Regulation S-X


Regulation S-X is a prescribed regulation in the United States of America that lays out the specific form and content of financial reports, specifically the financial statements of public companies. It is cited as 17 C.F.R. Part 210; the name of the part is "Form and Content of and Requirements for Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Investment Company Act of 1940, Investment Advisers Act of 1940, and Energy Policy and Conservation Act of 1975".
Regulation S-X extends the meaning of the term 'financial statements' to include all notes to the statements and all related schedules. Regulation S-X is closely related to Regulation S-K, which lays out reporting requirements for various SEC filings and registrations used by public companies. Regulation S-X profoundly affects internal and external accountants and auditors, and directors and officers and numerous officials, employees and contractors of publicly reporting companies, and because of the need for accurate reporting of monies and other data, any operation of a company may be affected to require ultimate compliance with Regulation S-X and the Sarbanes–Oxley Act.

Applicability

Regulation S-X and the Financial Reporting Releases set forth the form and content of and requirements for financial statements required to be filed as a part of registration statements under the Securities Act of 1933 and registration statements under section 12, annual or other reports under sections 13 and 15 and proxy and information statements under section 14 of the Securities Exchange Act of 1934; except as otherwise specifically provided in the forms.
Regulation S-X is seen less frequently but is equally valid for registration statements, annual reports and shareholder reports filed under the Public Utility Holding Company Act of 1935 and likewise for the Investment Company Act of 1940.

Relationship to GAAP

Regulation S-X generally implicitly discusses US Generally Accepted Accounting Principles. However, non-GAAP measures are sometimes used by companies to provide insight into its business. Non-GAAP financial measures are defined in Regulation G. Regulations G and Item 10e of Regulation S-K provide guidance on the use of non-GAAP measures. In May 2016 the SEC also issued additional Compliance & Disclosure Interpretations related to the rules and regulations on the use of non-GAAP financial measures.

Responsible agencies

Regulation S-X was devised by the SEC staff with copious input from accounting-related entities. Major entities involved in its maintenance include:
Because Regulation S-X is large and its impact on financial report is so pervasive, it is important to have a consistent terminology and to get it right from the beginning so that words and phrases have the same meaning throughout. Among other terms, certain basic terms are assigned meanings. For examples: Accountant's report, Amount, Certified, Control, Fiscal Year, Share, Wholly Owned Subsidiary, and so on.
A specific meaning is also given for "Summarized financial information".
A specific meaning is not given for the complex term Internal control over financial reporting, but reference is made to . As the failure to have such controls or properly implement them or use/provide their disclosure may come with penalties and since this phrase pervades thinking and rule-making in the securities industry, it is worth viewing this definition, a definition that requires management to be pro-active:

Qualifications and reports of accountants

Qualifications and Reports of Accountants
After laying out some basic and important definitions in Rule 1-02, Regulation S-X kicks off in Rule 2-01 by considering accountants and auditors and states who is acceptable to the SEC to act as such. Accountants and auditors must be properly registered in their own jurisdiction: "The Commission will not recognize any person as a certified public accountant who is not duly registered and in good standing as such under the laws of the place of his residence or principal office."
Further, one issue that matters critically is independence of the auditor from the client company. Final Rule 33-8183, while discussing audit services, non-audit services and auditor/accountant independence,
  • revised the Commission's regulations related to the non-audit services that, if provided to an audit client, would impair an accounting firm's independence;
  • required that an issuer's audit committee pre-approve all audit and non-audit services provided to the issuer by the auditor of an issuer's financial statements;
  • prohibited certain partners on the audit engagement team from providing audit services to the issuer for more than *five or seven consecutive years, depending on the partner's involvement in the audit, except that certain small accounting firms may be exempted from this requirement;
  • prohibited an accounting firm from auditing an issuer's financial statements if certain members of management of that issuer had been members of the accounting firm's audit engagement team within the one-year period preceding the commencement of audit procedures;
  • require that the auditor of an issuer's financial statements report certain matters to the issuer's audit committee, including "critical" accounting policies used by the issuer; and require disclosures to investors of information related to audit and non-audit services provided by, and fees paid to, the auditor of the issuer's financial statements.
  • In addition, under the final rules, an accountant would not be independent from an audit client if an audit partner received compensation based on selling engagements to that client for services other than audit, review and attest services.
To be extra clear about it, Sarbanes–Oxley lays out the nine impermissibles—that is the nine categories of prohibited non-audit services for auditors:
  1. Bookkeeping or other services related to the accounting records or financial statements of the audit client;
  2. Financial information systems design and implementation;
  3. Appraisal or valuation services, fairness opinions, or contribution-in-kind reports;
  4. Actuarial services;
  5. Internal audit outsourcing services;
  6. Management functions or human resources;
  7. Broker or dealer, investment adviser, or investment banking services;
  8. Legal services and expert services unrelated to the audit; and
  9. Any other service that the company's board determines, by regulation, is impermissible.
Here is where the SEC places the corporate onus: "The final rules recognize the critical role played by audit committees in the financial reporting process and the unique position of audit committees in assuring auditor independence "... because of "the unique ability and responsibility of the audit committee to insulate the auditor from the pressures that may be exerted by management."
The result of Final Rule 33-8183 was to add Rule 2-07 to Regulation S-X and to amend Rule 2-01 of Regulation S-X, as well as affect several other regulations, rules and forms.
These changes were triggered mainly by the Sarbanes–Oxley Act of 2002, enacted on July 30, 2002. Title II of the Sarbanes–Oxley Act, entitled "Auditor Independence" required the Commission to adopt, by January 26, 2003, final rules such as 33-8183.
Section 201 of Sarbanes–Oxley require that non-audit services that are not prohibited under the Sarbanes–Oxley Act and the Commission's rules be subject to pre-approval by the registrant's audit committee. These rules specify the requirements for obtaining such pre-approval from the registrant's audit committee. Section 202 of Sarbanes–Oxley requires an audit committee to pre-approve allowable non-audit services and specifies certain exceptions to the requirement to obtain pre-approval. These rules specify the requirements of the registrant's audit committee for pre-approving non-audit services by the auditor of the registrant's financial statements.
Thus it can be seen that the audit committee membership is not a reward for good behavior or a sinecure but rather a weighty responsibility flowing from the Sarbanes–Oxley Act, various SEC regulations, rules and Final Rules, to also discharge the responsibilities of Regulations S-X and Regulation S-K.
Qualifications and Reports of Accountants
  • 210.2-01 Qualifications of accountants.
  • 210.2-02 Accountants' reports and attestation reports.
  • 210.2-02T Accountants' reports and attestation reports on internal control over financial reporting.
  • 210.2-03 Examination of financial statements by foreign government auditors.
  • 210.2-04 Examination of financial statements of persons other than the registrant.
  • 210.2-05 Examination of financial statements by more than one accountant.
  • 210.2-06 Retention of audit and review records.
  • 210.2-07 Communication with audit committees.
After this initial section where the SEC lays out the requirements and limitations on interaction between company, management, audit committee, accountants and the auditor, Regulation S-X is then free to carry on and discuss the form and content of financial statements and financial reporting. Among other things Rule 210.2-06 imposes a period of seven years after an accountant concludes an audit or review of an issuer's financial statements, during which the accountant shall retain records relevant to the audit or review, including work-papers and other documents that form the basis of the audit or review, and memoranda, correspondence, communications, other documents, and records.