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Source: United States House of Representatives – Congressman Brad Sherman (D-CA)

Washington, D.C. – Today the House passed S. 945, the Holding Foreign Companies Accountable Act, legislation initiated in the Senate by Senator Kennedy and in the House by Congressman Brad Sherman (D-Sherman Oaks) who is also Chair of the House Financial Services Subcommittee on Investor Protection and Capital Markets, and Congressman Anthony Gonzalez (R-OH). This legislation, which was introduced by Senators Kennedy (R-LA) and Van Hollen (D-MD), will take a number of important steps to protect U.S. stock market investors from the type of major accounting failures that were seen in the early 2000s. The bill will now go to the President to be sign into law.

“This may be the most significant piece of investor protection legislation passed in several years,” said Congressman Sherman, Chair of the Investor Protection and Capital Markets subcommittee. “It is designed to assure Financial Statement integrity of 224 U.S.-Limited companies with over $1.8 trillion in market capitalization. The purpose is not to de-list any company, but to persuade China to allow the audit oversight that U.S. investors need, and the U.S. investors get when investing in U.S. companies or companies in over 50 foreign jurisdictions.”

Currently, the Public Company Accounting Oversight Board (PCAOB) is unable to inspect the audit work and practices of PCAOB-registered audit firms in a handful of foreign jurisdictions, primarily China. In most cases, audit firms in those foreign countries cite local laws related to data protection, privacy, confidentiality, or national security as the reason for being unable to provide the PCAOB with the information they need to complete their inspections.

According to the PCAOB, accounting firms which are unable to provide information necessary for effective oversight currently serve as the principal auditor for 224 U.S.-listed companies which have a combined total of $1.8 trillion in market capitalization.[1] The Holding Foreign Companies Accountable Act will protect investors and enforce a level playing field between U.S. and foreign companies by requiring companies which goes three years without the appropriate PCAOB audit inspection to be de-listed from U.S. exchanges. The legislation also requires foreign issuers to provide disclosures as to whether the company is owned or controlled by a foreign government.

“The People’s Republic of China has continuously sought to undermine and skirt rules to the detriment of American businesses and national security. In the case of their refusal to participate in PCAOB inspections, this situation is unfair and dangerous for investors,” said Congressman Gonzalez.The Holding Foreign Companies Accountable Act is designed to prevent companies based in China and certain other jurisdictions from taking advantage of our deep and liquid capital markets while avoiding the scrutiny that comes with inspection of their financial statement audits. I am pleased to see this bill pass both chambers of Congress, and I look forward to continuing to work alongside my colleagues to hold China accountable and protect our investors and businesses.”

“Since it was created, the PCAOB has established formal cooperative arrangements with foreign audit regulators that have allowed it to conduct inspections of one or more firms in over 50 foreign jurisdictions. I believe this legislation will create the right incentives for the small group of remaining countries, principally China, to reach similar agreements with the PCAOB,” said Congressman Sherman. “As Chair of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets and co-chair of the CPA and Accountants Caucus, I appreciate how critical it is that investors on U.S. stock exchanges have the additional protection that is provided by the PCAOB, and that should apply to companies in China just as it does to companies in Britain, the United States and Canada. I want to recognize the years of work that Congressman Mike Conaway, co-Chair of the CPA and Accountants caucus, has put into ensuring American investors in foreign entities have PCAOB protection.”

The text of the legislation is available here.

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