Public Company Accounting and Reporting Requirements

Public companies, which offer their securities for sale to the general public, operate under a set of accounting and reporting obligations. This framework is designed to provide transparency and reliability in financial information to protect investors and maintain the stability of capital markets. Investors rely on a company’s reported financial health to make informed decisions. This standardized approach ensures that the data investors receive is consistent and dependable, which underpins the public’s willingness to participate in financial markets.

The Regulatory and Standard-Setting Bodies

An ecosystem of oversight governs public company financial reporting, with distinct bodies responsible for creating, interpreting, and enforcing the rules. These organizations work together to ensure the integrity of the financial data that investors use. This multi-layered system was developed over time, largely in response to economic events that highlighted the need for robust and independent oversight. The structure is designed to separate rule-makers from enforcers and to ensure that auditors are themselves subject to review.

Securities and Exchange Commission (SEC)

The U.S. Securities and Exchange Commission (SEC) is the primary federal agency responsible for regulating securities markets. Established by the Securities Exchange Act of 1934, the SEC has the legal authority to prescribe accounting methods and enforce standards for publicly traded companies. Its mission is to maintain fair and orderly markets and facilitate capital formation.

While the SEC has the authority to set accounting standards, it has historically designated this role to the private sector. The SEC formally recognized the Financial Accounting Standards Board (FASB) as the organization responsible for setting these standards. The SEC retains oversight and can bring enforcement actions against companies and individuals for non-compliance with reporting obligations.

Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB) is the independent, private-sector organization designated by the SEC to establish financial accounting and reporting standards for U.S. companies. The standards created by the FASB are known as Generally Accepted Accounting Principles (GAAP). The FASB’s mission is to improve GAAP to provide useful information to investors and other users of financial reports.

The FASB operates through a transparent process that encourages broad participation. When a new or revised standard is needed, the Board issues proposals for public comment. Final standards are issued as Accounting Standards Updates, which amend the FASB Accounting Standards Codification, the single source of authoritative U.S. GAAP.

Public Company Accounting Oversight Board (PCAOB)

The Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies. Its creation marked a shift from self-regulation by the accounting profession to independent oversight. The SEC has oversight authority over the PCAOB, including the approval of its rules and budget.

The PCAOB’s responsibilities are distinct from the FASB’s. While the FASB sets the accounting standards (GAAP), the PCAOB sets the auditing and professional practice standards that registered public accounting firms must follow. The PCAOB also conducts regular inspections of these audit firms to assess their compliance and can impose disciplinary actions for violations.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) are the common set of standards and rules that public companies in the U.S. must follow when preparing their financial statements. Established by the FASB, GAAP provides the foundation for consistent and comparable financial reporting. The goal is to ensure a company’s financial statements are complete and comparable, allowing investors to analyze financial health and compare performance against other companies and its own past results.

A fundamental concept within GAAP is the accrual basis of accounting. This principle dictates that revenues are recognized when earned and expenses are recognized when incurred, regardless of when cash is exchanged. This provides a more accurate picture of a company’s performance during a period than the cash basis.

Another concept is materiality, which means that an omission or misstatement is significant if it could influence a user’s decision. Companies must report all significant financial data but do not need to be concerned with insignificant details. The going concern assumption is also foundational, meaning financial statements are prepared assuming the business will continue to operate for the foreseeable future.

To illustrate, the standard on Revenue from Contracts with Customers provides a five-step framework for when and how much revenue to recognize. Similarly, the standard on Leases requires companies to recognize most lease agreements on their balance sheets as assets and liabilities. This provides a more complete picture of a company’s financial obligations.

Required SEC Filings and Disclosures

Public companies must file regular reports with the SEC to provide investors with timely and accurate information about their financial condition and business operations. These filings are a primary mechanism for transparency and are publicly available through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Companies must file scheduled annual and quarterly reports and also provide timely updates about significant events to ensure the market has access to current data.

Form 10-K

The Form 10-K is the comprehensive annual report detailing a company’s business and financial condition. Filing deadlines depend on the company’s size: large accelerated filers have 60 days after the fiscal year-end, accelerated filers have 75 days, and non-accelerated filers have 90 days. The 10-K includes the company’s audited financial statements, which consist of the income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity.

Beyond financial statements, the 10-K contains important narrative sections. The “Business” section describes operations, products, and services, while the “Risk Factors” section discloses significant risks. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is another part where management provides its perspective on financial results and discusses business trends.

Form 10-Q

The Form 10-Q is a quarterly report that provides a continuing view of a company’s financial position. It is filed for each of the first three fiscal quarters, with a deadline of 40 days after the quarter’s end for large accelerated and accelerated filers, and 45 days for non-accelerated filers. The financial statements in a 10-Q are reviewed by an auditor but are not fully audited. The 10-Q updates the information from the most recent 10-K, including unaudited financial statements and an updated MD&A.

Form 8-K

The Form 8-K is a “current report” that companies file to announce major events that shareholders should know about. It is not filed on a regular schedule but is triggered by specific events and must be filed within four business days of the event. Events requiring an 8-K filing include entering into a material agreement, completing an acquisition, changes in the company’s accountant, and the departure or election of directors or principal officers. The purpose is to ensure investors have immediate access to information about unscheduled material events.

The Audit Process and Internal Controls

The reliability of a public company’s financial reporting depends on verification and internal discipline. This system involves an independent external review and internal processes designed to ensure accuracy and prevent fraud, a framework strengthened by federal legislation. The external audit provides an objective opinion on the financial statements, while strong internal controls are the company’s first line of defense in producing reliable data.

The Independent Financial Statement Audit

An independent financial statement audit is an examination of a company’s financial statements by an independent CPA firm. The purpose is for the external auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in conformity with GAAP. This opinion adds credibility to the statements and provides assurance to investors. The standards for conducting these audits are set by the PCAOB, and the final auditor’s report is included in the company’s annual Form 10-K.

The Sarbanes-Oxley Act (SOX)

The Sarbanes-Oxley Act of 2002 (SOX) is a federal law passed in response to major accounting scandals to enhance corporate responsibility. The law introduced reforms to the regulation of corporate governance and financial reporting. SOX established the PCAOB to oversee public company auditors and mandated greater independence for corporate boards’ audit committees. Its provisions directly address the accountability of corporate officers and the company’s internal processes for financial reporting.

CEO/CFO Certification

A provision of SOX, Section 302, requires a company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) to personally certify the accuracy of their company’s quarterly and annual reports. In this certification, the executives must state that they have reviewed the report, that it does not contain any untrue statements of a material fact or omit a material fact, and that the financial statements fairly present the company’s financial condition. This makes top executives directly accountable for the information their company provides.

Internal Control over Financial Reporting (ICFR)

SOX Section 404 requires management to establish and maintain an adequate internal control structure for financial reporting. Internal Control over Financial Reporting (ICFR) refers to a company’s processes designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements according to GAAP.

Section 404 has two main requirements. First, management must annually assess the effectiveness of the company’s ICFR and issue a report on its findings. Second, the company’s independent auditor must also perform its own audit of the company’s ICFR and issue a separate opinion on its effectiveness. This dual assessment provides a thorough review of the controls that support the financial reporting process.