States Securities And Exchange Commission Research Articles

Walter Schuetze and the Numbers Game: Advocate for Reform, Champion of Independence, Promoter of Fair Value, and Proponent of Simplification

ABSTRACT This paper examines the life of Walter Schuetze (1932–2017) and his contributions to the accounting profession. He was a public accountant, a founding member of the Financial Accounting Standards Board (FASB), the Chief Accountant for the United States Securities and Exchange Commission (SEC), a corporate board member, and an advocate for accounting reform. In 2008, he was inducted into the Accounting Hall of Fame. This paper shows how Walter Schuetze has left a quiet but impactful legacy with lessons learned that still have applicability to the accounting profession today.

The Intersection of Cryptocurrencies with Securities Law

The Intersection of Cryptocurrency and Securities Law has been discussed in various legal contexts in the present scenario. The rise of cryptocurrencies has put forth fresh challenges for investors as well as regulators and there is a need for clear direction on how to interpret the transactions that include digital currencies. The advent of crypto exchanges has formed an entire ecosystem of services and participants, who are looking to provide liquidity, exploit price differences for profit, and support the investments. The focus of the study is to investigate the legal and regulatory steps taken to include cryptocurrencies within securities law. The paper will delve into the distinctive attributes of cryptocurrencies and analyse the different regulations in which they can be classified as securities. Moreover, it will inspect the fluctuating regulatory strategies adopted by various countries and entities, such as the United States Securities and Exchange Commission (SEC), United Kingdom’s Financial Conduct Authority (FCA), The Australian Securities and Investments Commission (SIC), Securities and Exchange Board of India (SEBI) and others.

In Space, No One Can Hear You're Green: Standardization of Environmental Reporting, the SEC's Proposed Climate Change Disclosure Rules, and Remote Sensing Technology

Climate change is the existential issue of our age. Its challenges are massive, its science is ever‐developing and most now agree that its demands are immediate. How society deals with the immensity and immediacy of the challenge in the face of incomplete, immature, and sometimes inconclusive data is a question playing out now in our capital markets. Bending to demand from green investors and environmental activists, the United States Securities and Exchange Commission (SEC) proposed new rules on March 21, 2022, “to enhance and standardize climate‐related disclosures” to better inform investors' decision‐making. How should reporting companies, already obligated to report on material risks to their businesses, “enhance and standardize” climate‐related disclosure when the data are ambiguous or in conflict? This article proposes one possible and currently available solution: use satellite‐based data. By requiring the use of available satellite data, regulators can protect investors from being misled by cherry‐picked emissions data. We begin with a case for standardization and a brief history of environmental, social, and governance (ESG) reporting and metrics, both in the United States and internationally, as well as SEC efforts regarding climate change disclosures. We then explore the precedent for satellite use and space‐based technology in monitoring and regulatory compliance and argue that satellite and space data can be instrumental to help investors make more informed investment decisions based on reporting companies' true environmental impact.

Research Methods of Main Parameter Sensitivity Differences in China’s Dynamic Oil and Gas Reserve Estimation under SEC Standards

International oil and gas companies listed in New York must publish the information of oil and gas reserves under the SEC (United States Securities and Exchange Commission) standards every year. For greatly improving the SEC reserve, the SEC reserve value and the SEC reserve substitution rate, in this article not only the SEC reserve equations have been determined but also the SEC reserve value models have been established. The SEC reserve value models have been verified as correct. Based on these models, the multivariate function calculus method, the multivariate function limit method and the function recurrence method have been adopted to research parameter sensitivity differences rules, parameter adjustment directions, parameter adjustment degrees and SEC reserve parameter linkage adjustment rules. The research is significant, because there are great differences between SEC standards and China’s in reserve management mode, reserve estimation method system and financial management system. It is just these differences that cause the frequent adjustment of SEC reserve parameters during the process of SEC reserve submissions each year. As a result, this article reaches some conclusions. Above all, the article has clarified the parameter quantitative conditions that lead to the sensitivity between the SEC reserve and the initial production to begin stronger and weaker than the sensitivity between the SEC reserve and the price in production exponential, hyperbolic and harmonic decline types. Furthermore, the article has clarified the parameter quantitative conditions that lead to the sensitivity between the SEC reserve value and the initial production to begin stronger and weaker than the sensitivity between the SEC reserve value and the price in common production exponential decline types. Moreover, the article has clarified reserve parameter linkage adjustment rules and found the most significant parameter whose least adjustment will cause the largest reserve increase. In addition, the function calculus method adopted to disclose reserve parameter sensitivity rules will expand the parameter sensitivity analysis method that took the previous statistical mapping method as the main analysis method.

Predicting Cybersecurity Incidents Through Mandatory Disclosure Regulation

Cyber-crime is an increasingly common risk for organizations that collect and maintain vast troves of data. There is extensive literature that explores the causes of cyber-crime, but relatively little work that aims to predict future incidents. In 2011, the United States Securities and Exchange Commission (SEC) provided guidelines for how publicly traded companies should convey these risks to potential investors. The SEC and other regulatory agencies are exploring how to leverage artificial intelligence, machine learning, and data science tools to improve their regulatory efforts. This paper explores the potential to use machine learning and natural language processing techniques to analyze firms’ mandatory risk disclosure statements, and predict which firms are at the greatest risk of suffering cyber-security incidents. More broadly, this study highlights the potential for using legally mandated disclosures to bolster regulatory efforts, particularly in the context of prediction policy problems.

Public Enforcement after Kokesh: Evidence from SEC Actions

Disgorgement of ill-gotten gain, similar to an unjust enrichment claim, is a common remedy in United States Securities and Exchange Commission (SEC) enforcement. In June 2017, the Supreme Court held in Kokesh v. SEC that disgorgement is a penalty. As such, the statute of limitations in section 28 U.S.C. § 2462 for any “fine, penalty, or forfeiture” bars the SEC from seeking disgorgement for any violation committed more than five years before suit. The Kokesh decision has reverberated through federal enforcement. Most directly, it bars SEC disgorgement claims for long-running frauds, costing the Agency $1.1 billion to date. As is typical for Supreme Court decisions, Kokesh also raised more questions than it answered. If disgorgement is a penalty, then most other enforcement remedies are also penalties and are thus time limited to five years. Moreover, disgorgement in SEC civil actions is not expressly authorized in any statute. If disgorgement is a penalty, then perhaps the SEC cannot seek disgorgement in court actions at all. More than two years after the Kokesh decision, its impact remains uncertain. Using a unique dataset of over eight thousand SEC enforcement actions filed between 2010 and 2018, this Article unravels the impacts of Kokesh. Depending on how broadly lower courts interpret Kokesh, anywhere between twenty and eighty percent of SEC disgorgement is at risk. At the same time, and contrary to claims advanced by SEC leadership, Kokesh does not substantially undermine the Agency’s abilities to compensate investors or to deter misconduct, but it will certainly change the incentives at work during settlement negotiations. However Kokesh is interpreted, one group of defendants—individuals running long-standing frauds targeting small-scale investors—clearly benefits. Many of them will be able to fleece ordinary people of their nest eggs and then keep the money they stole. Even if such defendants cannot be deterred, the result is corrosive because it offends basic notions of fairness and thus undermines the rule of law.

An examination of SEC revenue recognition comments and IPO earnings management

PurposeThe purpose of this study is to examine the association between revenue-based earnings management in the periods immediately before and after firms’ initial public offerings (IPOs) and regulatory scrutiny by the United States Securities and Exchange Commission (SEC) during review of IPO firms’ registration statements.Design/methodology/approachThis paper uses conditional discretionary revenues (Stubben, 2010) as its measure of earnings management, and revenue recognition comments delivered by the SEC as its measure of regulatory scrutiny. The authors use ordinary least squares regression (OLS) models, as well as a supplemental count model, to assess the association between conditional discretionary revenues and revenue recognition comments delivered by the SEC.FindingsThis study finds evidence of a positive association between earnings management measures in the pre-IPO period and the number of revenue recognition comments received by those firms during the SEC’s review. Furthermore, this study provides evidence that greater numbers of comments are associated with declining earnings management measures in the post-IPO period. However, the evidence suggests that these associations apply only to income-decreasing earnings management.Originality/valueThis paper extends the IPO earnings management literature by using conditional discretionary revenues as the measure of earnings management, and contributes to a nascent research stream in the accounting literature by investigating the SEC’s comment letter process and its association with, and impact upon, earnings management in the IPO process.

Multivariate GARCH analysis of Fannie Mae, Freddie Mac, and American International Group: Did the short-selling ban reduce systemic return-risk?

This paper uses a multivariate GARCH framework to examine how the 2008 moratorium on short-selling affected the systemic return-risk across three firms at the center of the subprime mortgage crises: Fannie Mae and Freddie Mac, the two largest buyers of US home mortgages; and American International Group, a major insurer of mortgage-backed securities. Wald coefficient tests indicate shocks in prior day returns manifest less systemic return-risk under the short-selling ban, thus coinciding with the regulatory intentions of the United States Securities and Exchange Commission (SEC), to “moderate the sudden and excessive fluctuations in securities prices.” The findings also agree with prior work in observing abnormal-negative returns for heavily shorted firms, and diminished negative skewness and kurtosis under binding short-selling constraints.

The International Accounting Standards Board’s Progress in Promoting Judgement Through Objectives-Oriented Accounting Standards

This study analyzes how the International Accounting Standards Board (IASB) promotes professional judgement by issuing objectives-oriented accounting standards and exposure drafts. We focus on the the role of judgement as outlined in Phase I of the IASB Conceptual Framework (CF), Chapter 1, “Objective of General Purpose Financial Statements” and Chapter 3, “Qualitative Characteristics of Useful Financial Information” (IASB 2010). We discuss how the framework, when viewed through the prism of 'objectives-oriented accounting standards' as recommended by the United States Securities and Exchange Commission (SEC) Report in its “Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System” (July 2003), encourages professional judgement. We analyze International Financial Reporting Standards (IFRS) and Exposure Drafts (ED) issued by the IASB since its inception in 2002 to determine if those documents are consistent with objectives-oriented accounting standards. Our analysis is useful for gaining insights into how the IASB integrates the CF with the SEC’s recommended objectives-oriented accounting approach to promote judgement in the interest of IASB/FASB convergence of accounting standards.

SEC Comment Letters and Financial Statement Restatements

We use United States Securities and Exchange Commission (SEC) comment letters and accounting restatements to investigate the SEC’s Division of Corporation Finance (DCF) financial reporting oversight procedures. We investigate how DCF compares with “other monitors” in identifying disclosures requiring restatement and how these restatements differ. Our tests focus on DCF as a whole and on the individual industry offices that comprise the DCF. We conclude that, while there are significant variations across DCF offices in the prompting of restatements, company variables used by the SEC to select firms for review appear consistent with SOX section 408 criteria. We also find the oversight process focuses on companies with weaker “other monitors,” i.e. audit firms. Our results provide evidence for the debate on whether or not an SEC type review and comment letter monitoring process could serve as the model for achieving the oversight for IFRS enforcement that is critical to international capital markets.

Stock Market Reaction to Elimination of the Reconciliation from IFRS to U.S. GAAP in the USA

Stock Market Reaction to Elimination of the Reconciliation from IFRS to U.S. GAAP in the USA

Reserves in Nontraditional Reservoirs: How Can We Account for Them?

Summary The United States Securities and Exchange Commission (SEC), on 29 December 2008, adopted new rules for disclosing oil and gas reserves. The definitions contained within these rules are broadly consistent with the SPE Petroleum Resources Management System (PRMS); the definitions in the previous rules differed from PRMS in a number of specific instances (SPE 2007). A notable difference in the new rules is inclusion of more nontraditional resources as potential oil and gas reserves rather than as mining reserves. With new disclosure rules, new questions arise about the manner in which reserves in nontraditional resources are to be reported.

Modernization of the SEC Oil and Gas Reserves Reporting Requirements

Summary Modernized United States Securities and Exchange Commission (SEC) rules for reporting oil and gas reserves are now broadly consistent with the SPE definitions and generally reflect public requests for specific changes in the previous rules. Disclosure requirements based on the revised definitions feature use of annual average prices; wider use of reliable technologies; broader recognition of nontraditional resources, including those from oil sands, shales, and coal; optional disclosure of probable and possible reserves; and replacement of the "certainty" criterion for some reserves by a "reasonably certain" criterion. Official clarification of some of the new terms may be forthcoming; here, I provide my opinion of their intent.

Disclosure of Year 2000 Issues in Corporate Financial Reports

The Year 2000 represents a significant challenge for many organizations. Financial report users, which include investors,creditors, suppliers, customers, employees, as well as others,have an interest in knowing how organizations are dealing with the Year 2000 issue. There could be significant negative consequences for organizations that fail to properly address the Year 2000 issue. Public corporations that have material issues associated with the Year 2000 issue are required by the United States Securities and Exchange Commission (SEC) to disclose specific information in their annual financial reports. This paper introduces the Year 2000 issue and reviews the development of public corporation annual report disclosures that are required and recommended by the SEC. The annual reports of 51 companies, which had fiscal years ending in the last half of 1998, were selected from the S&P 500 and were examined for the quality and quantity of Year 2000 disclosures. While all of the companies examined provided some Year 2000 disclosures, very few of the companies provided all of the required and recommended practices set forth by the SEC and some appeared to report in a severely deficient manner.

The role of accounting information in security exchange delisting

Our paper looks at the considerations used by the American Stock Exchange (AMEX) in its decision to remove one of its listed firms. The involuntary delisting process is examined using a sample of 150 firms delisted over the 1981 to 1992 period. The first part of our study compares the AMEX numerical guidelines to firms' financial accounting numbers prior to delisting. The next part identifies additional factors used by the AMEX from the Delisting Applications filed with the United States Securities and Exchange Commission (SEC) upon a firm's removal. The third part investigates the importance of these and other factors by estimating a logistic regression model using a matching sample of continuously listed firms. The results indicate that audit opinions, Chapter 11 filings, firms' trading volume, and one-year stock return prior to delisting are important factors in the delisting decision. The AMEX financial guidelines are also a significant factor in the logit model. However, in many cases the AMEX did not follow the criteria outlined in these guidelines, suggesting that accounting numbers play a role secondary to that of other factors cited in the Delisting Applications. Finally, shareholder lawsuits plus SEC investigations, which cause adverse publicity and can harm the AMEX's reputational capital, was also found to be a significant variable in the logit regression.

Oil and gas reserve value disclosures and bid-ask spreads

My paper presents empirical evidence to suggest that the initial disclosure of the discounted present value of oil and gas reserves, mandated by the United States Securities and Exchange Commission (SEC) in Accounting Series Release No. 253 (ASR 253) ( SEC, 1978) was associated with a decline in the bid-ask spread of disclosing firms' common stock that appears to have persisted for the twelve month period following the initial reserve disclosures. This finding is important because it implies that ASR 253 equalized access to information across classes of investors, thereby enhancing the equality of opportunity in financial markets. The objective of decreasing information asymmetry and increasing equality of opportunity in financial markets is an operational criterion for disclosure regulation which also provides accounting researchers with a means to study the effectiveness of accounting policy. The results of this study suggest that ASR 253 ( SEC, 1978) constituted effective public policy because it helped mitigate information asymmetry. The question of whether or not firms should be required to disclose value-based measures of assets and liabilities is important and timely because regulators appear to be moving toward a policy of expanding fair value disclosures.