The Federalist Society

Proposed Legislation

S. - - -

To improve the quality of financial disclosure by, and auditor's reports and opinions on, enterprises that have issued securities registered with the United States Securities and Exchange Commission.

 


IN THE SENATE OF THE UNITED STATES

February __, 2002

_______ introduced the following bill; which was read twice and referred to the Committee on _______________.

 

A BILL

To improve the quality of financial disclosure by, and auditors' reports and opinions on, enterprises that have issued securities registered with the United States Securities and Exchange Commission.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the "Financial Disclosure Enhancement Act of 2002".

SECTION 2. FINDINGS.

The Congress finds as follows:

(1) Current accounting standards, properly applied, can fail adequately to reflect the financial risks and rewards of investing in publicly traded securities;

(2) Current accounting standards, properly applied, can create incentives for issuers to engage in costly transactions entered into with the material purpose of achieving an accounting treatment favorable to the issuer;

(3) Current accounting standards, because they can require close judgments and must address complex and novel transactions, are susceptible of legitimate differences of opinion in application, and those differences can have significant implications for the valuation of publicly traded securities;

(4) Current accounting standards can provide strong incentives for reporting entities to engage in aggressive or illegal conduct in order to structure transactions that have the appearance of complying with generally accepted accounting principles;

(5) Financial markets can, if provided with sufficiently accurate and timely information, effectively price securities even when such information is not incorporated into reports prepared in accordance with generally accepted accounting principles;

(6) The integrity and transparency of America's capital markets will be improved by a disclosure regime that efficiently reduces the incentive for enterprises to structure transactions so as to obtain accounting treatments that do not accurately reflect the financial reality of the underlying transaction; and

(7) Investor confidence can be enhanced and the cost of capital can be reduced through such disclosures.

SECTION 3. AUDITORS' OPINION AND REPORT REGARDING FINANCIAL MARKET IMPLICATIONS OF GAAP REPORTING.

(a) The Securities and Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting immediately after Section 10A the following new section:
"Sec. 10B. Auditors' Opinion and Report Regarding Financial Market Implications of GAAP Reporting.

(a) It shall constitute a deceptive practice for an accountant to represent that any financial statement that it has audited complies with any requirement of the federal securities laws unless such statement is accompanied by an opinion and report of that accountant issued to the United States Securities and Exchange Commission, and prepared in compliance with such rules and regulations as shall be promulgated by the Commission, describing significant accounting treatments and judgments that, if disclosed, would have a material effect on the valuation of the reporting issuer's publicly traded securities. All such opinions and reports shall be publicly disclosed together with the financial statements as to which they relate.

(b) No failure to comply with subsection (a) of this Section 10B shall be deemed to constitute a violation of any provision of federal or state law giving rise to an express or implied private right of action, or to any cause of action on the part of any State or subdivision thereof. Authority to bring criminal actions alleging violations of Section 10B shall vest exclusively in the United States Department of Justice. Authority to bring actions alleging civil violations of Section 10B shall vest exclusively in the Commission.

(c) The Commission may transmit such evidence as may be available concerning acts or practices that may constitute a violation of subsection (a) of this Section 10B to the Attorney General, who may, in his discretion, institute the necessary criminal proceedings under this title. Any person who willfully violates subsection (a) of this Section 10B, or any rule or regulation thereunder, shall upon conviction be fined not more than [$10 million/$1 million] or imprisoned not more than [10] years, or both, except that when such person is a person other than a natural person, a fine not exceeding [$100 million/$2.5 million] may be imposed.

(d) Whenever it shall appear to the Commission that any person has violated subsection (a) of this Section 10B, the Commission may bring an action in a United States district court to seek, and the court shall have authority to order or impose any or all of the following injunctions, orders, or penalties, in addition to any other remedies available at equity or law:

(1) An order assessing damages in such amount as the court shall reasonably determine as to have been caused as a direct consequence of such violation, giving due regard to the application of principles of proportionate liability defined in Section 21D(f) of this Act, together with a plan of distribution that will allow for recovery
by purchasers or sellers of such securities who may have suffered the losses caused by such violation;

(2) An order prohibiting, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated subsection (a) from preparing or affiliating with any person who prepares audited or unaudited financial statements that purport to satisfy any requirement of the federal securities laws;

(3) An order imposing a civil penalty payable into the Treasury of the United States in an amount that shall not exceed the greater of (A) [$10 milion/$100,000] for a natural person or [$100 million/$500,000] for any other person, or (B) the gross amount of gain to such defendant as a result of the violation.

(e) The United States Securities and Exchange Commission shall, by no later than December 31 of each calendar year, cause to be published in the Federal Register a report detailing the measures the Commission has taken to adopt rules and regulations implementing subsection (a) and to monitor compliance with subsection (a), as well as the Commission's findings with regard to such compliance.


SEC. 4. ADDITIONAL APPROPRIATIONS FOR THE SECURITIES AND EXCHANGE COMMISSION.

(a) The Securities and Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting immediately after Section 35(b) the following new section:

"Sec. 35(c). Implementation of Section 10B. In addition to any other funds authorized to be appropriated to the Commission, there are authorized to be appropriated to carry out the rulemaking and enforcement functions of Section 10B an additional $____ million for fiscal year ___."


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