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Subject 3. Regulated Sources of Information PDF Download

Regulatory authorities require publicly traded companies to prepare financial reports in accordance with specified accounting standards and other securities laws and regulations. An example of such a regulatory authority is the SEC in the U.S.

Other organizations exist without explicit regulatory authority and develop reporting standards, facilitate cooperation, and advise governments. Examples include the International Organization of Securities Commissions, the European Securities Committee, and the European Securities and Market Authority.

International Organization of Securities Commissions (IOSCO)

This is essentially the international equivalent of the U.S. Securities and Exchange Commission (SEC).

  • It works to achieve improved market regulation internationally.
  • It works to facilitate cross-border listings.
  • It advocates for the development and adoption of a single set of high-quality accounting standards.

U.S. Securities and Exchange Commission (SEC)

In the U.S., the form and content of the financial statements of companies whose securities are publicly traded are governed by the SEC through its regulation S-X. Although the SEC has delegated much of this responsibility to the FASB, it frequently adds its own requirements. The SEC functions as a highly effective enforcement mechanism for standards promulgated in the private sector.

Financial Notes and Supplementary Schedules

Financial footnotes are an integral part of financial statements. They provide information about the accounting methods, assumptions and estimates used by management to develop the data reported in the financial statements. They provide additional disclosure in such areas as fixed assets, inventory methods, income taxes, pensions, debt, contingencies such as lawsuits, sales to related parties, etc. They are designed to allow users to improve assessments of the amounts, timing, and uncertainty of the estimates reported in the financial statements.

Supplementary Schedules: In some cases additional information about the assets and liabilities of a company is provided as supplementary data outside the financial statements. Examples include oil and gas reserves reported by oil and gas companies, the impact of changing prices, sales revenue, operating income, and other information for major business segments. Some of the supplementary data is unaudited.

Management Discussion and Analysis (MD&A)

This requires management to discuss specific issues on the financial statements, and to assess the company's current financial condition, liquidity, and its planned capital expenditure for the next year. An analyst should look for specific concise disclosure as well as consistency with footnote disclosure.

Note that the MD&A section is not audited and is for public companies only.

Auditor's Reports

The auditor (an independent certified public accountant) is responsible for seeing that the financial statements issued comply with generally accepted accounting principles. In contrast, the company's management is responsible for the preparation of the financial statements. The auditor must agree that management's choice of accounting principles is appropriate and that any estimates are reasonable. The auditor also examines the company's accounting and internal control systems, confirms assets and liabilities, and generally tries to be sure that there are no material errors in the financial statements.

Though hired by the management, the auditor is supposed to be independent and to serve the stockholders and the other users of the financial statements.

An auditor's report (also called the auditor's opinion) is issued as part of a company's audited financial report. It tells the end-user the following:

  • Whether the financial statements are presented in accordance with generally accepted accounting principles.
  • It identifies those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
  • Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.

An auditor's report is considered an essential tool when reporting financial information to end-users, particularly in business. Since many third-party users prefer or even require financial information to be certified by an independent external auditor, many auditees rely on auditor reports to certify their information in order to attract investors, obtain loans, and improve public appearance. Some have even stated that financial information without an auditor's report is "essentially worthless" for investing purposes.

There are four common types of auditor's reports, each one representing a different situation encountered during the auditor's work. The four reports are as follows:

  • An unqualified opinion report is issued by an auditor when the financial statements presented are free of material misstatements and are in accordance with GAAP, which, in other words, means that the company's financial condition, position, and operations are fairly presented in the financial statements. It is the best type of report an auditee may receive from an external auditor. It is regarded by many as the equivalent of a "clean bill of health" to a patient, which has led many to call it the "clean opinion."

  • A qualified opinion report is issued when the auditor encountered one or two situations that did not comply with generally accepted accounting principles; however, the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or "clean opinion," but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated.

  • An adverse opinion is issued when the auditor determines that the financial statements of an auditee are materially misstated and generally do not comply with GAAP. It is considered the opposite of an unqualified or clean opinion, essentially stating that the information contained to assess the auditee's financial position and results of operations is materially incorrect, unreliable, and inaccurate.

  • A disclaimer of opinion, commonly referred to simply as a disclaimer, is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements. This type of report is issued when the auditor tried to audit a company but could not complete the work due to various reasons and does not issue an opinion.

Other Sources of Information

  • Interim reports. Publicly held companies must file form 10-Q (interim report) on a quarterly basis. It is far less detailed than annual financial statements, as it contains unaudited basic financial statements, unaudited footnotes to financial statements, and management discussion and analysis.

  • Proxy statements. An analyst should look for litigation, executive compensation, and related-party transactions, known as proxy statements. Proxy statements should be considered an integral part of the financial report, and they may contain special compensation "perks" for officers and directors, as well as lawsuits and other contingent obligations facing the company.

  • Companies' websites, press releases, and conference calls.

User Contributed Comments 21

User Comment
roydain Are Financial notes audited? Are Proxy Statements audited?
quean2008 1. Interim report is in condense form, not subject to full audit and less date than anaual report
2. Accounting method and assumption can be found on footnote while others in MD&A or supplementary schedule
quean2008 IASC --> IASB = FASB (U.S)
IOSC = SEC (U.S)
rethan Is this statement correct?
"10-Q (interim report) on a quarterly basis. It is far less detailed than annual financial statements, as it contains unaudited basic financial statements"
I thought 10-Qs had to be audited as they are filed with the SEC
JoshL1 No, 10-Q's are not audited. They are "reviewed" by the auditors, which is nowhere near as robust as the audit of the 10-K (the annual year-end financial statements).
MRSLETS What is 10-Q and 10-K?
reganbaha 10-Q (interim report)
10-K (the annual year-end financial statements).
EMerkert SEC is a joke, just a bunch of lawyers who have basic knowledge of financial matters. U.S. would be better off without it.
cleopatraliao unqualified>qualified>adverse>disclaimer :D
kahh Who knows more on this COSO opinion?
Saxonomy Sounds like you or a friend has been sanctioned.
zsbaksa IAS standards were published between 1973-2001
IFRS standards from 2001-. IAS by IASC, IFRS by IASB
IFRS takes precedence over IAS if there are contradictions and IAS is dropped.
thekobe mrslets, take a brief look at the edgar online website so you can take a look to a 10q and a 10k, so you can realize the differences
vatsal92 Unqualified -> Clean report
Qualified -> Exceptions to Accounting principles
Adverse -> Not fair presentation
Disclaimer -> Unable to express an opinion.
leon121 You got that right EMerkert. Another excuse to expand the government's role in our lives...
LogicMan what is "COSO"?
irapp92 COSO stands for the Comittee of Sponsoring Organizations of the treadway commission. They established a new system of internal control strategies for companies, thus planting the seed for new broadly accepted standards of internal reporting and control within public companies. A quick Google gives you all the info if you're interested
akhlo Technically the auditors are hired by the board of directors, not management but whatever.
UcheSam This phrase “Though hired by the managemen....” is not correct. In context, External Auditor is being spoken about here. External auditors are appointed and engaged by the shareholders mostly through audit committee.
zealtina Proxy Statements are concerned with shareholders right?
D3Er Why it is called 'UNQUALIFIED opinion report' when all it means is a "clean bill of health'?
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I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
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