Financial Fraud Detection and Disclosure Act

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Financial Fraud Detection and 
Disclosure Act''.

SEC. 2. AMENDMENT TO SECURITIES EXCHANGE ACT OF 1934.

    (a) Amendments to the Securities Exchange Act of 1934.--The 
Securities Exchange Act of 1934 is amended by inserting after section 
10 (15 U.S.C. 78j) the following new section:

                    ``fraud detection and disclosure

    ``Sec. 10A. (a) Audit Requirements.--Each audit required pursuant 
to this title of an issuer's financial statements by an independent 
public accountant shall include, in accordance with methods prescribed 
by the Commission, the following:
            ``(1) procedures designed to provide reasonable assurance 
        of detecting illegal acts that would have a direct and material 
        effect on the determination of financial statement amounts;
            ``(2) procedures designed to identify related party 
        transactions which are material to the financial statements or 
        otherwise require disclosure therein; and
            ``(3) an evaluation of whether there is substantial doubt 
        about the issuer's ability to continue as a going concern over 
        the ensuing fiscal year.
    ``(b) Required Response to Audit Discoveries.--
            ``(1) Investigation and report to management.--If, in the 
        course of conducting any audit pursuant to this title to which 
        subsection (a) applies, the independent public accountant 
        detects or otherwise becomes aware of information indicating 
        that an illegal act (whether or not perceived to have a 
        material effect on the issuer's financial statements) has or 
        may have occurred, the accountant shall, in accordance with 
        methods prescribed by the Commission--
                    ``(A)(i) determine whether it is likely that an 
                illegal act has occurred, and (ii) if so, determine and 
                consider the possible effect of the illegal act on the 
                financial statements of the issuer, including any 
                contingent monetary effects, such as fines, penalties, 
                and damages; and
                    ``(B) as soon as practicable inform the appropriate 
                level of the issuer's management and assure that the 
                issuer's audit committee, or the issuer's board of 
                directors in the absence of such a committee, is 
                adequately informed with respect to illegal acts that 
                have been detected or otherwise come to the attention 
                of such accountant in the course of the audit, unless 
                the illegal act is clearly inconsequential.
            ``(2) Response to failure to take remedial action.--If, 
        having first assured itself that the audit committee of the 
        board of directors of the issuer or the board (in the absence 
        of an audit committee) is adequately informed with respect to 
        illegal acts that have been detected or otherwise come to the 
        accountant's attention in the course of such accountant's 
        audit, the independent public accountant concludes that--
                    ``(A) any such illegal act has a material effect on 
                the financial statements of the issuer,
                    ``(B) senior management has not taken, and the 
                board of directors has not caused senior management to 
                take, timely and appropriate remedial actions with 
                respect to such illegal act, and
                    ``(C) the failure to take remedial action is 
                reasonably expected to warrant departure from a 
                standard auditor's report, when made, or warrant 
                resignation from the audit engagement,
        the independent public accountant shall, as soon as 
        practicable, directly report its conclusions to the board of 
        directors.
            ``(3) Notice to commission; response to failure to 
        notify.--An issuer whose board of directors has received a 
        report pursuant to paragraph (2) shall inform the Commission by 
        notice within one business day of receipt of such report and 
        shall furnish the independent public accountant making such 
        report with a copy of the notice furnished the Commission. If 
        the independent public accountant making such report shall fail 
        to receive a copy of such notice within the required one-
        business-day period, the independent public accountant shall--
                    ``(A) resign from the engagement; or
                    ``(B) furnish to the Commission a copy of its 
                report (or the documentation of any oral report given) 
                within the next business day following such failure to 
                receive notice.
            ``(4) Report after resignation.--An independent public 
        accountant electing resignation shall, within the one business 
        day following a failure by an issuer to notify the Commission 
        under paragraph (3), furnish to the Commission a copy of the 
        accountant's report (or the documentation of any oral report 
        given).
    ``(c) Auditor Liability Limitation.--No independent public 
accountant shall be liable in a private action for any finding, 
conclusion, or statement expressed in a report made pursuant to 
paragraph (3) or (4) of subsection (b), including any rules promulgated 
pursuant thereto.
    ``(d) Civil Penalties in Cease-and-Desist Proceedings.--If the 
Commission finds, after notice and opportunity for hearing in a 
proceeding instituted pursuant to section 21C of this title, that an 
independent public accountant has willfully violated paragraph (3) or 
(4) of subsection (b) of this section, then the Commission may, in 
addition to entering an order under section 21C, impose a civil penalty 
against the independent public accountant and any other person that the 
Commission finds was a cause of such violation. The determination 
whether to impose a civil penalty, and the amount of any such penalty, 
shall be governed by the standards set forth in section 21B of this 
title.
    ``(e) Preservation of Existing Authority.--Except for subsection 
(d), nothing in this section limits or otherwise affects the authority 
of the Commission under this title.
    ``(f) Definitions.--As used in this section, the term `illegal act' 
means any action or omission to act that violates any law, or any rule 
or regulation having the force of law.''.
    (b) Effective Dates.--As to any registrant that is required to file 
selected quarterly financial data pursuant to item 302(a) of Regulation 
S-K (17 CFR 229.302(a)) of the Securities and Exchange Commission, the 
amendments made by subsection (a) of this section shall apply to any 
annual report for any period beginning on or after January 1, 1994. As 
to any other registrant, such amendment shall apply for any period 
beginning on or after January 1, 1995.

Summary: Financial Fraud Detection and Disclosure Act - Amends the Securities Exchange Act of 1934 to include within statutorily mandated audit requirements specified fraud detection and disclosure procedures to be followed by an independent public accountant. Authorizes the Securities and Exchange Commission to impose civil penalties for willful violations of this Act by an independent public accountant.