1.3 Overview: Regulatory Requirements and SEC Filings

The public availability of company information began after the stock market crash of 1929.  The crash led to efforts to make information about companies more readily available to investors (and regulators). The United States enacted two major pieces of legislation: The Securities Act of 1933 and the Securities Exchange Act of 1934. These acts reshaped the U.S. financial market landscape because they imposed rules on information that had to be disclosed whenever securities were being offered to the public for sale. The first act:

•    Required that investors receive financial and other significant information on the securities being offered for sale;

•    Prohibited deceit, misrepresentations, and other fraud.

The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) and made it the chief regulator of U.S. financial markets, charged with enforcing the two acts.  It therefore regulates the information that must be disclosed by companies; the initial acts required companies with more than $10 million in assets to file annual and other periodic reports with the SEC.

In 2009, the SEC issued a final ruling requiring companies to file this information in interactive data format.  In their words: “We are adopting rules requiring companies to provide financial statement information in a form that is intended to improve its usefulness to investors. In this format, financial statement information could be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats….. Companies will provide their financial statements to the Commission and on their corporate Web sites in interactive data format using the eXtensible Business Reporting Language (XBRL).”  ---Source: http://www.sec.gov/rules/final/2009/33-9002.pdf

The ruling required large companies to file in this way starting in 2009, and required all companies required to file reports to move to this standard by June 2011.

The information that must be filed was spelled out in Section 13 of the Securities Act of 1934 (scroll down to page 120).  For the point of view of financial analysis, the most important reports are the (audited) 10-K report, filed annually, and the (unaudited) 10-Q report, filed quarterly (except in the quarter a 10-K is filed).  These reports provide an overview of the company's business and financial condition and include its financial statements. 

Today’s filings contain hundreds of pages because they reflect the increasing complexity of a global economy which in turn generates an ever-increasing volume and complexity of information.  These trends underlie the U.S. Department of Labor’s current employment growth projections (Occupational Outlook Handbook, 2010-2011) as follows:

“Employment of accountants and auditors is expected to grow by 22 percent between 2008 and 2018, which is much faster than the average for all occupations.”

Similarly they predict 20% growth for financial analysts and 24% for management analysts over the same time period.  They also observe that:

“….  the growing movement towards International Financial Reporting Standards (IFRS), which uses a judgment-based system to determine the fair-market value of assets and liabilities, which should increase demand for accountants and auditors because of their specialized expertise.”

Source: http://www.bsl.gov/oco

These trends reflect the growing importance and complexity of financial statement preparation, analysis and valuation in today’s global economy.  This changing environment places increased demands upon everyone working in this area to continually enhance their conceptual and practical skills.  Valuation Tutor is designed to let you meet these demands by exploiting the same technological advances that have driven the changes in the regulatory environment.  This is achieved because Valuation Tutor consists of an integrated system consisting of a text book, software, and dataset.  Each chapter of the textbook provides step-by-step instruction on how to immediately apply important concepts to the real world by exploiting technology to process the rich set of disclosed information.  The system lets you not only analyze a specific company but compare it to a large set of other companies.  The ability to compare is where you develop a sense of what the numbers mean, and where you start to develop professional judgment.