I
104TH CONGRESS
1ST SESSION
H. R. 725
To amend the Securities Exchange Act of 1934 to impose additional fraud
detection and disclosure obligations on auditors of public companies.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 30, 1995
Mr. WYDEN (for himself, Mr. DINGELL, and Mr. MARKEY) introduced the
following bill; which was referred to the Committee on Commerce
A BILL
To amend the Securities Exchange Act of 1934 to impose
additional fraud detection and disclosure obligations on
auditors of public companies.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Financial Fraud De-
tection and Disclosure Act of 1995’’.
SEC. 2. FINANCIAL FRAUD DETECTION AND DISCLOSURE.
(a) AMENDMENTS TO THE SECURITIES EXCHANGE
ACT OF 1934.—The Securities Exchange Act of 1934 is
amended by inserting after section 13 (15 U.S.C. 78m)
the following new section:
‘‘SEC. 13A. FRAUD DETECTION AND DISCLOSURE.
‘‘(a) AUDIT REQUIREMENTS.—Each audit required
pursuant to this title of an issuer’s financial statements
by an independent public accountant shall include, in ac-
cordance with generally accepted auditing standards, as
may be modified or supplemented from time to time 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 fi-
nancial statement amounts;
‘‘(2) procedures designed to identify related
party transactions which are material to the finan-
cial statements or otherwise require disclosure there-
in; and
‘‘(3) an evaluation of whether there is substan-
tial doubt about the issuer’s ability to continue as a
going concern over the ensuing fiscal year.
‘‘(b) REQUIRED
RESPONSE
TO
AUDIT
DISCOV-
ERIES.—
‘‘(1) INVESTIGATION AND REPORT TO MANAGE-
MENT.—If, in the course of conducting any audit
pursuant to this title to which subsection (a) applies,
the independent public accountant detects or other-
wise becomes aware of information indicating that
an illegal act (whether or not perceived to have a
acts that have been detected or otherwise come to
the accountant’s attention in the course of such ac-
countant’s audit, the independent public accountant
concludes that—
‘‘(A) any such illegal act has a material ef-
fect on the financial statements of the issuer,
‘‘(B) senior management has not taken,
and the board of directors has not caused sen-
ior 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 di-
rectors 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 pe-
riod, 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 re-
port given) within the next business day follow-
ing such failure to receive notice.
‘‘(4) REPORT AFTER RESIGNATION.—An inde-
pendent 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 ac-
countant’s report (or the documentation of any oral
report given).
‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde-
pendent public accountant shall be liable in a private ac-
tion for any finding, conclusion, or statement expressed
in a report made pursuant to paragraph (3) or (4) of sub-
section (b), including any rules promulgated pursuant
thereto.
‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO-
CEEDINGS.—If the Commission finds, after notice and op-
portunity 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 im-
pose 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.—Ex-
cept 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 vio-
lates 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 pursu-
ant 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, 1996. As to any other registrant,
such amendment shall apply for any period beginning on
or after January 1, 1997.
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