When you invest in stocks, bonds, mutual funds or any other publicly traded security, you take on risk. The value of these assets is dependent upon the financial health of the issuing companies and their ongoing growth. The U.S. Securities and Exchange Commission regulates the financial disclosures and trading operations of public companies, while the Financial Accounting Standards Board determines exactly how those finances should be reported.
The SEC was created in 1934 to protect investors and to regulate stock markets. The Great Crash of 1929 revealed a number of weaknesses within the market system, namely that companies had no obligation to be truthful with their investors and were not held accountable for unethical behavior. The SEC's mission is to protect investors, to maintain orderly and efficient markets and to assets companies in raising capital. It oversees company financial reporting and market activity and has the power to levy fines and bring lawsuits if rules are broken.
The FASB is an independent organization that creates financial reporting standards for public and governmental organizations. Its role is to ensure that companies report financial information in a clear and ethical way, and that accounting practices are consistent. This ensures that anyone reading a financial report can understand what information is given, what is meant by various terms and how financial operations are functioning.
The SEC requires all publicly traded companies to provide detailed financial reports to the public on a quarterly basis and uses the FASB standards as a format for those reports. Together, the SEC and FASB want to make sure that people have as much information as is possible about the companies they invest in, and that this information is delivered in a clear and consistent manner. FASB standards are aimed at creating financial transparency and eliminating fraudulent activity so that companies are less likely to fool investors through accounting slight-of-hand.
Investors can locate public financial records using the SEC's EDGAR database. This database is completely searchable and is helpful for research on both potential and current investments. In addition, investors can use EDGAR to track any disciplinary filings or other legal issues.
Nola Moore is a writer and editor based in Los Angeles, Calif. She has more than 20 years of experience working in and writing about finance and small business. She has a Bachelor of Science in retail merchandising. Her clients include The Motley Fool, Proctor and Gamble and NYSE Euronext.