment of dividends by the registrant.
6. Significant changes in bonds, mortgages and similar debt.
7. Summarized financial information of subsidiaries not consolidated and 50 percent or less owned persons.
8. Income tax expense.
9. Warrants or rights outstanding.
10. [Reserved]
11. Related party transactions which affect the financial statements.
12. [Reserved.]
13. Repurchase and reverse repurchase agreements.
14. Accounting policies for certain derivative instruments.
For example, #8 (Income Tax Expense) is only four modest paragraphs but must be complied with in the light of FAS 109 Summary- Accounting for Income Taxes, a 116-page document.
Commercial and Industrial Companies
Commercial and Industrial Companies (Rules 5-01 to 5-04) http://taft.law.uc.edu/CCL/regS-X/art5.html"Commercial and Industrial Companies" is a very general category comprising most trading or potentially tradable companies. Rule 5 applies to all entities except for those covered by Rule 6, Rule 6A, Rule 7 and Rule 9. Rule 5 'keeps everybody on the same page' by requiring the minimum acceptable disclosure for Balance Sheets and Income Statements.
- Rule 5-02 Balance Sheets http://taft.law.uc.edu/CCL/regS-X/SX5-02.html "The purpose of this rule is to indicate the various line items and certain additional disclosures which ... should appear on the face of the balance sheets or related notes ..."
- Rule 5-03 Income Statements http://taft.law.uc.edu/CCL/regS-X/SX5-03.html "The purpose of this rule is to indicate the various line items which ... should appear on the face of the income statements ..."
Registered Investment Companies
Registered Investment Companies (Rules 6-01 to 6-10) http://taft.law.uc.edu/CCL/regS-X/art6.htmlInvestment companies, mainly mutual funds, with any interstate presence and above a certain size, must register with the SEC under The Investment Company Act of 1940.
Investment companies are considered to be an industry with special reporting requirements, outlined in Rules 6-01 to 6-10 .
Employee Stock Purchase, Savings and Similar Plans
Employee Stock Purchase, Savings and Similar Plans (Rules 6A-01 to 6A-05) http://taft.law.uc.edu/CCL/regS-X/art6A.htmlRule 6A-01—Application of Rule 6A-01 to Rule 6A-05
Rule 6A-02—Special Rules Applicable to Employee Stock Purchase, Savings and Similar Plans
Rule 6A-03—Statements of Financial Condition
Rule 6A-04—Statements of Income and Changes in Plan Equity
Rule 6A-05—What Schedules Are to Be Filed
Insurance Companies
Insurance Companies (Rules 7-01 to 7-05) http://taft.law.uc.edu/CCL/regS-X/art7.htmlRule 7-01—Application of Rule 7-01 to Rule 7-05
Rule 7-02—General Requirement
Rule 7-03—Balance Sheets
Rule 7-04—Income Statements
Rule 7-05—What Schedules Are to Be Filed
Financial Statements of Smaller Reporting Companies
Financial Statements of Smaller Reporting Companies (Rules 8-01 to 8-08)http://taft.law.uc.edu/CCL/regS-X/art8.htmlRule 8-01—Preliminary Notes to Article 8
Rule 8-02—Annual Financial Statements
Rule 8-03—Interim Financial Statements
Rule 8-04—Financial Statements of Businesses Acquired or to be Acquired
Rule 8-05—Pro Forma Financial Information
Rule 8-06—Real Estate Operations Acquired or to be Acquired
Rule 8-07—Limited Partnerships
Rule 8-08—Age of Financial Statements
Bank Holding Companies
Bank Holding Companies (Rules 9-01 to 9-06) http://taft.law.uc.edu/CCL/regS-X/art9.htmlRule 9-01—Application of Rule 9-01 to Rule 9-07
Rule 9-02—General Requirement
Rule 9-03—Balance Sheets
Rule 9-04—Income Statements
Rule 9-05—Foreign Activities
Rule 9-06—Condensed Financial Information of Registrant
Rule 9-07 -- [Reserved]
Interim Financial Statements
Interim Financial Statements (Rule 10-1)http://taft.law.uc.edu/CCL/regS-X/art10.htmlRule 10-01—Interim Financial Statements
Pro-Forma Financial Information
Pro-Forma Financial Information (Rules 11-01 to 11-03)http://taft.law.uc.edu/CCL/regS-X/art11.htmlForm and Content of Schedules
Form and Content of Schedules (Rules 12-01 to 12-09) http://taft.law.uc.edu/CCL/regS-X/art12.htmlGENERAL
Rule 12-01—Application of Rule 12-01 to Rule 12-29
Rule 12-02—to Rule 12-03 [Reserved]
Rule 12-04—Condensed Financial Information of Registrant
Rule 12-05—to Rule 12-08 [Reserved]
Rule 12-09—Valuation and Qualifying Accounts
Rule 12-10—to Rule 12-11 [Reserved]
FOR MANAGEMENT INVESTMENT COMPANIES
Rule 12-12—Investments in Securities of Unaffiliated Issuers
Rule 12-12A—Investments—Securities Sold Short
Rule 12-12B—Open Option Contracts Written
Rule 12-12C—Summary Schedule of Investments in Securities of Unaffiliated Issuers
Rule 12-13—Investments Other than Securities
Rule 12-14—Investments In and Advances To Affiliates
Rule 12-15—Summary of Investments—Other than Investments in Related Parties
Rule 12-16—Supplementary Insurance Information
Rule 12-17—Reinsurance
Rule 12-18—Supplemental Information (for Property-Casualty Insurance Underwriters)
FOR FACE AMOUNT CERTIFICATE INVESTMENT COMPANIES
Rule 12-21—Investments in Securities of Unaffiliated Issuers
Rule 12-22—Investments In and Advances To Affiliates and Income Thereon
Rule 12-23—Mortgage Loans on Real Estate and Interest Earned on Mortgages
Rule 12-24—Real Estate Owned and Rental Income
Rule 12-25—Supplementary Profit and Loss Information
Rule 12-26—Certificate Reserves
Rule 12-27—Qualified Assets on Deposit
FOR CERTAIN REAL ESTATE COMPANIES
Rule 12-28—Real Estate and Accumulated Depreciation
Rule 12-29—Mortgage Loans on Real Estate