SEC

Definition

The SEC, or Securities and Exchange Commission, is a U.S. government agency responsible for regulating the securities industry and protecting investors. It plays a crucial role in ensuring that companies adhere to transparent financial reporting and disclosure standards, which are essential for maintaining public trust and market integrity. The SEC's guidelines directly influence ethical practices within the auditing profession, especially regarding auditor independence and objectivity.

5 Must Know Facts For Your Next Test

1. The SEC was created in response to the stock market crash of 1929 and the Great Depression to restore investor confidence.
2. One of the primary functions of the SEC is to enforce federal securities laws and regulate securities markets.
3. The SEC requires publicly traded companies to disclose financial information regularly, which helps auditors assess the accuracy and completeness of financial statements.
4. Auditors must maintain independence from their clients to avoid conflicts of interest, a principle strongly emphasized by SEC regulations.
5. The SEC has the authority to impose penalties for violations of securities laws, including fines and suspensions of trading activities.

Review Questions

• How does the SEC influence ethical standards in auditing practices?
  • The SEC significantly influences ethical standards in auditing by enforcing regulations that require transparency and accuracy in financial reporting. By mandating that publicly traded companies adhere to strict disclosure requirements, the SEC helps ensure that auditors can perform their duties objectively. This regulatory framework establishes a foundation for ethical behavior among auditors, as they are held accountable not only to their clients but also to the public and regulatory bodies.
• What are the implications of SEC regulations on auditor independence and objectivity?
  • SEC regulations are crucial for maintaining auditor independence and objectivity, as they set forth rules that prevent auditors from engaging in activities that may compromise their impartiality. For instance, auditors are prohibited from providing certain non-audit services to their clients, which helps eliminate potential conflicts of interest. This independence is vital for preserving public trust in financial statements, as stakeholders rely on auditors to provide unbiased assessments of a company's financial health.
• Evaluate how the establishment of the SEC has shaped the landscape of corporate governance and auditing in the United States.
  • The establishment of the SEC has profoundly shaped corporate governance and auditing by promoting higher standards of transparency and accountability within publicly traded companies. By implementing rigorous reporting requirements and enforcing compliance with securities laws, the SEC has fostered a culture of ethical behavior among corporations and auditors alike. This regulatory environment encourages good corporate governance practices, ultimately protecting investors and enhancing overall market integrity in the U.S.

Related terms

GAAP:

Generally Accepted Accounting Principles, the standard framework of guidelines for financial accounting used in the U.S.

Sarbanes-Oxley Act:

A law enacted in 2002 aimed at improving corporate governance and accountability in the wake of financial scandals.

Insider Trading: The illegal practice of trading stocks or other securities based on non-public, material information about the company.