Notes

Explore the functions of the Securities and Exchange Commission. Learn the definition of SEC and understand its main purpose. Discover the history of the SEC.
SEC Definition
All business sectors in the United States operate under guidelines that have been established either directly or indirectly by our government. The accounting industry is no different. The organization that oversees accounting practices is called the Securities and Exchange Commission, which is also known as the SEC.

SEC History
During the mid-1920s, times appeared to be good financially. The stock market had become so popular that people were taking their life savings and investing in it. They were confident that with the soaring price of stock, investing was certainly a get-rich-quick scheme.

On October 29th, 1929, stock prices plummeted. Investors panicked and started trying to sell stock as quickly as they could. In one day alone, over 16.4 million shares of stock were sold! The market was overwhelmed, and the economy was devastated. Not only did individuals lose everything they had and many companies were forced to close their doors, but these same groups of individuals also lost trust with the entire banking and finance environment.

Government leaders wanted to know why this happened and why so many people lost so much money. In their investigation it was discovered that some of the problems that attributed to the stock market crash came from faulty financial statement reporting. That's why by 1934, the government stepped in and created the Securities and Exchange Commission.

Purpose of the SEC
The SEC was established as a committee to oversee the banking and finance sector of the business world. More importantly, they were charged with regulating the practices of the accounting industry. The number one goal of the SEC is to protect the investors. In order to do this, there has to be true and accurate financial information that's reported on all the financial statements.

To ensure that this occurred, the SEC created yet another organization to focus strictly on the accounting industry. This organization is called the Financial Accounting Standards Board, which is also known as the FASB.

The SEC charged the FASB with creating the guidelines for financial reporting that all accounting professionals must follow in order to produce accurate and reliable financial statements. These guidelines are called the Generally Accepted Accounting Principles, or GAAP for short.

Another organization that was formed by the SEC is the Public Company Accounting Oversight Board, which is also known as the PCAOB. The PCAOB oversees the audits of public companies.

Lesson Summary
During the era of the 1920s, the popularity of the stock market soared. People believed that investing their hard-earned money in stock market would give them a way to get rich quick. After all, stock brokers and companies that offered the stock made it look like there was no way that an investor could possibly lose money. But then it happened: stock prices began to drop and investors panicked, they started to sell their stock as quickly as they could, the flooded market couldn't handle it, and on October 29th, 1929, the stock market crashed. Investors lost everything they had.

After careful investigation, the government attributed the stock market crash to false financial reporting. In 1934, the Securities and Exchange Commission was created with the purpose of overseeing the banking and financial sector of the business world. In order to effectively do this, the SEC created the Financial Accounting Standards Board, which was charged with setting guidelines that all accounting professionals must follow to produce accurate and reliable financial statements.

These guidelines were called the Generally Accepted Accounting Principles, or GAAP for short. The SEC also created another organization. This one is called the Public Company Accounting Oversight Board, or PCAOB for short. The PCAOB is responsible for overseeing the audits of public companies.

With the help of the SEC and the organizations that they have created and overseen, you can rest easy that information seen on financial statements today is as accurate and reliable as possible.