Question

The SEC has the legal authority to:

1) Prescribe accounting principles and reporting practices for all corporations who use U.S. GAAP or IFRS.
2) Prescribe income tax principles and reporting practices for all U.S. companies.
3) Prescribe accounting principles and reporting practices for all corporations issuing pubLiCly traded securities within the U.S. capital markets.
4) All of the choices are correct regarding the SEC's legal authority.

Answer 1

The SEC prescribes accounting principles and reporting practices for corporations issuing publicly traded securities within the U.S. capital markets but does not set income tax principles. The authority of the SEC was strengthened by the Sarbanes-Oxley Act to protect investors from accounting fraud.

Step-by-step explanation:

The Securities and Exchange Commission (SEC) is a regulatory body in the United States charged with various responsibilities related to securities and financial markets. Among its powers is the ability to prescribe accounting principles and reporting practices. However, it is important to make a distinction:

1. The SEC has the authority to prescribe accounting principles and reporting practices for all corporations issuing publicly traded securities within the U.S. capital markets.
2. The SEC does not have the authority to prescribe income tax principles; this is the domain of the Internal Revenue Service (IRS) and the U.S. Congress.

Following the Sarbanes-Oxley Act in 2002, the SEC's role in regulating public corporations was enhanced to protect investors from accounting fraud, in reaction to several high-profile scandals. Thus, the correct answer to the student's question is that the SEC can prescribe accounting principles and reporting practices for corporations issuing publicly traded securities within the U.S. capital markets.