Question

As you may know, proper financial reporting is critical to the evaluation a company’s strategy. Discuss the role of the SEC in ensuring integrity in financial reporting.

Answer 1

The key purpose of the financial statements is to report and present fair information to all the stakeholders (including prospective investors/stakeholders) so as to help them make informed judgement about the health of the company. In this respect the accounting rules and standards are set by the FASB however matters relating to capital markets - primary issuances, secondary trading in stocks and bonds and capital market intermediaries - come under the purview of SEC whose mission is to protect investors, maintain orderly & efficient markets which can help in capital formation for the economy.

Unlike the traditional banking deposits, the investments in capital markets (key being stock market and bond investments) are not guaranteed by any one (Federal Authority) and the onus of making a thorough assesment and informed judgement on merits of investment in a particular security is solely of the investor though they may be aided by their advisors. Since the rules of reporting are under the FASB, SEC focuses on primarily fair & timely disclosure of market relevant information to everyone and maintain fair dealing and protect (especially retail public) from frauds and manipulation. SEC oversees the market participants like stock exchange, dealers & brokers, mutual funds and investment advisors - it monitors their & companies' activities for fair dealing to all investors and penalises for insider trading (one set of investors getting preferential material information), accounting frauds and providing misleading information.

SEC purview extends to all securities registered for offerring to US investors and it ensures that the necessary financial information required by the investors is available to them and the information disseminated is fair, and timely and available to all the investors at the same time This give confidence to the investors in the capital market system and is necessary for the promoting orderly growth if the capital markets in the country.