Holding Foreign Companies Accountable Act

Floor Speech

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Mr. SHERMAN. Mr. Speaker, I thank the gentleman for yielding. I will speak longer than I usually do on these bills because I both want to persuade people to support the bill and also provide important information to the entire House that will be part of the legislative history of this bill and is designed to guide the SEC in issuing appropriate regulations.

Mr. Speaker, I rise in strong support of S. 945, the Holding Foreign Companies Accountable Act. I thank Chairwoman Waters and her staff for working with my office, and all the members who have been involved in this bill and making this issue a priority.

Mr. Speaker, I believe this will be perhaps the most significant piece of investor protection legislation that the Congress adopts this Congress because it applies to some 224 publicly traded companies and assures investors of the financial statement integrity that they expect from all companies that are traded in the United States.

Mr. Speaker, let's go back in history a bit. For well over a century, investors in corporations have insisted that the financial statements they get are audited by an independent auditor. But at the beginning of this century, we learned that that was not enough. We saw Enron and WorldCom. We passed the Sarbanes-Oxley bill, and created the PCAOB so that we have a system where not only are the companies' financial statements audited, but the audit is subject to being audited by a governmental entity. That is essential in this century to have investors adequately protected. So when we are dealing with 224 public companies with $1.8 trillion in capitalization, we need that level of protection.

Mr. Speaker, I thank my colleague from Ohio (Congressman Gonzalez) for joining me in leading on this issue in the House. I thank my good friend and cochair of the bicameral, bipartisan CPA Caucus, Mike Conaway, who has been working on these issues for many years. And I thank Senators Kennedy and Van Hollen for their leadership in advancing this bill.

Mr. Speaker, currently the PCAOB, the Public Company Accounting Oversight Board, is unable to inspect the audit work and practices of certain audit firms in a handful of jurisdictions. Today, that includes Belgium and France to some degree, but, primarily, the issue is China. In most cases, audit firms in those jurisdictions cite local laws related to data protection or national security as a reason for being unable to provide the PCAOB with the information they need.

Accordingly, as I mentioned before, the PCAOB has noted that the auditor for some 224 U.S.-listed companies with a combined total capitalization of $1.8 trillion is not subject to the enhanced oversight that this Congress has insisted upon since 2002.

Since it was created, the PCAOB has established a formal cooperative relationship with foreign audit regulators that have allowed it to conduct inspections of firms in more than 59 U.S. jurisdictions. However, the PCAOB and the Securities Exchange Commission have tried to engage with Chinese regulators for over a decade in an effort to reach a similar cooperative agreement and are still not able to conduct inspections with regard to China or Hong Kong.

Mr. Speaker, our legislation will bring an end to this sort of risk for investors in U.S. markets by requiring the SEC to stop trading in a company's stocks if the PCAOB is unable to inspect the audit report and the audit work papers for a period of 3 years.

Mr. Speaker, this is an investor protection bill. I am chair of the Investor Protection and Capital Markets Subcommittee. This bill is not anti-China, and it is not designed to prohibit the trading of Chinese companies. Rather, it provides a 3-year window, during which we expect China will enter into a reasonable agreement with the SEC and the PCAOB so that we have the additional level of protection for investors that we expect and have demanded since we passed the Sarbanes-Oxley bill in 2002.

Mr. Speaker, I am pleased to say that the House has already passed this legislation in similar--and actually, superior--form as an amendment to the 2001 NDAA, National Defense Authorization Act. It is the intention of the authors of this Senate bill to achieve exactly what that language--approved by the House earlier this year--sets forward. And that amendment to the NDAA is part of the legislative history of this bill and our consideration of it today.

Mr. Speaker, in order to guide the interpretation of this bill, Senator Kennedy and I have a statement, and I include in the Record that statement. United States Senate Statement: S. 945--Holding Foreign Companies Accountable Act. Considered on Friday, December 2, 2020

Madam Speaker, I write to submit a statement for the record to address S. 945, the Holding Foreign Companies Accountable Act.

It is the intent of this legislation to provide the Securities and Exchange Commission with the discretion necessary to determine how much of a company's total audit must be performed by a firm beyond the reach of PCAOB inspections before trading in the company's securities is prohibited by the Commission. Consistent with our work with the Securities and Exchange Commission on this legislation, it is our expectation that the Commission will not prohibit trading in the securities of companies under this act, as long as not more than one third of a company's total audit is performed by a firm beyond the reach of PCAOB inspections. This legislation provides the Commission with the authority to determine how an audit would be measured, whether that be total revenue, assets, or another metric.

Furthermore, the scope of this legislation is not intended to be limited to public companies which rely on foreign audit firms that have some form of ownership relationship with a PCAOB-registered public accounting firm. Specifically, it is intended to also encompass public companies which rely on foreign audit firms that are affiliated with or maintain some form of affiliation agreement with a PCAOB-registered public accounting firm. John Kennedy, U.S. Senator.

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Mr. SHERMAN. Mr. Speaker, I will read it so that it is before the entire House.

``It is the intent of this legislation to provide the Securities and Exchange Commission with the discretion necessary to determine how much of a company's total audit must be performed by a firm beyond the reach of PCAOB inspections before trading in the company's securities is prohibited by the Commission. Consistent with our work with the Securities and Exchange Commission on this legislation, it is our expectation that the Commission will not prohibit trading in the securities of companies under this act, as long as not more than one- third of a company's total audit is performed by a firm beyond the reach of the PCAOB inspections. This legislation provides the Commission with the authority to determine how an audit would be measured, whether that be total revenue, assets, or another metric.

``Furthermore, the scope of this legislation is not intended to be limited to public companies which rely on foreign audit firms that have some form of ownership relationship with a PCAOB-registered public accounting firm. Specifically, it is intended to also encompass public companies which rely on foreign audit firms that are affiliated with or maintain some form of affiliation agreement with a PCAOB-registered public accounting firm.''

Mr. Speaker, one particular comment to draw your attention to is that it is not the intention of this bill to cover firms that have some small part of their audit being done in China, perhaps one subsidiary in China, but is rather designed to apply when a third or more of the audit is not subject to PCAOB inspection. And how you define one-third of the audit, whether that is the audit of one-third of the revenues or one-third of the assets, or some other metric, is left to the SEC.

As House sponsor of this legislation, I have cosigned the statement I have just read, prepared by Senator Kennedy, but would have the following additional remarks:

I will take this opportunity to make clear, it is not the intention of this legislation that every public company, which is a client of an audit firm with a branch, office, or affiliate in a jurisdiction beyond the reach of the PCAOB inspections, be subject to a trading prohibition.

Instead, the trading prohibitions required under this bill are intended to be applied when a significant portion of the audit is prepared by an audit firm or the branch, or office, or affiliate of an audit firm which the PCAOB is unable to inspect, and the SEC has the authority to interpret this provision.

As chair of the Investor Protection and Capital Markets Subcommittee, I appreciate how critical it is for investors on U.S. stock exchanges to have the additional protection that the financial statements have not just been audited, but that that audit is subject to review by the PCAOB.

Mr. Speaker, I appreciate my colleagues for their support of this legislation, and look forward to its passage here today.

Mr. Speaker, I thank the gentleman for yielding me enough time to both describe the major parts of the legislation and also make it clear to the regulators what expectations the House and Senate have for the regulations that they will issue.

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