FINC 225 Discussion Board 5

Unit 5 Discussion Board

Financial Statement Analysis

What are some examples of major ethical breaches in the recent past that have led to increased scrutiny in the field of financial reporting and analysis? Why are they important to a firm’s stakeholders and the public at large?

Ethics. What exactly is it? Merriam-Webster definition is: rules of behavior based on ideas about what is morally good and bad. Whose ideas? My guess would be society, but that still leaves this definition open for major debates. So I looked up code of ethics, Merriam-Webster said: a set of rules about good and bad behavior. Are these written somewhere? Where can I pick up a copy? In my opinion every corporation should have their “code of ethics” written and every employee should have a copy. I am sure some do, just as I am sure some don’t. And some employees just don’t care.

Enron, for example, is famous for the un-ethical practices most of their top officers, which came to light in late 2001. The SEC opened up an investigation after Enron turned in a $618M loss in their 3rd quarter and still paid their top 140 executives $680M in 2001. Top Enron executives sold off their company stocks, but prevented other employees from selling their stocks because of a restriction in their 401K. Enron then filed for Chapter 11 bankruptcy and the employees lost everything they had. For some it was what they were retiring on.

Ethics are very important. Whether you are the CEO of a company or the nightly janitor, our actions define us. Some of our action either directly or indirectly effect other people and sometimes that can be bad. What the executives of Enron did, not only took from employees, but took from the families of those employees. The new executives have the task of dismantling what is left of Enron and trying to pay back creditors. But what of the employees that lost everything, you ask? There was 20,000 employees, the each received $3,100. Doesn’t seem fair at all, does it?

Review and reflect on the knowledge you have gained from this course. Based on your review and reflection, write at least 3 paragraphs on 1 of the following topics:

The Sarbanes-Oxley Act is authored by senators Paul Sarbanes (MD) and Michael G. Oxley (OH) and was enacted in 2002 by the Bush administration following several large corporate accounting scandals. The Sarbanes-Oxley Act requires companies to provide full disclosure of off balance sheet items in periodic reports and to institute an internal control system to be assessed annually.

  1. What is the Sarbanes-Oxley Act, and what are some of the elements of this Act that were designed to protect the integrity of the financial statements prepared and disseminated by publicly traded companies?

Referred to as the Public Company Accounting reform was mainly geared towards public firms but now has provisions that apply to the private firms. This law increases the requirements for all U.S. public company’s Board of Directors, Management and Accounting firms by increasing the role of responsibilities for the Board of Directors by requiring at least one board member to have financial expertise to oversee the company’s procedures, compliances and financial statements and increased the independence of auditors who review the accuracy of these financial statements by not allowing to act as a consultant.

The Sarbanes-Oxley Act contains (11) eleven titles but the most important sections are 302 (reviewing of financial reports by signing officers), 401 (financial statements published by issuers) , 404 ( requirement to publish information in their annual report), 409 (what issuers are required to report to the public), 802 (penalties and fines imposed in case of misconduct) and 906

What is the SEC, and what is its role in protecting the integrity of financial statements prepared and disseminated by publically traded companies? 

What is SEC?

The Securities and Exchange Commission (SEC) is a government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce, through the mail or on the internet must be registered with the SEC (Champ, 2017).

What’s its role in protecting the integrity of financial statements prepared and disseminated by publicly traded companies?

The Division of Corporation Finance assists the Commission in executing its responsibility to oversee corporate disclosure of important information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. The Division’s staff routinely reviews the disclosure documents filed by companies. The staff also provides companies with assistance interpreting the Commission’s rules and recommends to the Commission new rules for adoption (Champ, 2017).

The Division of Corporation Finance reviews documents that publicly-held companies are required to file with the Commission. The documents include:

registration statements for newly-offered securities;

annual and quarterly filings (Forms 10-K and 10-Q);

proxy materials sent to shareholders before an annual meeting;

annual reports to shareholders;

documents concerning tender offers (a tender offer is an offer to buy a large number of shares of a corporation, usually at a premium above the current market price); and

filings related to mergers and acquisitions (United States, 2017)

These documents disclose information about the companies’ financial condition and business practices to help investors make informed investment decisions. Through the Division’s review process, the staff monitors compliance with disclosure requirements and seeks to improve the quality of the disclosure. To meet the SEC’s requirements for disclosure, a company issuing securities or whose securities are publicly traded must make available all information, whether it is positive or negative, that might be relevant to an investor’s decision to buy, sell, or hold the security (Hoyle, Schaefer & Doupnik, 2017).

Corporation Finance provides administrative interpretations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939, and recommends regulations to implement these statutes. Working closely with the Office of the Chief Accountant, the Division monitors the activities of the accounting profession, particularly the Financial Accounting Standards Board (FASB), that result in the formulation of generally accepted accounting principles (GAAP). Increasingly, the Division also monitors the use by U.S. registrants of International Financial Reporting Standards (IFRS), promulgated by the International Accounting Standards Board (Halperin, 2017).

The Division’s staff provides guidance and counselling to registrants, prospective registrants, and the public to help them comply with the law. For example, a company might ask whether the offering of a particular security requires registration with the SEC. Corporation Finance would share its interpretation of the relevant securities regulations with the company and give it advice on compliance with the appropriate disclosure requirement.

The Division uses no-action letters to issue guidance in a more formal manner. A company seeks a no-action letter from the staff of the SEC when it plans to enter uncharted legal territory in the securities industry. For example, if a company wants to try a new marketing or financial technique, it can ask the staff to write a letter indicating whether it would or would not recommend that the Commission take action against the company for engaging in its new practice (Frankel & Forman, 2017).


Champ, N. (2017). Going public: My adventures inside the SEC and how to prevent the next devastating crisis.

Frankel, M. E. S., & Forman, L. H. (2017). Mergers and acquisitions basics: The key steps of acquisitions, divestitures, and investments.

Halperin, R. A. (2017). The influence of uncertainty in a changing financial environment: An inquiry into the root causes of the Great Recession of 2007-2008. Cham: Springer International Publishing.

Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2017). Advanced accounting. New York, NY: McGraw-Hill Education.

United States. (2017). Securities and Exchange Commission Overpayment Credit Act: Report (to accompany H.R. 1257) (including cost estimate of the Congressional Budget Office).

The Sarbanes-Oxley Act 2002. (n.d.). Retrieved November 03, 2017, from

Federwisch, Anne (2015, Oct 6). Ethical issues in the financial services industry. Retrieved from

CNN Library (2016, April 17) Enron fast facts. Retrieved from

Keller, Bill (2002, Jan 26) Enron for dummies. Retrieved from