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81–956CC 2002

OATH TAKING, TRUTH TELLING, AND REMEDIES

IN THE BUSINESS WORLD

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCE, TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JULY 26, 2002

Serial No. 107–121

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman 

MICHAEL BILIRAKIS, Florida 

JOE BARTON, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

JAMES C. GREENWOOD, Pennsylvania 

CHRISTOPHER COX, California 

NATHAN DEAL, Georgia 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

GREG GANSKE, Iowa 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES ‘‘CHIP’’ PICKERING, Mississippi 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

TOM DAVIS, Virginia 

ED BRYANT, Tennessee 

ROBERT L. EHRLICH, Jr., Maryland 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

ERNIE FLETCHER, Kentucky 

JOHN D. DINGELL, Michigan 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RALPH M. HALL, Texas 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, Jr., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

PETER DEUTSCH, Florida 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

TOM SAWYER, Ohio 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

KAREN MCCARTHY, Missouri 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

THOMAS M. BARRETT, Wisconsin 

BILL LUTHER, Minnesota 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

CHRISTOPHER JOHN, Louisiana 

JANE HARMAN, California 

DAVID V. MARVENTANO, Staff Director 

JAMES D. BARNETTE, General Counsel 

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION

CLIFF STEARNS, Florida, Chairman 

FRED UPTON, Michigan 

NATHAN DEAL, Georgia 

Vice Chairman 

ED WHITFIELD, Kentucky 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

JOHN B. SHADEGG, Arizona 

ED BRYANT, Tennessee 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

ERNIE FLETCHER, Kentucky 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana 

(Ex Officio) 

EDOLPHUS TOWNS, New York 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

CHRISTOPHER JOHN, Louisiana 

JANE HARMAN, California 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

BART GORDON, Tennessee 

PETER DEUTSCH, Florida 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

JOHN D. DINGELL, Michigan, 

(Ex Officio) 

(II) 

C O N T E N T S 

Page

Testimony of: 

Cathy, Samuel Truett, Founder, Chairman and Chief Executive Officer, 

Chick-fil-A, Inc .............................................................................................. 10

Cohn, Sherman L., Professor of Law, Georgetown University Law Center 17

Lidsky, Lyrissa C. Barnett, Professor of Law, Levin College of Law, 

University of Florida ..................................................................................... 38

Smith, L. Murphy, Assistant Department Head, Department of Accounting, Texas A&M University ......................................................................... 14

(III) 

(1)

OATH TAKING, TRUTH TELLING, AND 

REMEDIES IN THE BUSINESS WORLD 

FRIDAY, JULY 26, 2002

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION, Washington, DC. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 

2123, Rayburn House Office Building, Hon. Cliff Stearns 

(chairman) presiding. 

Members present: Representatives Stearns, Deal, Shimkus, Bryant, Terry, Tauzin (ex officio), and Towns. 

Also present: Representatives Chambliss, Collins, and Isakson. 

Staff present: Ramsen Betfarhad, policy coordinator and majority 

counsel; Shannon Vildostegui, majority counsel; David Cavicke, 

majority counsel; William Carty, legislative clerk; J.P. Guzzardo, 

legal intern; Bruce Gwinn, minority professional staff; and 

Consuela Washington, minority counsel. 

Mr. STEARNS. The subcommittee will come to order, and we 

would like to have our panelists come down. I would like to welcome all of you, especially our witnesses, and thank them for their 

appearance and testimony before the subcommittee. Today we will 

examine business ethics and oath taking in light of the recent scandals that have colored this country’s recent corporate history. 

The Energy and Commerce Committee has been at the forefront 

of congressional investigations examining Enron, Global Crossing 

and WorldCom. Those investigations, in addition to uncovering disturbing facts about illegal and questionable practices that permeate 

these companies and others, also highlighted a seemingly pervasive 

disregard of ethics by business executives and professionals. 

In the earnings race of the mid to late 1990’s, many business executives and professionals seemed to have traded their own integrity and the good name of their company, albeit incrementally, for 

greed and a chance to beat analysts’ earnings estimates. I don’t 

think this phenomenon is unique to the 1990’s. America’s corporate 

and economic history is replete with stories of disastrous failures 

in business ethics during boom periods. The 1990’s were no exception. 

As with other postboom periods in our history, markets’ self-correcting mechanisms have kicked in to better align corporate practice with business ethics. In the recent months investors have severely punished companies by driving down their share prices 

where there was a slight hint of questionable behavior such as acVerDate 0ct 31 2002 12:42 Nov 08, 2002 Jkt 082299 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 W:\DISC\81956 81956
2

counting irregularity. This is how the market reacts in helping to 

mitigate against a crisis of confidence and trust that pervades corporate America today. 

Economic history also shows that when there are such crises of 

confidence and trust in American business, that government must 

act. It enacts new laws just as we did yesterday. It enforces existing laws much more rigorously, as the SEC and the Department 

of Justice are now doing. The new laws and more rigorous enforcement of existing laws are all designed to address current ills that 

stem from lapses in business ethics and hope to prevent similar future problems. 

Both prudent government intervention and market self-corrections will go a long way toward remedying this problem, but no 

lesser luminaries than Warren Buffett and Alan Greenspan have 

reminded us that the attitudes and actions of the CEO and other 

officers of companies are what determine corporate conduct, good 

or bad. Obviously, markets’ self-correcting mechanisms and legal 

prohibitions and sanctions help keep that conduct in check. CEOs 

can be fired, and worse, they can go to jail for bad conduct, and 

we have just seen that recently. 

Yet it seems to me, just as Warren Buffett wrote in a recent editorial when he said, quote, to clean up their acts on these fronts, 

CEOs don’t need independent directors, oversight committees or 

auditors who are absolutely free of conflicts of interest. They simply need to do what is right, end quote. Doing the right thing 

means having and exercising good business ethics. We cannot legislate integrity or personal responsibility. Laws can only encourage 

good behavior. But Congress will legislate enforcement and stiff 

penalties if CEOs do not do the right thing. 

At today’s hearing we are hearing from law and business professors that teach our future corporate executives and business professionals ethics. We will learn what are the existing codes of ethics 

that govern the professions. We will also learn whether those codes 

should be improved and/or better instilled in the students of today. 

We will hear from prominent business executives—a prominent 

business executive speaking to the role and the significance of the 

CEOs and other corporate officers in the business ethics that pervade their companies. 

So I look forward to our witnesses today, and I want to thank 

them for their participation, and now we will have an opening 

statement from the distinguished ranking member, the gentleman 

from New York Mr. Towns. 

[The prepared statement of Hon. Cliff Stearns follows:]

PREPARED STATEMENT OF HON. CLIFF STEARNS, CHAIRMAN, SUBCOMMITTEE ON

COMMERCE, TRADE, AND CONSUMER PROTECTION

Good morning. I would like to welcome you all, especially our witnesses for their 

appearance and testimony before the subcommittee. Today, we will examine business ethics and oath taking in light of the recent scandals that have colored this 

country’s recent corporate history. 

The Energy and Commerce Committee has been at the forefront of Congressional 

investigations examining Enron, Global Crossing, and Worldcom. Those investigations, in addition to uncovering distributing facts about illegal and questionable 

practices that permeated those companies and others, also highlighted a seemingly 

pervasive disregard of ethics by business executives and professionals. 

3

In the earnings race of the mid to late 90s, many business executives and professionals seem to have traded their own integrity and the good name of their company, albeit incrementally, for greed and a chance to beat analysts earnings estimates. I don’t think this phenomenon is unique to the 90s. America’s corporate and 

economic history is replete with stories of fantastic failures in business ethics during 

‘‘boom’’ periods. The 90s were no exception. 

As with other post-boom periods in our history, the markets’ self-correcting mechanisms have kicked in to better align corporate practice with business ethics. In the 

recent months, investors have severely pushed companies by driving down their 

share prices where there was a slight hint of questionable behavior, such as 

‘‘accounting irregularities’’. This is how the markets react in helping mitigate 

against the crisis of confidence and trust that pervades corporate America today. 

Economic history also shows that when there are such crises of confidence and 

trust in American business, the Government acts. It enacts new laws, as we did yesterday. It enforces existing laws more rigorously, as the SEC and Department of 

Justice are doing. The new laws and more rigorous enforcement of existing laws are 

all designed to address current ills that stem from lapses in business ethics and 

hope to prevent similar future ills. 

Both prudent government intervention and market self-corrections will go a long 

way towards remedying the problem. But no lesser luminaries than Warren Buffet 

and Alan Greenspan remind us that the attitudes and actions of the CEO and other 

officers of companies are what determine corporate conduct, good or bad. Obviously, 

markets’ self-correcting mechanisms and legal prohibitions and sanctions help keep 

that conduct in check. CEO’s can be fired and worst can go to jail for bad conduct, 

as we have seen happen recently. Yet, it seems to me that as Warren Buffet wrote 

in a recent editorial: ‘‘[t]o clean up their act on these fronts, C.E.O.’s don’t need 

‘‘independent’’ directors, oversight committees or auditors absolutely free of conflicts 

of interest. They simply need to do what’s right.’’ Doing the right thing means having and exercising ‘‘good’’ business ethics. We cannot legislate integrity or personal 

responsibility. Laws can only encourage good behavior. 

At today’s hearing we’ll hear from law and business professors that teach our future corporate officers and business professionals ethics. We will learn what are the 

existing codes of ethics that govern business professionals. We’ll also learn whether 

those codes should be improved and/or better instilled in the students. We will hear 

from a prominent business executive speaking to the role and significance of the 

CEO and other corporate officers in the business ethics that pervades a company. 

I thank the witnesses for their participation and look forward to their testimony.

Mr. TOWNS. Mr. Chairman, I have an opening statement that I 

will just place in the record, but I would just like to make a few 

comments. First of all, I would like to thank you for holding this 

hearing. I think it is important that we do it at this time. Ethics 

is something that we cannot legislate, but I think that we cannot 

sit around and just watch and see what is happening, because it 

is important that we have the confidence of the general public, and, 

of course, if we do not do something, I am certain that that confidence will not be there. So I want to salute you, Mr. Chairman, 

for taking the lead in this particular issue and to say to you that 

even though the business community have done a few things, but 

I still don’t think it is enough, and that in the event that we do 

not do something, then I think that we are going to jeopardize, you 

know, a lot of people in a lot of areas, and the confidence just will 

not be there. 

So I want to salute you for moving forward with this hearing 

today and to say to you that I look forward to hearing from the witnesses, because I think that when we talk about ethics, we can’t 

talk about it enough. So thank you very much, Mr. Chairman. And 

I yield back. 

Mr. STEARNS. Okay. The gentleman yields back. And by unanimous consent his opening statement will be made part of the 

record. 

4

My colleagues, by unanimous consent the gentleman from Georgia, the Honorable John Isakson, will participate if there is no exception. So ordered. 

Now, the vice chairman of our subcommittee the gentleman, also 

from Georgia, Mr. Nathan Deal. 

Mr. DEAL. Thank you, Mr. Chairman, and thank you for holding 

this hearing today, and in a few minutes I look forward to introducing one of the very special panel members here, Mr. Truett 

Cathy, who is certainly one of the premiere business people in our 

Nation and from our State of Georgia, and we are proud to have 

him here. And I also welcome my colleague Mr. Isakson to this 

hearing today. 

As you have indicated, Mr. Chairman, we hear a lot about the 

bad things that go on in business, in corporate America. Today as 

we listen to those from the academic community who train the 

CEOs and the legal advisors to major corporations, and as we listen to a businessman who has shown that success in the marketplace does not depend on dishonesty, but, in fact, it depends on exactly the opposite, that is that you play by the rules, that you treat 

your customers fairly, and that you display the kind of leadership 

that people in the everyday world who invest in corporations expect, I think we get the message out that that is the foundation 

on which American business has truly been built. And the ones 

who have deviated from that are the exceptions to the rule and not 

the rule itself. 

Certainly all of us, as we have come through our own educational 

background, have been taught that morality and ethics are, in fact, 

the cornerstones of not only a successful personal life, but a successful business and professional life. And I think that we need to 

send a message, especially to the young people of this country 

today, that as they make their choices about professions, as they 

make their choices about what they are going to do with their lives, 

that they understand very clearly that from the halls of Congress 

to the business communities itself, that the concept of honesty and 

fair dealing is important and, in fact, is essential. 

I am pleased that we have these outstanding members of this 

panel to reinforce that concept as we proceed to this hearing, and 

I look forward to introducing Mr. Cathy in a few moments. Thank 

you, Mr. Chairman. 

Mr. STEARNS. Thank my colleague. 

And Mr. Shimkus. 

Mr. SHIMKUS. Thank you, Mr. Chairman. 

It is great to have you all here today, and it is a shame that we 

have to have you here today, because this shouldn’t be something 

that we have to advertise. This just should be the way we operate. 

You know, one of the Founding Fathers was quoted—and I won’t 

try to remember which one. He says, though good laws do well, 

good people do better. And it talks about a moral foundation of 

truth that is instilled throughout our society, although sometimes 

we lose our way. 

I am a West Pointer, so I didn’t wear my class ring for a long 

time. Actually I put it on not to get—I put it on during the impeachment issues because I had to keep asking a lot of questions. 

The code at West Point is duty, honor, country. And I have my 

5

class ring here. And General MacArthur said, duty, honor, country. 

Those three words reverently dictate what you ought to be, what 

you can be, what you will be. His speech to the corps of cadets at 

the end of his career indicates how the Academy has attempted to 

imbed into a culture that would permeate through the military. 

Other things that are done at West Point is the honor code: A 

cadet will not lie, cheat or steal, nor tolerate those who do; and 

part of the cadet prayer, which says, help me to do the harder right 

over the easier wrong, not being content with the half truth when 

the whole can be won. 

This background, when I had to make some tough decisions, 

caused me to focus back on my educational background, and not 

only that, but also my family background and my training there. 

But we all know that this also tries to permeate itself through the 

Army Officer Corps where an officer’s word is his bond. The moral 

foundation of the United States Army tends to depart from the 

background at West Point, but it always continues and takes more 

work, just like a successful marriage takes work, a good corporate 

culture takes work. 

We are glad that you are here to help get the word out that there 

are goods actors out there instilling good corporate cultures, and if 

we are concerned about having character education in our schools, 

which is a big thing now—unfortunately we have to do that, because they are not getting it at home—then it is good to tell the 

story that that there needs to be character core education in the 

boardrooms. 

We thank you all for being here. We are excited about listening 

to your stories, and we hope our other folks who are creating jobs 

and wealth in this country will take heart that there are good folks 

out there. 

And, Mr. Chairman, thank you for the extension of my time, and 

I yield back. 

Mr. STEARNS. Thank you. I want to thank the gentleman. 

Mr. Terry, gentleman from Nebraska. 

Mr. TERRY. Thank you, Mr. Chairman. I have a statement, and 

I will just submit it. 

Mr. STEARNS. So ordered. 

[The prepared statement of Hon. Lee Terry follows:]

PREPARED STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEBRASKA

Thank you, Mr. Chairman, and thank you for holding this hearing on a very important issue: the accountability of chief executive officers for the financial statements their companies issue to the public. 

I am not a promoter of more laws, just better ones. I do not support increased 

regulations; rather, enforcing the ones we already have on the books. This Committee and this Congress have taken strong steps this session to streamline accounting laws and oversight regulations. We have closed loopholes, filled in gaps, tightened grips, and made our economy’s future strong by doing so. 

Issue by issue, Mr. Chairman, your leadership has led to real-time financial disclosures, transparent investor information, plain language documentation, and 

harsher penalties for those who knowingly commit the crimes that lead to Enrons, 

Worldcoms, and ImClones. Yet more needs to be done, which is why this hearing 

today is so important. 

Like a quarterback for a football team, CEOs get to take all of the credit when 

things go well and have to take all of the blame when things go badly. Yet legally, 

they are not held accountable. When a quarterback fumbles, throws a few interceptions, maybe even throws the game, the coach has a responsibility to bench him, 

6

so that no more follies will occur. Mr. Chairman, the federal government must be 

the coach every once in a while, and we have a responsibility to bench CEOs who 

lie, cheat, hide, and steal. President Truman said it best: ‘‘The buck stops here.’’ At 

the end of the day, CEOs have a duty to ensure ethical behavior of their companies. 

By signing on the dotted line that their financial statements are accurate and true, 

CEOs will be held accountable to the letter of the law. 

Thank you again, Mr. Chairman, for holding this hearing, and I look forward to 

the testimony.

Mr. STEARNS. Mr. Bryant, the gentleman from Tennessee. 

Mr. BRYANT. Thank you, Mr. Chairman. 

Having walked in late, I apologize to the panel. I will be very 

brief here. 

I would say that listening to Mr. Shimkus’s speech, I would tell 

him that I would take full credit for that, although I am not sure 

I actually did. I actually taught at West Point during that time, 

and I claim him when he is on his best behavior that he was one 

of my students; but usually when he is not on his best behavior, 

I disavow him completely. But I will certainly agree with what he 

says and thank the panel for coming. 

I can’t help but think not just the cause—but I cannot help but 

think back just a few short years ago with what we went through 

in Washington as a part of the actual impeachment of a President 

and actually being firsthand involved in that myself, knowing what 

was there and the example that was not only, I think—the very 

bad example that was not only set to our youth, but I think something we missed was the bad example it set for our corporate executives and other people in business and certainly, I believe, lowered the standard, if you will, of truth and integrity. And I think 

it was a very bad example. I am not saying that is all of it by any 

means. Certainly at the core is simply greed, the human nature of 

greed. But we have to do what we can as a body, as a Congress, 

to correct that. 

We always hear you can’t legislate morality, but we do attempt 

to do it in many ways. But certainly we have to do that. Also we 

have to set an example ourselves as Members of Congress. But I 

can sound like I am starting to preach here, and I am not. 

But let me yield back my time and thank this very distinguished 

panel for being here today and so we can move on and hear them. 

Thank you. 

Mr. STEARNS. I thank my colleague. 

I think that what we are going to do is have—the vice chairman 

introduce one of our CEOs, the distinguished Mr. Cathy, and then, 

Mr. Isakson you will have an opportunity after Mr. Deal speaks to 

also do an opening statement and to provide anything further. 

So with that we will move to our panel and Mr. Deal. 

Mr. DEAL. Thank you, Mr. Chairman. 

Probably the guest that we have today in the form of a panel 

member is best recognized by some of the ads that feature the ‘‘Eat 

Mor Chikin.’’ this is certainly one of the more successful advertising recognition symbols in our country. It is the recognition of 

Chick-fil-A, and we are very pleased, especially Mr. Isakson and I 

as Georgians, to have a native Georgian on the panel today, Mr. 

Truett Cathy. 

Mr. Cathy grew up in Atlanta. He began his business activities 

running a Coca-Cola stand in Atlanta. He carried the concepts of 

7

good business practices from those early years, in his preteen 

years, all the way through his career here until today and is certainly, I think, the model for the kind of business that all of us 

would like to see succeed in our country. 

Chick-fil-A has over 1,040 franchises across the country. It is a 

business that for 34 consecutive years have each year posted sales 

growth, and that in itself is phenomenal. It is a business that has 

adhered to the importance of never having a customer who leaves 

dissatisfied; that the customer is first and most important, because 

that is what keeps a business, especially a business like the restaurant business, going on a daily basis. 

But he has a unique distinction. The restaurant business is a 

very competitive business, and Sundays are sometimes regarded as 

the most important day in the restaurant business because people 

are off working generally, and they go out to eat. But because it 

is Sunday, Mr. Cathy has consistently adhered to the concept that 

his restaurant is closed on Sunday, and the reason is that he wants 

his employees to have time to worship, if they choose, and also to 

have time with their families. So it is not the typical business 

model, and he is certainly not in many respects the typical business entrepreneur, but is the example that all of us, I think, should 

adhere to. He is a very kind and gentle man, and it is indeed my 

pleasure to have him on this panel today. 

Mr. STEARNS. I thank the gentleman. 

Mr. Isakson, you are welcome to make introductory remarks. 

Mr. ISAKSON. I will just be very brief, and I appreciate all the 

things that Congressman Deal said. And Congressman Collins is 

also—all of us from Georgia are here because in my—I don’t know 

a finer man than Truett Cathy, and I have known him for a number of years. I practiced business in Atlanta for 34 years before I 

came to Congress. It was a real estate business, so we from time 

to time dealt with Chick-fil-A people looking for sites. My kids were 

raised on Chick-fil-A because it is the favorite thing they like to 

eat. 

But the point I wanted to make is this: Truett Cathy is not one 

of those people that writes a book or comes up with a cute phrase 

and puts it on for pretense. He is a guy that every day lives the 

life that he is here to tell you about, and I can tell you in advance 

he will be more humble than he should be because he is that type 

of a man. 

I just lament that, having attended the Enron hearings here in 

Washington a few months ago and seeing standing-room-only 

crowds coming to hear about a tragedy, that we don’t have a standing-room-only crowd here today to hear about what most American 

business is really like, but what I think Atlanta and Georgia’s finest businessman is. Truett Cathy walks the walk. He talks the 

talk. He has changed the lives of thousands of children, and he has 

made it possible for hundreds of his employees to get college educations who would otherwise never have had a chance. But every 

Sunday, for, I think, 50 years, he has taught 13-year-old boys Sunday school, trying to point them in the right direction in life, and 

many of them today are walking examples just like Truett is. 

So it is a real honor for me to be here around my role model and 

my idol Truett Cathy. Thank you, Mr. Chairman. 

8

Mr. STEARNS. Thank you. 

And the gentleman Mac Collins from Georgia is also recognized, 

not a member of the committee, but certainly welcome his comments. 

Mr. COLLINS. Thank you, Mr. Chairman. And I join my two colleagues as well as the other colleagues in welcoming the panel, particularly the Cathy family, Mr. Truett, his son Dan, and two 

grandsons. 

You know, I have know Mr. Cathy for, oh, 10, 15 years since I 

have been campaigning in Clayton County and Henry County, 

Georgia, for political office. I know him as a man of honor, a man 

of integrity and a man of faith. And I know that he has, as a father, raised a family with those same traits. Not only has he raised 

a family who are people of faith, but he has taken in a lot of foster 

children; homes in the United States that he has for foster children, funded them, visits with them, and lets them know of his 

faith, and through faith has been successful to him and will be successful for them if they follow that route. But not only here, but 

in Peru, he has helped children there. 

It has been mentioned he has been teaching Sunday school for 

a number of years. I have attended some of his classes because I 

wanted to hear him. I welcome them. I am glad to call them 

friends, and I am glad that they live in the Third District of Georgia. 

Thank you for all you do, all your family. And one last thing. Mr. 

Cathy, when each of his children became the age of driving, at that 

time it was 16 in Georgia, they could get them an automobile, but 

on the steering wheel of that automobile would be an engraving. 

It would be a Bible verse of their choice. That is the type of man 

Truett Cathy and his wife and family are. Thank you, Mr. Truett. 

Mr. STEARNS. I thank the gentleman. 

Also we have also from the great State of Georgia Mr. Saxby 

Chambliss, who is offering a quick opening statement or comment. 

Mr. CHAMBLISS. Thank you, Mr. Chairman, and just adding to 

what my colleagues have said about Mr. Cathy, he is a remarkable 

man who has had a remarkable life and has had just a profound 

influence on any number of other not just Georgians, but Americans, and he is somebody that we Georgians are extremely proud 

of. And just one quick story. 

His son Dan and Mr. Cathy invited me to an event back the Saturday before the Fourth of July, which is an annual event they 

have at their ranch, which is located in my district, and it is a 

ranch on which they have a home for children. And it is—the home 

itself is a remarkable story, it says a lot about Mr. Cathy and Dan 

and that whole family. And we were there that Saturday night. 

There were probably, I don’t know, 3,000, 3,500 folks there at Mr. 

Cathy’s and Dan’s invitation. And there were, gee, a lot more children than there were adults just enjoying life, celebrating the great 

country that we live in, and having an opportunity to see the work 

that Mr. Cathy has done for so many children in our part of the 

State who have not had the advantages that most of us have had. 

And it was truly a great night for America, but it was a great night 

to pay tribute to the Cathy family. 

9

Mr. Cathy, unfortunately, by the time I got there, had already 

gone, and he had gone for the right reason. He had left Upson 

County and had headed somewhere—I don’t believe it was back 

home, Mr. Cathy. I know it was north of Atlanta. But he was gone 

to teach Sunday school or gone home so he could get a good night’s 

sleep so he could teach Sunday school the next morning. And all 

Georgians are extremely proud of—I am very proud of you. We are 

proud to have your facility in my district, and we appreciate you 

being here today, and thank you and Dan and your whole family. 

Mr. STEARNS. I thank the gentleman. 

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. CHARLES F. BASS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEW HAMPSHIRE

Mr. Chairman, thank you. I am pleased that this subcommittee is addressing the 

issue of business ethics. In light of recent corporate responsibility scandals, it is appropriate that we examine how the federal government may be able to rectify the 

institutional problems that exist within our business models. 

Although I do not believe it is the role of Congress to legislate honesty mandates, 

as Americans, it is incumbent upon us to reevaluate the significance of social responsibility and its effects on our business and economic systems. The failure to adhere to a professional code of ethics by some executives has contributed to the current economic melange. I believe this hearing will serve as a positive step in redressing the wrongs that have led to this point so that they should not have to occur 

in the future. 

I yield back to the Chairman. 

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Thank you, Mr. Chairman, and I’d like to thank you for holding this hearing and 

for continuing to focus on the myriad problems that have been exposed in the business community in recent months. Straight truth, favorable or not, from our public 

companies and their governors is the foundation for trust in our free market system, 

and we in Congress must find the best way to encourage ethical behavior by business leaders and protect investors from corporate malfeasance. 

Our business community, and the investor culture that thrives therein, is based 

upon concepts that we’ve heard more and more about since these corporate scandals 

have unfolded. The notions of ‘‘transparent accounting,’’ ‘‘auditor independence’’ and ‘‘investor confidence’’ are more than Boardroom phrases. Because of the technology 

boom of the late 90’s and the democratization of the financial markets, these concepts are now discussed around American dinner tables. Investors simply must have 

confidence in financial reporting, and we must do everything we can to ensure the 

veracity of reporting and the continued strength of our market system. The first 

and, I think, most important, step in this process is to restore the fundamental trust 

of the general public in the integrity of business leaders and the financial reports 

they issue. 

Swearing an oath has long been a very public way for those in a position of leadership—in government and in the private sector—to take explicit responsibility for 

their actions with regard to that position. For example, Members of Congress take 

an oath to uphold the Constitution. Public avowal serves as an assurance to the 

public—investor or constituent—that the leader raising her right hand will act in 

the interest of those she serves. But in addition to that, it shores up confidence in 

the system as a whole. It shows that the system is comprised of men and women 

who are accountable not only to those they serve directly, but also to the entire community. 

Mr. Chairman, the investors who have lost huge amounts of money are irate with 

the shady dealings of their corporate representatives. So too are those of us who believe in the virtues of the free market. In fact, it is the most stalwart of defenders 

of free markets that are most offended by those who have abused the system. 

The business community is just that, a community, and when people cook the 

books in an attempt to line their own pockets, they do an incredible disservice to 

all of those who try to inform themselves completely and invest responsibly. Yesterday we took meaningful steps to protect investors by passing the Conference report

10

for HR 3763. I look forward to hearing from our witnesses today about further steps, 

legislative or otherwise, that need to be taken to restore confidence in our market 

system. 

Again thank you, Mr. Chairman, for holding this hearing and for investigating 

possible remedies to the problems we face. 

I yield back the balance of my time.

Mr. STEARNS. We want to welcome—— Mr. COLLINS. Mr. Chairman, would you yield for a moment, 

please? 

Mr. STEARNS. I would be glad to yield. 

Mr. COLLINS. This is the Commerce Committee, and we are so 

proud to be over here with you. And, you know, we are from Georgia, and Georgia is the poultry capital of the world. We are having 

trouble based on some conflict that we have with Russia. It might 

be a good suggestion if we send Mr. Cathy over to Russia. I believe 

he could convince those people over there they need to eat more 

chicken, and if they eat more chicken, then they will probably bring 

down that barrier and settle that conflict. 

Mr. STEARNS. Probably so. Does vodka go with chicken? 

Mr. DEAL. Not at Chick-fil-A. 

Mr. STEARNS. Let me welcome our panel. 

Mr. COLLINS. They are already indulging in enough of that, but 

they need to eat more chicken. 

Mr. STEARNS. Okay. Of course, we have Samuel Truett Cathy, 

who is founder and chairman and chief executive officer of Chickfil-A. We have Murphy Smith, assistant department head, department of accounting, Texas A&M University. And we have Sherman 

Cohn, professor of law, Georgetown University Law School; and 

Lyrissa Barnett Lidsky, a professor of law, Levin College of Law, 

the University of Florida. 

So let me welcome all of you this morning, and we will go from 

my left to my right with opening statements, and, Mr. Cathy, we 

will start with you. What we need you to do is turn on the mike 

and then move the mike a little closer to you. 

STATEMENT OF SAMUEL TRUETT CATHY, FOUNDER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, CHICK-FIL-A, INC. 

Mr. CATHY. Okay. Great. It is indeed an honor for me and humbling in spirit to be here with you and hearing all these glorying 

remarks. I could sit here and enjoy this the rest of the day, and 

I will be here, be glad to listen to you. I love to hear such kind remarks, and I am grateful for those. But I am thankful that you invited me to speak, realizing when I was in school I was tongue-tied. 

The best I could do was the name Truett Cathy, and here you are 

inviting me to speak to a very distinguished group. So I am indeed 

honored. People ask me, do you get many speaking engagements, 

and I say, well, I get a lot of first-time speaking engagements, but 

seldom does anyone ask me back. So I appreciate this first opportunity I have had to speak to such a distinguished group. 

As I think about ethics and the business ethics, I realize there 

is no such thing as a business ethics. It is individual ethics. People 

make the business. I am proud of all my representation of Chickfil-A folks. They know what dedication and commitment is and loyalty among our people. We are a private company. That is why we 

don’t have a board of directors to answer to, thank goodness. And 

11

we do not have to answer to stockholders that arereally the bosses 

of these companies. They are the ones that ought to be protected 

and watch after their own interest. But today I am grateful that 

we are still a private company, family owned, and operate on some 

principles that have been very meaningful to me throughout my 

business life. 

Here back in 1982 we were experiencing some kind of difficult situations. No. 1 is we just moved into a $10 million corporate 

headquarters. It was fully financed. Business interest on borrowing 

money was 20 and 21 percent. We saw some decline in our sales 

because all the major chains were getting in the chicken breast 

sandwich business, which caused the product to be inflated, and I 

was disturbed at the time because everything that I had at that 

time was predicated on the success of Chick-fil-A. 

And so I called a meeting among our executive committee. All of 

these gentlemen have more than 20 years of service with Chick-filA. They are fully dedicated and committed to operating a business 

on Christian principles, and so I asked the question, why are we 

here? Why are we alive, and why are we in business anyway? We 

never established a corporate purpose. But among the conversation 

of the eight of us spending 2 days there, we came away that this 

might be our corporate purpose, that we might glorify God by being 

a faithful steward for all that is entrusted to our care, and that we 

might have a positive influence on all the people that we come in 

contact with. 

We came back and shared this with our staff people, and they 

said, well, what else do you do? I said, well, we didn’t have an answer to the current problems, but we did establish where our goals 

were, where our corporate purpose was and asked them to cooperate with. They were kind enough to give to me at Christmastime 

a plaque identifying my corporate purpose. So it was meaningful to 

them, but it is meaningful even today that where my responsibility 

is, how I should conduct myself over telephone calls and salespeople and people that are not doing the job that is expected of 

them. 

So being in the restaurant business, I feel kind of a divine calling 

to do those things—meeting people’s needs, their physical needs, 

their emotional needs and even the spiritual needs. It is a privilege 

that we have to employ 40,000 or 50,000 young people in our various businesses, and I am motivated by what I see in young people. 

A lot of them work because they have to work. Others work because they just like to work. I have never seen any objections to 

people enjoying their work. I find people that enjoy their work if 

they are putting their heart into it and performing at their very 

best. When we get in trouble is when we are doing less than what 

is expected of us. 

But it was brought out the fact of I do teach 13-year-old boys in 

Sunday school, and the reason that I do that is I feel it is the last 

opportunity to establish some values in life that will get them over 

the critical years of a teenager. So I tell them, you know, it is important that you make good decisions. Good decisions mean goods 

results; fair decisions, fair results; and the sad part about it, bad 

decisions equal bad results. So even teaching, I have my former 

students, some in prison today that have gone wayward and doing 

12

those things, and I ask, you know, I wondered if I had had just a 

little bit more time to spend with that individual. 

Also I pointed out—I asked one morning, how many of you would 

like to have a million dollars? And all the hands went up. They 

could have everything they wanted. Dad could have a pickup truck 

with shotgun shelf, and Mom could have a new dress. He could 

have a Go Kart. And I said, well, let me tell you something better 

than a million dollars; that the Bible says a good name is rather 

to be chosen than great riches. 

I think that is something we all need to realize, that God has a 

plan in our life. I consider the Bible as a blueprint, a road map for 

our life. I think instinctively we are all born with the idea that we 

want to be somebody and achieve goals that might be worthy, but 

somehow or another we are getting our priorities mixed up. I was 

asked by a reporter one time, how would you like to be remembered when you leave here? After thinking a moment or two, I said, 

I guess I would like to be remembered that I kept my priorities in 

the proper order, because I have observed business people, highly 

successful business, being a complete failure when it comes to the 

important things like your conduct with your family and in society 

and community. 

It is very, very important that we take a look at the important 

things. We realize we are in a changing world, but the important 

things never have changed. I still feel the principles of the Bible. 

I see no conflict between biblical principles and good business practice. They are there. They are outlined for us. And we need to read 

the Bible, and not only read it, but interpret it. 

I have been impressed with attending the national prayer breakfast where the President was there and his wife, and the Vice 

President and his wife, and numerous other peoples. And a Jewish 

person read from the Old Testament, and a Protestant read from 

the New Testament. Prayer is prayer. 

To get in my office and find that a kindergarten group was coming through, elementary school group, and I have a book at that 

time, It Is Easier to Succeed Than to Fail, and I told the children, 

I don’t have books for each of you, but I will give you three and 

put them in the library. And I am signing this book, and under it 

I will put Proverbs 22:1. I am not going to tell you what Proverbs 

22:1 is. You look it up, and you can find it in the Bible. I said, 

when you go to check out the book, take a look at what Proverbs 

22:1 says. I said, you do have a Bible in your school, don’t you? The 

teacher said, I am sorry, Mr. Cathy, we are not allowed to have a 

Bible in our school. How is it that people of higher authorities rely 

on prayer and Bible reading and character building, yet a child 

going to school cannot carry a Bible in their hands? 

Mr. STEARNS. Mr. Cathy, I am going to have to interrupt you. We 

have a vote on the floor, so I am going to recess the committee, and 

we will come back momentarily. We just have one vote. So the committee stands in recess. 

[Brief recess.] 

Mr. STEARNS. The subcommittee will reconvene, and Mr. Cathy 

was just finishing up his opening statement. 

So, Mr. Cathy, as a courtesy, if you don’t mind wrapping up your 

opening statement, and then we will hear from Dr. Smith. 

13

Mr. CATHY. Thank you for the time that has already been given 

to me. I want to make a closing statement or two that I would like 

to relate to you. 

Many other things I would like to share with you at the proper 

time, but I will close by maybe telling you about a picture that I 

have on the wall of my office that was sent to me by my daughter 

as a teenager. But on that is a picture of a mountain climber, had 

proper attire with his safety rope on, with the caption that no goal 

is too high if we climb with care and confidence. And that is a reminder to all my people there that no goal is too high, but we have 

to be careful, and we have to practice biblical principles and do 

those things that will cause us to continue to experience success. 

So I would like to close by just making the statement I see no 

conflict between biblical principles and our faith, and we could do 

well to consider the things that are important in our life. And I feel 

that some of our people have been misguided to think that pressure 

put on them about the bottom line. We concentrate on people. And 

I know sometimes the stock companies concentrate on the bottom 

line. We should forget about the bottom line. It is important that 

we do things right and do things right long enough that you will 

receive the rewards that you are looking for. That is my closing remark. 

[The prepared statement of Samuel Truett Cathy follows:]

PREPARED STATEMENT OF S. TRUETT CATHY

Mr. Chairman and members of the Committee, I am honored that you have asked 

me to be here today. I cannot think of a greater privilege than to speak to the leaders of our nation. Further, that you thought me fit to speak on the issue of ethics 

is personally humbling. 

After agreeing to appear before you today, I had to ask myself ‘‘what is the meaning of ‘business ethics’?’’ I concluded that there is really no such thing as business 

ethics. There is only personal ethics. I believe no amount business school training 

or work experience can teach what is ultimately a matter of personal character. 

Businesses are not dishonest or selfish, people are. Thus, a business, successful or 

not, is merely a reflection of the character of its leadership. 

I am deeply disturbed, as you are, by the lack of character I see in the marketplace. In order to satisfy the increased pressure for greater profits, some business 

leaders are making bad choices which ultimately hurt thousands of employees, 

stockholders, and the economy. 

We all know that the scorecard of any business is the profit it produces. Without 

profit, we cannot take care of our employees, our families, or contribute to the betterment of our communities. The question is: How do we balance the pursuit of profit and personal character? 

For me, I find that balance by applying biblical principles. I see no conflict between biblical principles and good business practices. We’ve tried to operate Chickfil-A that way from the beginning... 1946 . . . Comments. 

In grade schoo...(My Proverbs 22:1 story)...

There also is the book, ‘‘Everything I Need To Know I Learned In Kindergarten’’, 

and some of these things are... Comments. 

So, personal character is something we must teach our children and enforce 

through our actions. That is one reason we close on Sunday. Not everyone has personal convictions about closing on Sunday, but I believe most people respect my personal convictions in doing so. I once asked the group of 13 year old boys I teach 

Sunday school...(the hypocrite story)... Comments. 

I have a framed poster on my wall of a mountain climber given to me by my 

daughter, Trudy when she was just a young teenager, which says, ‘‘No goal is too 

high if we climb with care and confidence’’. Many businesses today are overextended 

and have gotten themselves into financial trouble. I have always tried not to overextend. I am satisfied stepping from one plateau to the next, making sure we are 

doing everything right so that we can move on with confidence. I have always said 

I want to make sure we are getting better before we get bigger. 

14

Mr. Chairman and members of the committee, in closing, I would like to say that 

the important things in life haven’t changed: those are faith, family values, and 

good character among others. I was asked the other day how I wanted to be remembered. My reply was that I would like to be remembered as one who kept their priorities in order; that while I’ve tried to build a successful business, I’ve kept focused 

on my family, the reputation of my name, on influencing others, and on incorporating my faith into every part of my life. In other words, Mr. Chairman, I believe 

faith works on both Main Street and Wall Street. Thank you again for the opportunity to be here today.

Mr. STEARNS. I thank you. 

Dr. Smith, your opening statement. 

STATEMENT OF L. MURPHY SMITH, ASSISTANT DEPARTMENT 

HEAD, DEPARTMENT OF ACCOUNTING, TEXAS A&M UNIVERSITY 

Mr. SMITH. Well, first, thanks for allowing me to be here today. 

Ethical values provide the foundation on which a civilized society 

exists. Without that foundation, civilization collapses. On a personal level everyone must answer the following question: What is 

my highest aspiration? The answer might be wealth, fame, knowledge, popularity or integrity, but if integrity is secondary to any of 

the alternatives, it will be sacrificed in situations where a choice 

must be made, and those situations will inevitably occur in every 

person’s life. Allegations of unethical behavior by top management 

at Enron helped destroy the company’s ability to function. 

A goal of a business firm should be to increase its owner’s 

wealth. To do so requires the public’s trust. In the long run, that 

trust depends on ethical business practices. In the United States 

and other free societies, people often have the freedom to make 

their own decisions about the right thing to do. Before the American Republic, a common belief was that where there was liberty, 

anarchy would result, because people would be unable to govern 

themselves. Yet Americans were free and well-behaved. How could 

this be? 

The great English writer G.K. Chesterton observed that America 

was the only Nation in the world founded on a creed. He said that 

creed was set forth with dogmatic and even theological lucidity in 

the Declaration of Independence. Chesterton was referring to the 

second paragraph of America’s founding document: We hold these 

truths to be self-evident that all men are created equal; that they 

are endowed by their Creator with certain unalienable rights; that 

among these are life, liberty and the pursuit of happiness. 

Whether a person derives ethical values from religious principle, 

history and literature, or personal observation, there are some 

basic ethical guidelines to which everyone must agree. In considering the impact of ethical values on a society, nationally syndicated columnist Chuck Colson made the following observation: 

Societies are tragically vulnerable when the men and women who 

compose them lack character. A nation or a culture cannot endure 

for long unless it is undergirded by common values, such as valor, 

public-spiritedness, respect for others and for the law. It cannot 

stand unless it is populated by people who will act on motives superior to their own immediate interests. 

The purpose of ethics in business is to direct businessmen and 

women to abide by a code of conduct that facilitates, if not encourVerDate 0ct 31 2002 12:42 Nov 08, 2002 Jkt 082299 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 W:\DISC\81956 81956
15

ages, public confidence in their products and services. Educators 

sometimes wrestle with the question, can ethics be taught? The 

26th President of the United States, Theodore Roosevelt, put it this 

way: To educate a person in mind and not in morals is to educate 

a menace to society. More recently the National Commission on 

Fraudulent Financial Reporting indicated that the business curricula should integrate the development of ethical values with the 

acquisition of knowledge and skills. 

When societal values are deteriorating, maintaining high ethical 

standards in accounting and business grows increasingly difficult. 

People will undoubtedly ask if everyone else is cheating, then how 

can an ethical person succeed? The answer is in the definition of 

success. The real measure of success is a person’s character, not 

fame and fortune. Genuine success is living a life that reflects high 

ethical values. President Abraham Lincoln said it well: Honor is 

better than honors. 

What can government do? Perhaps America’s first President can 

help answer that question. In George Washington’s farewell speech 

to public life, he said, the survival of freedom on American soil 

would have nothing to do with him and everything to do with the 

character of its people and the government they would elect. He 

said, of all the dispositions and habits which lead to political prosperity, religion and morality are indispensable supports. Reason 

and experience both forbid us to expect that national morality can 

prevail in the exclusion of religious principle. Passing additional 

laws and regulations are often necessary to punish criminal behavior and to provide moral guidance to law-abiding citizens; however, 

even more effective leadership would be for government to inspire 

its citizens to act with virtue and honor. 

As President Washington pointed out, there is no better source 

of inspiration than religious principle. The fact that governmental 

institutions have downplayed the role of religion, particularly 

Christianity, starting in the last half of the 20 century is arguably 

a key factor in the decline of national morality, including the recent 

ethical failures in business. Government should include and encourage the active participation of people of faith and the inclusion 

of religious principle in the public arena. This would almost certainly be a step in the right direction of inspiring ethical behavior 

in American society, including the business community. 

In the aftermath of 9/11, I am encouraged by the refocus on 

valor, public-spiritedness and other godly values. As President 

Bush leads our Nation, I am grateful that he reads the Bible and 

spends time in prayer. He affirms our national motto, In God We 

Trust. 

Rules and regulation of government cannot preserve a free and 

ethical society whose people lack integrity. Ethics is the heart of 

America’s economic and social freedom. Unethical behavior is a 

dagger in the heart. According to business textbooks, top management sets the ethical direction for the firm. Company policies and 

internal controls are ineffective without ethical leadership from the 

top. Likewise, the political leaders of our Nation set the tone for 

its citizens. Laws and regulations will do far less than your example. 

16

And finally, I just thank you for your efforts and all the Members 

of Congress who are striving to pass appropriate legislation and to 

provide ethical leadership for our country. 

[The prepared statement of L. Murphy Smith follows:]

PREPARED STATEMENT OF L. MURPHY SMITH, PROFESSOR OF ACCOUNTING, TEXAS

A&M UNIVERSITY

Ethical values provide the foundation on which a civilized society exists. Without 

the foundation, civilization would collapse. On a personal level, everyone must answer the following question: What is my highest aspiration? The answer might be 

wealth, fame, knowledge, popularity, or integrity. But if integrity is secondary to 

any of the alternatives, it will be sacrificed in situations in which a choice must be 

made. Such situations will inevitably occur every person’s life. 

Allegations of unethical behavior by top management at Enron helped destroy the 

company’s ability to function. A goal of a business firm should be to increase its 

owners’ wealth; to do so requires the public’s trust. In the long run, that trust depends on ethical business practices. 

In the United States and other free societies, people often have the freedom to 

make their own decisions about the ‘‘right’’ thing to do. Before the American Republic, a common belief was that where there was liberty, anarchy would result because 

people would be unable to govern themselves. Yet Americans were free and well behaved. How could this be? The great English writer, G.K. Chesterton, observed that 

America was the only nation in the world founded on a creed. He said that creed 

was set forth with dogmatic and even theological lucidity in the Declaration of Independence. Chesterton was referring to the second paragraph of America’s founding 

document: ‘‘We hold these truths to be self-evident, that all men are created equal, 

that they are endowed by the Creator with certain unalienable rights, that among 

these are life, liberty and the pursuit of happiness.’’

Whether a person derives ethical values from religious principle, history and literature, or personal observation, there are some basic ethical guidelines to which 

everyone must agree. In considering the impact of ethical values on a society, nationally syndicated columnist Chuck Colson made the following observation. 

‘‘Societies are tragically vulnerable when the men and women who compose them 

lack character. A nation or a culture cannot endure for long unless it is under-girded 

by common values such as valor, public-spiritedness, respect for others and for the 

law; it cannot stand unless it is populated by people who will act on motives superior to their own immediate interest.’’

The purpose of ethics in business is to direct business men and women to abide 

by a code of conduct that facilitates, if not encourages, public confidence in their 

products and services. Educators sometimes wrestle with the question: Can ethics 

be taught? The twenty-sixth president of the United States, Theodore Roosevelt put 

it this way: ‘‘To educate a person in mind and not in morals is to educate a menace 

to society.’’ More recently the National Commission on Fraudulent Financial Reporting (Treadway Commission) indicated that business curricula should integrate the 

development of ethical values with the acquisition of knowledge and skills. John C. 

Burton, former dean of the Columbia University Business School, in a speech to the 

American Accounting Association, stated that the declining influence of social institutions has increased the role educators must play in shaping values. 

When societal values are deteriorating, maintaining high ethical standards in accounting and business grows increasingly difficult. People will undoubtedly ask: If 

everyone else is cheating, then how can an ethical person possibly succeed? The answer is in the definition of success. The real measure of success is a person’s character, not fame and fortune. Genuine success is living a life that reflects high ethical 

values. President Abraham Lincoln said it well: ‘‘Honor is better than honors.’’

What can government do? Perhaps America’s First President can help answer 

that question. In George Washington’s farewell speech to public life, he said that 

the survival of freedom on American soil would have nothing to do with him, and 

everything to do with the character of its people and the government they would 

elect: 

Of all the dispositions and habits which lead to political prosperity, religion and 

morality are indispensable supports. [R]eason and experience both forbid us to 

expect that national morality can prevail in exclusion of religious principle. 

Passing additional laws and regulations are often necessary to punish criminal behavior and to provide moral guidance to law-abiding persons. However, more effective leadership would be for government to inspire its citizens to act with virtue and 

honor. As President Washington pointed out, there is no better source of inspiration 

17

than religious principle. The fact that governmental institutions have downplayed 

the role of religion, particularly Christianity, starting in the last half of the twentieth century, is arguably a key factor in the decline of national morality, including 

the recent ethical failures in business. Government should include and encourage 

the active participation of people of faith and the inclusion of religious principle in 

the public arena. This would almost certainly be a step in the right direction of inspiring ethical behavior in American society, including the business community. In 

the aftermath of 9-11, I am encouraged by the re-focus on valor, public-spiritedness, 

and other godly values. As President Bush leads our nation, I am grateful that he 

reads the Bible and spends time in prayer. He affirms our national motto: In God 

we trust. 

Rules and regulations of government cannot preserve a free and ethical society 

whose people lack integrity. Ethics is the heart of America’s economic and social 

freedom. Unethical behavior is a dagger in the heart. According to business textbooks, top management sets the ethical direction for the firm. Company policies and 

internal controls are ineffective without ethical leadership from the top. Likewise, 

the political leaders of our nation set the tone for its citizens. Laws and regulations 

will do far less than your example.

Mr. STEARNS. Thank you, Dr. Smith. 

Professor Cohn. 

STATEMENT OF SHERMAN L. COHN, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER 

Mr. COHN. Thank you very much for the invitation and for hearing us out on these very important issues. 

I associate myself with what my two colleagues to my right have 

already said, and I am not going to repeat it. 

Mr. STEARNS. You might just move the microphone just a little. 

That is good. 

Mr. COHN. Thank you. I would like to focus on the role of lawyers. I teach legal ethics at Georgetown. I practice it in many ways. 

I tell my students that the most important ethical question is the 

one you ask yourself in front of the mirror as to who you are, and 

that every lawyer at some point will have to ask that question in 

a very hard situation. There are many such situations. 

The problem, once you get from the broad ethical precepts to application, is that there are so often conflicting precepts and how 

they apply. For the lawyer, you have two very fundamental values 

that come into conflict. One is your duty to your client, which we 

all hold as very important. Those of you who have had occasion to 

employ lawyers know that you want that lawyer to be loyal to you 

and to exercise the duty to you, not to the other side. But then we 

have the value of the duty to the system and to the public. 

In the business world, where we have set up a system by which 

there should be checks and balances, the accountant and the accountant statements which we thought we could rely on until recently, that is a very important protection. That is a part of what 

our whole securities law is built on and our system is built on. The 

lawyer who stands there should be able to say, no, you can’t do 

that, or I will not participate in it. And that is the conflict that occurs, because there should be some balance where the lawyer is not 

entirely the handmaiden of the client. 

Now, clients don’t generally like to hear that. They want the lawyer to do their bidding. But the lawyer should have independent 

judgment and should be able to say to the CEO, no matter who he 

is, or the financial person, or anyone else, no, this can’t be done 

that way, and I will not participate in it if it is done. Now, that 

18

may mean, and I tell my students this, you keep your resume 

ready, particularly if you are in-house counsel. Whether it is government or private, you have to be ready to walk and to give up 

a job and to give up all the income that comes with that position. 

And this is true even in large law firms where quite often you have 

a client such as an Enron or a Xerox or a WorldCom that gives so 

much into the bottom line of that business called the law firm, and 

at some point with your integrity you have to say, no, I can’t do 

that, and I am ready to walk. 

That is the message we convey. It is a lot harder to carry it out, 

and, therefore, we have set up various ethical guideposts. I have 

given you some excerpts from the rules of professional conduct. 

1.13 says that when the corporate person with whom the lawyer is 

dealing is doing something wrong, it is up to the lawyer to then 

take it up to the highest level, which would include the board of 

directors, and say, there is something wrong here. Now, of course, 

once you do that, once you go past the person who hired you, you 

have to be ready to find a new job or find a new client. That is a 

part of it. But you go up as far as the board. If the board does not 

go along with you, and you think it is wrong, then at that point 

you have the ability and, I suggest, the duty to withdraw. 

The one thing you can’t do is breach your duty of confidentiality. 

You can’t make it public. All you can do is resign. That is our system, because the duty of confidentiality is so very important. You 

can’t participate in fraud. You can’t aid it. You can’t abet it. 

Now, one of the aspects is where does the SEC fit in all this? 

Now, the SEC, does enforce illegal ethics, not as much as we would 

like to have them do it. One of the problems is resources. Government always has a problem with resources, and that is why this 

Congress almost 100 years ago, created a concept which has often 

been called private attorneys general in the Clayton Act, having to 

do with antitrust. Antitrust was so important to this Congress that 

it established a process of treble damages plus attorney’s fees when 

the plaintiff wins in order to encourage private litigation. In the 

case of securities regulation, this Congress, in its wisdom, in 1995, 

went the other way and said, we just want the SEC to enforce 

these matters. And in the Private Securities Litigation Act they 

pulled back on the private attorney general concept in this area. 

Now, about 30 years ago there was a case before the Supreme 

Court called J.I. Case Company v. Borak, in which the issue was 

whether there was to be a private cause of action to enforce a public duty. The SEC, in an amicus brief, said, we think there should 

be. Why? Because we don’t have enough resources to enforce. I suggest that is something that needs to be rethought. 

Thank you, Mr. Chairman. 

[The prepared statement of Sherman L. Cohn follows:]

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Mr. STEARNS. And I thank you. 

Professor Lidsky, welcome. 

STATEMENT OF LYRISSA C. BARNETT LIDSKY, PROFESSOR OF 

LAW, LEVIN COLLEGE OF LAW, UNIVERSITY OF FLORIDA 

Ms. LIDSKY. I thank you. It was nice to be invited to speak on 

this important topic, and I am glad that the committee has chosen 

to address truth-telling in the business world. I have gotten where 

I dread reading the papers, like most of the public, because I am 

worried that I will read about a web of lies that has taken down 

a corporation and taken its investors with it. But when I read the 

papers as a legal ethics professor, my question is, where were the 

lawyers? Now, I am not the first person to ask that question. A 

judge asked it about the lawyers in the S&L scandals. And so my 

second question is, what didn’t we learn in the 1980’s during the 

S&L crisis about how to prevent these kinds of things from happening? 

Looking at the legal ethics rules, believe it or not, the legal ethics 

rules clearly state that lawyers may not tell outright lies, and the 

legal ethics rules also clearly state that a lawyer cannot remain silent and assist a client to lie to a court. But when it comes to 

transactional lawyers, the law is less clear about what a lawyer’s 

duties are when a client is trying to perpetrate a lie on the public. 

The problem with the recent cases is that they appear to involve 

a lot more than lawyers simply remaining silent and adhering to 

their duty of keeping a client’s confidences. They actually seem to 

involve lawyer enablement or lawyers as enablers of client lies, and 

that is important because lawyers serve as gatekeepers for clients 

like Enron. If lawyers didn’t assist Enron, it never could have 

gained access to the capital markets, securities markets, and so 

lawyer assistance was absolutely vital for it to do what it did. 

Now, let me enter a disclaimer here. I am not claiming to know 

any more than the general public about the specific law firm’s actions in Enron. In fact, Vincent and Elkins probably employs many 

of my former law school classmates. I am from Texas, and it is a 

big Texas firm. But nonetheless, it seems that there was lawyer 

enablement in the sense that lawyers were doing things like drafting press releases, structuring transactions that didn’t have any 

substance behind them, drafting opinion letters, and so they were 

lending their expertise and credibility to a corporation that couldn’t 

have done what it did without their assistance. Also, the assistance 

of the accountants and the bankers was crucial. 

So the question is what should they have done to avoid enabling 

this kind of fraud by the client? The question for us today might 

be who is going to fix the problem? And I have to say that I don’t 

have faith in the bar to fix the problem of its own. The bar is largely self-regulating, and the bar has shown a failure of will when it 

comes to resolving the conflict between the duty of confidentiality 

and the duty not to assist a client in fraud. 

The bar recently had an opportunity to draft clear rules that told 

lawyers what they have to do to avoid enabling client fraud, and 

they just didn’t do it. So I think it is going to require the government to take action. I think the SEC has to be involved with more 

civil enforcement actions against law firms that draft documents 

39

they know to be false and enable the client to lie to the public. I 

think the SEC—it is useful if the SEC promulgates rules that 

clearly state the lawyer’s disclosure obligations when a client is trying to lie to the public. That was what was done partly in the wake 

of the S&L scandal, and it has been somewhat successful for those 

lawyers that are involved in banking. 

But I don’t think that is enough. SEC simply doesn’t have the 

resources to deal with a problem of this magnitude. And I don’t 

think it is a problem restricted to a few bad apples. I think there 

is a systemic cultural problem where people just don’t want to take 

responsibility for calling a halt to actions of a client that are improper. So I think the solution has to come from private litigation, 

unfortunately. And I say unfortunately, because private litigation 

has costs. Once you enable more lawsuits to be brought against law 

firms, it means that there are going to be a number of frivolous 

suits brought, too. But nonetheless, the prospect of having to be 

held accountable in dollars to investors who were harmed by a client’s lies will make law firms sit up and take notice. 

Attorneys who prosecute these type of actions have the resources 

to pursue them. They have the sophistication to deal with cases 

that involve complexity of the type that Enron, WorldCom, all of 

those cases present. And unfortunately, it is one of the few solutions to curbing this kind of lawyer enablement that we have been 

seeing. The criminal penalties don’t hurt either, but they can only 

deal with the most extreme cases. 

It was said earlier that you can’t legislate morality. I agree, you 

can’t legislate morality, but what you can do is create laws that 

support people who exercise moral courage, people like Sherron 

Watkins, and you can create cultures that support people who exercise moral courage, and that starts in law school. It starts with telling lawyers that there are things—young lawyers, they are not 

lawyers yet—that there are things more important than their law 

degree, things more important than their law license that they 

have to adhere to. 

Mr. STEARNS. I thank you. 

And, of course, I want to just recognize you come from the University of Florida. I had the opportunity to represent the university 

for 4 years, and now that is in a new congressional district where 

I am running, so I certainly want to commend you and that wonderful university. 

I will start with my questions. I had the opportunity to participate in the oversight hearings on Enron in which we dealt with 

Vincent and Elkins, which was a law firm for Enron. And, Professor Lidsky, when you talk about lawyer enabling, when Sherron 

Watkins came to the CEO and said, there is a problem, he gave 

it to the law firm. Now, you would think at that point that law firm 

would recognize immediately, like we did on the committee, every 

Democrat, Republican recognized immediately, that she was, one, 

a whistle-blower, and, two, that this company is going to implode. 

Yet Vincent and Elkins put together a memo which created a camouflage, a smokescreen to the whole thing and allowed people to 

say there is not a big problem. 

You are telling me right now the bar is not stepping forward to 

put in a code of ethics preventing enabling lawyers to help their 

40

clients because they have fiduciary responsibility and confidentiality. But don’t they have an ethical responsibility to say, no, we 

can’t go forward? Sherron Watkins is telling the truth. There is no 

use camouflaging it. So what can the United States do with this 

lack of ethics, with lawyers enabling clients to participate in a 

cover-up or a smokescreen like we saw in the Enron situation? 

Ms. LIDSKY. I think the only thing you can do is make it clear 

that they are going to be held accountable for that later. In the situation you described, what a law firm might tend to do when it is 

a huge client for the firm is they don’t want to be complicit in the 

client’s fraud, but one of the ways they try to assuage their own 

fears of being complicit in the client’s fraud is by kind of avoiding 

knowing too much. And so you can comfort yourself by saying, I 

didn’t tell an outright lie. I didn’t know anything that would have 

made me change my opinion, because you put blinders on so you 

couldn’t see what you know was going on around you. 

And so I think that is kind of a tendency that a law firm might 

have in a situation like that, is to try to block off so you don’t find 

out anything that would trigger a duty to have to put a halt to it 

if you were the whistle-blower yourself. 

Mr. STEARNS. Professor Cohn, Professor Lidsky has alluded to 

the fact that we have to hold the lawyers personally responsible in 

terms of money. I think you had indicated that the way to solve 

this problem is to say a lawyer or a law firm that is involved with 

enabling, and is found guilty, has a monetary penalty on them, possibly jail. 

I mean, the bar is not doing it; should Congress? I mean, how 

should we do something like she is talking about? And do you 

agree or disagree? 

Mr. COHN. No. I agree that for those bad apples—and let us hope 

that the whole bushel isn’t bad, either for the CEOs or the lawyers 

or the accountants; that there are a lot of good people out there. 

But for those who are tempted by greed—and that is what it is, 

even for the professionals, because the professionals see that fee 

coming in and want to keep it coming in. 

Mr. STEARNS. Wants it to get larger. 

Mr. COHN. And wants it to get larger, and wants to keep that 

client. So that there has to be a real sanction—and a real sanction. 

Mr. STEARNS. Coming from the government and the Security Exchange Commission? 

Mr. COHN. It can come from there. But we know through history 

that—and this Congress has recognized it for almost 100 years 

now—that government interest in an area goes up and down, sometimes depending on politics, sometimes depending on other demands. And there are never enough resources. And therefore we, 

this Congress, in the Clayton Act established the whole concept of 

the private attorney general to help enforce government policy that 

the Congress sets. 

Mr. STEARNS. Okay. So are you saying that Congress should legislate something or the SEC should institute brand-new laws that 

make lawyers monetarily responsible in the event of enabling? 

Mr. COHN. I think that the SEC probably has enough laws now. 

They need to enforce them. 

Mr. STEARNS. So, is that your opinion, too? 

41

Ms. LIDSKY. I think they have enough laws to enforce in terms 

of making lawyers pay. I think there should be more clear disclosure rules. 

Mr. STEARNS. Okay. Dr. Smith, my questions are almost over. I 

have attacked this questioning from the lawyer side, but let me go 

from the accountant side. We also saw Arthur Anderson dealing 

with Enron—that Arthur Anderson was involved because they 

wanted more business. Is this same kind of problem that we saw 

in the attorney/client also true in the client and the accountant? 

Mr. SMITH. Absolutely. I think when Professor Lidsky was talking about the challenge of practicing as a lawyer and facing a situation where you need to maintain your confidentiality with your 

client, but you are also trying to be sure you do the right thing, 

I mean, that is an issue that the accounting profession has to deal 

with. 

I guess the question that came to my mind when Professor 

Lidsky was talking was it seems like when the accountants fail in 

their role, that they are being held accountable and they are being 

sued. And, obviously, that is one of the problems—well, one of the 

things that led to the demise of Arthur Anderson. Frankly, I was 

wondering, well, doesn’t the same thing happen to law firms when 

they have a really difficult situation like the one with Enron? 

Mr. COHN. The answer is yes. Yes, it is the same. And Vinson 

& Elkins, Kirkland & Ellis, and other law firms are being sued out 

of the Enron matter now. 

Mr. STEARNS. Okay. My time has expired. We will go—we have 

a vote, but we are going to go to the ranking member for his questions. 

Mr. TOWNS. Thank you very much, Mr. Chairman. 

Of course, even though we may not be able to legislate morality, 

there is a role for government to establish legal boundaries for 

what is acceptable behavior in business and elsewhere. Would you 

all agree with that statement? 

Mr. COHN. Absolutely. 

Mr. SMITH. Absolutely. 

Ms. LIDSKY. [Nodding in the affirmative.] 

Mr. TOWNS. Yesterday both the House and the Senate passed the 

accounting standards bill and have now sent it to the President for 

signature. And let me ask you, Professor Cohn, Professor Lidsky, 

and, of course, Dr. Smith, whether you are familiar with the legislation and whether you think it sets out the appropriate boundaries 

for behavior in the business world. 

Mr. COHN. I think it makes a good start. It is good increment—

as Professor Coffee at Columbia said, and as is reported in the 

paper, it is a good incremental move. I don’t think it goes far 

enough, but it is an important start. 

Mr. TOWNS. When you say—could you sort of expound on that, 

far enough, some of the things you think that should be in it? 

Mr. COHN. Well, I would certainly go back and reexamine that 

1995 Private Securities Act, because, if you take a look there, it 

withdrew some very important threats against exactly what happened. What we did learn out of the savings and loan scandals is 

that you could go after law firms, and there were many law firms 

who paid tens of millions of dollars out of Lincoln Savings & Loan 

42

and other scandals like that. And we also know there were a lot 

of private suits that were able to help the SEC or the OTC there 

in its work. And yet, in 1995, this Congress decided to pull that 

back and take that private attorney general concept and reduce it 

in the securities area, not in the antitrust area where it started, 

but the securities area, even though the SEC in the Borack case 

told the Supreme Court, we need this because we don’t have 

enough resources to do the job. 

So I suggest there is a contradiction there that this committee 

might address. 

Mr. TOWNS. Next. 

Mr. SMITH. Well, the day I arrived, yesterday, of course the stock 

market had a great day, and I think the general public clearly reacted very favorably to the fact that Congress was taking action. 

And people need reassurance. And I think, as you were saying, Mr. 

Towns, the point that government may not be able to legislate individual morality, but clearly it sets moral direction by the laws that 

are passed, and government is necessary to punish misbehavior. 

But I guess I would like to go back and say that I just wanted 

to agree with something that Mr. Cathy said earlier. I think one 

of the tragedies in our country is that while people here today have 

had the freedom and felt very comfortable sharing their faith perspectives and showing appreciation to Mr. Cathy’s example—which 

I totally agree with—you know, I think it is a shame that there is 

an educational system in America where many educators feel that 

they are unable to share their faith and feel that they are unable 

to have a Bible in the school. And I think without those 

foundational principles laid down early in children’s lives, that you 

wind up—and the incredible pressure to make money and to, you 

know, be as successful as possible without regard to their character 

is a huge problem. And I think that would be something that will 

be great for this committee to address, along with the problems in 

law and business and accounting. 

Mr. TOWNS. Thank you very much. Do you have something very 

quickly to add to this? 

Ms. LIDSKY. Yes. I would say that there is the possibility of lawsuits against law firms, as Vinson & Elkins is finding out. But the 

1995 act took away the biggest hammer, which was aiding and 

abetting liability for 10(b)(5) violations. And so I think that that 

needs to be rectified. 

Mr. TOWNS. Thank you. 

Mr. Chairman, I would like to enter into the record the accounting bill H.R. 3763, the Sarbanes bill: ‘‘not later than 180 days after 

the date of enactment of this Act, the Commission shall issue 

rules—’’. 

Mr. STEARNS. So ordered. 

[The information referred to follows:]

43

Mr. TOWNS. And the last thing I want to say before I yield back, 

Mr. Chairman, litigation is fine, you know. But, you know, it still 

doesn’t get to the problem that I really—and the way I think we 

need to get there, and that is that the little people who have lost 

money, even though we litigate, it doesn’t solve that problem. They 

are still out of their money. And I don’t know what we do to be 

able to address that issue. 

And do you have any comments on it? Because we have some 

folks that have lost everything. They are at the age to retire and 

they have absolutely nothing. I mean—and that to me is a very disturbing thing, and I don’t know how we get there. Do you have any 

comments on that? 

Mr. COHN. Well, that is the hard one. And it goes back decades 

and centuries where this has been going on, where greed will end 

up robbing the little people. I have seen my own retirement fund 

go down in the past year. 

I suppose there is the possibility, though I am not sure that I 

favor it, of in effect a securities fund. I pay to the State of MaryVerDate 0ct 31 2002 12:42 Nov 08, 2002 Jkt 082299 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 W:\DISC\81956 81956

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land every year money into what is called the Attorneys Securities 

Fund. So for attorneys who steal from clients, there is some money 

to help them. That concept might somehow come into this with 

some kind of an insurance, a premium paid on every stock transaction. It is a possibility. 

I haven’t thought it through well enough to say I am even in 

favor of it, but there are certainly examples, as we did in the banking business. We did that, and the banks are insured up to—each 

one of us, up to $100,000 per account. And that is because of a premium that the banks pay into the FDIC, and that might very well 

be a precedent to take a look at. 

Mr. TOWNS. Thank you. 

I yield back, Mr. Chairman. 

Mr. STEARNS. Thank you, my colleague. And again, we ask your 

patience and indulgence. The subcommittee is going to take a recess to go vote, and we will be right back. 

[Brief recess.] 

Mr. STEARNS. The subcommittee will reconvene. The gentleman, 

Mr. Deal, from Georgia is recognized. 

Mr. DEAL. Thank you, Mr. Chairman. 

Mr. Cathy, we are not going to ignore you. I am going to get back 

with you with some questions in just a minute, if I have the time, 

but I want to pursue an issue that Professor Cohn has raised, and 

also Professor Lidsky. And that relates to the 1995 securities reform legislation. As I am sure both of you recall, that was legislation that was bipartisanly supported, and in fact required—and, I 

believe, was the only instance in which we overrode the veto of 

President Clinton on that issue. 

And what led to that legislation was the extreme abuse that had 

occurred by the plaintiffs trial bar with regard to what many of us 

would perceive to be frivolous litigation and, in fact, lawsuits being 

filed not for the purpose of trying to convince a jury, but simply to 

try to leverage, and in many instances to the extent to almost extort settlements from corporations, of what probably would have ultimately proven to be frivolous lawsuits. But obviously, because of 

the costs that were associated with it, plaintiff’s counsel knew that 

it was going to probably settle because it was going to be cheaper 

to do so. 

That was the abuse that the reform of 1995 was aimed at. It was 

a legitimate concern, one that I think is still—would have been a 

legitimate concern had we not taken corrective action. 

With regard to the ruling about aiding and abetting, it is my understanding that the Supreme Court had ruled in the Central Bank 

case that the statute did not confer the control over aiding and 

abetting. And we simply did not, I suppose, incorporate that and 

extend that in the authority granted to the SEC. Perhaps that is 

something we might look at, but I don’t think it is fair to say that 

we took it out of the 1995 act. We did not. I don’t think it was ever 

there by virtue of the interpretation of the Supreme Court. 

But let me ask you a related question, because I think this is one 

that as a member of the bar, and as one who at age 23 was very 

excited when I was admitted to the bar, and I think during my 

legal education was impressed with the fact that it was an ethical 

45

profession and one that the bar itself would hold you to a standard 

by virtue of the licensing process, whether anyone else did or not. 

As one who has been chairman of the judiciary committee at my 

State level for a number of years before coming to Congress, I was 

always concerned that we were granted a peculiar situation by virtue of my State law and, I am sure, in some other States. And that 

is, all other licensed professions were regulated through our Secretary of State’s office, with someone assigned to monitor and control that activity. But the bar was unique in that it was an integrated bar, and that by law was assigned to the bar itself to do 

that. 

And I think overall the bar has done a fairly good job of disciplining and disbarring its members, but invariably—one of the 

cases that I am familiar with—it has always been the situation 

where the lawyer was in effect defrauding or mistreating his client. 

It was rarely anything in a third-party atmosphere where the lawyer and his client were mistreating a third party. 

Would either of you care to comment about whether or not disbarment for that kind of collusive activity is being dealt with by 

the bar through the disbarment process? 

Ms. LIDSKY. Well, first I wanted to say that the lawyer self-regulation process does work very well for some things. Lawyers are 

held to ethical standards by the bar that are very high in some instances. So my condemnation of the bar’s failure in this area 

shouldn’t be taken as a global condemnation of the bar, because I 

do think they set high standards for lawyers in many instances. 

And indeed, 41 States have said that—at least that lawyers may 

reveal fraud in some instances. But the problem is partly the complexity of the kind of transactions that we are taking about here— rarely are they going to go in after a transactional lawyer as opposed to a lawyer in litigation. So it is harder to find out about the 

fraud in the first place, ordinarily. Rarely will they go after a 

transactional lawyer who was in what is perceived to be a complicated situation in a lot of these circumstances. 

I can’t answer your question specifically; you know, name how 

many cases that the bar has pursued, but it is not their primary 

focus. I can say that with confidence. 

Mr. COHN. You are absolutely right. There are very few situations in which the bar—and we are speaking of the bar here, we 

are speaking about something that is under the control of the Supreme Court of each State. So, it is not entirely separated from a 

public body. But it is very seldom that a non-client will be able to 

have charges brought against a lawyer, either civilly or in the disciplinary situation. There are some, but not very many. 

In the area of fraud, it is interesting to me that until 1983, the 

ethical rules said that a lawyer could disclose any crime, and that 

included when fraud was criminal, a criminal fraud. That was 

taken out of the rules by the ABA in 1983 at the hue and cry of 

the corporate bar because of their dealing with their clients. 

In the proposals that are now the Rules of Professional Conduct, 

the proposals of the Kutak Commission back there, there was an 

explicit provision about disclosure of fraud, fraud that would hurt 

the public. But at the house of delegates, that was shouted out 

mainly by the corporate bar. 

46

Now, curiously too, to me, when that went out to the States, it 

was only a minority of States that followed what the ABA proposed. Most States at least permit the public disclosure of upcoming fraud—not past fraud, but upcoming fraud. And some States 

such as New Jersey require it. They make it mandatory. 

The SEC has on occasion enforced this type of requirement on 

lawyers for public corporations on the theory that this feeds into 

the reports that get filed to the SEC. That needs more of that by 

either SEC having the resources to do it or expanding the possibility of private litigation. 

I am aware that the 1995 act was meant to eliminate or at least 

deal with a very real problem of frivolous suits, which is real. It 

is still real. That is not going to go away so easily, either. But my 

personal view is that it also established an atmosphere by which 

anything seems to go. And so the act was—is a very important 

benchmark as to the atmosphere that Congress has conveyed to the 

public and the corporate public. 

Mr. DEAL. Mr. Chairman, would you indulge, and I would just 

make a very brief concluding statement. I think this has been very 

revealing and I think a good discussion. I would hope that Congress has corrected any misinformation or misinterpretation that 

was sent anywhere by virtue of our actions this week. And I think 

in fact we have done exactly that. 

I would simply say with regard to professional status of the bar 

in terms of self-regulation and licensing and the deferment that 

has being given by the States to them, that I would hope the ABA 

will go back and reexamine that disclosure rule, and I would also 

hope that we would see the bars of the States taking their own initiative, maybe even in the absence of an outside complaint, when 

by virtue of disclosure of information it becomes very obvious that 

something ethically was wrong. I think if the bar doesn’t begin to 

do that on its own initiative, instead of waiting for the complaint 

process, then I think, very well, it is going to lose its peculiar ability to regulate itself that has been given to it. 

But thank you very much. Thank you, Mr. Chairman. 

Mr. STEARNS. Thank the gentleman. 

The gentleman from Nebraska. 

Mr. TERRY. Thank you, Mr. Chairman. And as a member of the 

bar from Nebraska, it has been an interesting discussion. And I 

agree with Mr. Deal; unless the bar associations are willing to do 

this sua sponte, without complaint, I am not sure how we can ever 

go after the lawyers who do this, because they are incognito; we 

don’t know who they are as a shareholder. We can’t file a specific 

complaint as required by most bar associations across the State. 

You just can’t say, ‘‘I think a lawyer has been bad’’ to initiate an 

investigation into whether there has been an ethics violation. 

So it has been an interesting violation, but I want to raise it 

from the lawyer level to the CEO level within the corporation, and 

ask in a philosophical question here—well, not so philosophical. 

But we are now mandating, and soon financial disclosure reports 

have to be filed with the signature of the CEO affirming the authenticity and truthfulness of the information therein. 

I just wonder, though, philosophically—waxing philosophically 

here, without a code of conduct, is this enough to change behavior? 

47

Do you think this goes far enough? Will the fact that we have just 

coupled them with mandated jail sentences change behavior? 

What are your thoughts on this mandated signature and affirmation? And I will—anyone on the panel; it is not specific to anyone. 

Mr. Cathy, since you or somebody in your position has to sign on 

that, what are your feelings? 

Mr. CATHY. Well, you know, Chick-fil-A is still a private company, and we have a lot of privileges that I have. And I am sometimes asked, why don’t you go public? That is the way to make 

money. That you can sell, you know, many, many times of what the 

company is worth and you can walk off with a gold mine in your 

hands. 

But one reason I don’t go public is, No. 1, is I might lose my job. 

Second, is if I had some friends and widows and so forth to invest 

their life savings in my company, I would feel personally responsible for that. I would think I ought to be the loser before they 

would be the loser. I think they should sacrifice—whoever might be 

identified as guilty—sacrifice what material things they might 

have to rectify some of the damage that has been done for those 

that cannot help themselves. And I would feel—that in itself led 

me to be able to borrow money that I needed to grow at the pace 

I wanted to grow, so I take the personal liability. And I feel that 

any CEO should take the responsibility to take care of that one 

who is a stockholder. And they should be making the calls, and 

then we should be—they should be protected, and that right might 

be right. And certainly we put too much confidence in signatures 

of maybe the chief executive officers and the auditors and so forth 

that has become wealthy because of some of the schemes that have 

been invented by those where pressure is put on them, the bottom 

line, the bottom line. It doesn’t make any difference on how you 

reach it, but let us keep an eye on the bottom line. 

Mr. TERRY. Yeah. 

Mr. CATHY. And so we are more interested in people than the 

profits. 

Mr. TERRY. Well, and you are a man of integrity and honor. And 

it is amazing that we have heard testimony in this room of CEOs 

that are willing to take all the credit when the company was going 

up, and had absolutely no knowledge of anything going on when it 

was going down. Which just baffles me because, as a captain of a 

ship, you take responsibility for the actions of your crew. And it is 

with great dismay that we have heard that type of testimony here. 

Any of you other—Professor Lidsky, would you like to comment? 

Ms. LIDSKY. I think a signature requirement is an excellent idea. 

If somebody put their name to something, there is a formality there 

that makes them really think about what they are doing. And truly 

dishonest people will still be dishonest and be willing to put their 

name on it, but people—it will make them think twice and make 

them really think about what they are doing. Especially with lawyers. There is a culture amongst lawyers that when you sign your 

name, you had better have read what you signed and understood 

it and know what it was about. 

And I think that that would be an excellent formality that would 

make people really think about the significance of what they do before they do it. 

48

Mr. COHN. And it has worked from the standpoint of the liability 

of people who sign prospectuses when stock is being offered on the 

market and—with their personal liability. So there is that precedent out there that, since the Securities Acts of the 1930’s, has 

built a very good market. 

Mr. SMITH. I would like to interject one thing on that. I think the 

general public needed reassurance that our elected leaders were 

taking the problems seriously. And so I can appreciate the legislation that has recently been—that has already been enacted and 

that is coming down the line. 

But I would like to say, when I was an accounting student roughly 30 years ago, one of the things that is taught in all the business 

books and in the accounting books is that the financial statements 

are the responsibility of management. And so I think that there 

has always been that responsibility, and management could have 

always been held accountable. 

I am always impressed when I get to meet legislators like yourselves, just what great people of integrity and wanting to do the 

right thing I see, and I really appreciate your efforts. But I guess 

you all know this: There is always that balance between when you 

have too much legislation. And sometimes I wonder if the legislation we had before the current economic or stock market crisis had 

been really rigorously enforced, maybe things would have been better. And you all have mentioned the ethics rules that lawyers have 

to face and deal with, and the idea that was shared that, if the bar 

did a better job of enforcing what is already there, maybe that 

would have helped us avoid the current dilemma. 

Mr. STEARNS. I thank the gentleman. I think what we are going 

to do is—we have a vote, so I think we are each going to go around 

and probably ask one question, so we can get through and let you 

go so you don’t have to wait for us. 

Dr. Smith, do accounting programs have a mandatory accounting 

ethics course? 

Mr. SMITH. No, they don’t. 

Mr. STEARNS. And, Dr. Cohn, they do, though, in the law. 

Mr. COHN. Absolutely, since Watergate. 

Mr. STEARNS. Since Watergate. And do you think, Dr. Smith, 

based upon all these problems that we have had, that the accounting industry should have a mandatory ethics course in the program? 

Mr. SMITH. I don’t know that a single course is absolutely necessary. I think ethics should be integrated into the existing 

courses. I teach ethics in my courses. Every course I teach, I integrate ethical issues into some of the other issues that we discuss, 

and I have 1 day in particular that I specifically talk about it. 

Mr. STEARNS. When an accountant gets his degree, is there an 

oath he has to take? 

Mr. SMITH. Yes. 

Mr. STEARNS. And, obviously, for the law there is an oath. And 

is this oath, do you think, encompassing enough that it makes an 

impression, like Mr. Deal mentioned when he took the oath as a 

lawyer? I have never heard of the accountants talk too much about 

this oath. 

49

Mr. SMITH. I think that is something for us in accounting to look 

at and think about. 

Mr. STEARNS. Mr. Cathy, my last question is—I had the opportunity to run a very small operation, not like yours. But I notice 

I had sometimes employees would display unethical behavior; there 

would be stealing and other things like that. How do you create a 

climate of high morality and ethics? I know it starts from the leader down. But do you have a code of ethics that you have the employees read? I mean, what do you do when somebody, for example, 

has an ethical problem? When you encounter an ethical dilemma, 

what do you do? 

Mr. CATHY. We used to place on cash registers the commandment, ‘‘Thou shall not steal.’’ Mr. STEARNS. Right. Okay. 

Mr. CATHY. As a reminder to these individuals that you shouldn’t 

steal. But we have some of that in spite of all the advantages we 

offer. We think maybe some try to discover a new way to do it that 

may be more profitable. But I think it starts from the top, as you 

say. We set the tone. And we think all of our operators know what 

is expected of them. They are expected to be honest, although some 

of the operators from time to time slip up and take a little bit more 

money than what they are getting. You know, Chick-fil-A is getting 

rich, I need the money. So they excuse themselves—— Mr. STEARNS. Rationalize. 

Mr. CATHY. [continuing] for taking things that don’t belong to 

them. Going back to the kindergarten situation. There are a lot of 

things, but you can’t teach character unless you have got something to start with. 

So if a person is going to lie, he is going to steal. So they go hand 

in hand. I have never seen anybody that has stolen that couldn’t 

justify their actions by saying that they had a sick mother at home 

and didn’t have any money and they needed that, or food, or other 

things that they can put up as an excuse. But they all—they 

should be accountable. And we don’t mind discharging a person if 

we test the test. But I realize that others, in spite of all opportunities you offer, that is not good enough for them, they need a little 

bit more. 

Mr. STEARNS. Thank you, Mr. Cathy. 

And my ranking member. 

Mr. TOWNS. Thank you very much, Mr. Chairman. 

Let me begin by saying, Mr. Cathy, listening to you is a breath 

of fresh air. I want you to know that. Because when we look at 

where we are today and what is going on, and then to hear you 

and to listen to the way that you have gone about your business, 

I tell you, it makes a major difference. Your situation is very 

unique than what we see in here today. Let me just ask this question, Mr. Chairman—and I will conclude—to Professor Cohn, and 

I guess Professor Lidsky. 

Are you familiar with section 307 of the Sarbanes bill that just 

passed the House and the Senate and that the President has indicated he will sign into law? That section 307 of the Sarbanes bill 

requires the SEC to adopt rules requiring outside counsel to report 

to chief legal counsel or chief executive officer of a corporation any 

material violation of security laws or any breach of fiduciary duty. 

50

If neither of those officers take appropriate remedial or disciplinary 

actions, the outside legal counsel must then notify the audit committee or another committee comprised of independent directors of 

the board for that corporation. 

Do you believe that this provision will help outside legal counsel 

to exercise more independent judgment in these issues? 

I would like to get Professor Cohn and Professor Lidsky to comment on that. 

Mr. COHN. I believe this is very helpful because it makes it clear 

and specific. However, this is now included in Rule 1.13, which 

every State has adopted, so that it is there now. That obligation 

is there now. I am interested to know what the SEC will do about 

enforcing it. If this gives the SEC enforcement power for what is 

now 1.13, then it is—in my judgment an advance forward and it 

is a good move. If the SEC doesn’t enforce it and it just sits there, 

it is no more than 1.13 is now. 

Ms. LIDSKY. I am in complete agreement. It is excellent, in the 

sense that it reiterates the duty under the current ethics rules to 

ascend the corporate ladder, to try to prevent a client who is trying 

to insist on committing a fraud. And it is nice, because it gives you 

enforcement potentially. But the question is, is anybody really 

going to enforce it. I think it can’t but be helpful. 

Mr. TOWNS. Let me—just a last comment, very quickly, Mr. 

Chairman. 

You know, when you think about disbarment, you think about all 

these other things, but do you feel that severe penalties, more severe penalties—you know, as Mr. Cathy pointed out, that if you 

just take whatever they have and sort of give it back to the people 

that they have robbed from—you know, do you support that philosophy, having more severe penalties? 

Mr. COHN. I think one thing that might be examined is whether 

the SEC now has the power to order a disgorgement of all profits 

made under an illegal situation or a fraudulent situation. And not 

disgorgement into the Federal Treasury, but back to the people 

who have been harmed. In some States you can get disgorgement 

and repayment to the people who have been hurt. And if the SEC 

does not have that power, I suggest that that is something this 

committee might take a look at. 

Mr. STEARNS. Thank the gentleman. And last, to wrap up, the 

gentleman from Georgia, Mr. Deal. 

Mr. DEAL. Thank you, Mr. Chairman. Again, thank you for having this hearing and for inviting this very distinguished panel. I 

am not going to ask a question, mainly because we have got only 

a few minutes left on this vote that is still pending right now. But 

particularly to all of you, and especially to Mr. Cathy and your son 

and your grandsons, we thank you for being here today setting the 

kind of example that all of us believe is the example that Corporate 

America should hear. And I especially like your slogan, ‘‘Eat More 

Chicken,’’ because, as you know, my congressional district in north 

Georgia is the No. 1 chicken producing, poultry producing district 

in the entire United States. And we appreciate what you do for the 

poultry industry as well as what you do for setting the kind of corporate example. 

51

You know, we just can’t pass up those opportunities to plug what 

is happening in our district and our State. And we are proud of 

you, and I especially appreciate the fact that you would be here 

today. 

Thank you, Mr. Chairman. 

Mr. STEARNS. You are welcome. And that is an unpaid political 

advertisement. 

Mr. Cathy, Dr. Smith, Professor Cohn, and Professor Lidsky, 

thank you very much for your patience. And the subcommittee is 

adjourned. 

[Whereupon, at 12:43 p.m., the subcommittee was adjourned.]

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