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76–123 PDF 2013

THE 10TH ANNIVERSARY OF 

THE SARBANES-OXLEY ACT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 26, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–152 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

FRANK C. GUINTA, New Hampshire 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 26, 2012 ..................................................................................................... 1 

Appendix: 

July 26, 2012 ..................................................................................................... 29 

WITNESSES 

THURSDAY, JULY 26, 2012 

Berlau, John, Senior Fellow, Finance and Access to Capital, the Competitive 

Enterprise Institute (CEI) ................................................................................... 2 

Bullard, Mercer E., President and Founder, Fund Democracy, Inc., and Jessie 

D. Puckett, Jr., Lecturer and Associate Professor of Law, the University 

of Mississippi School of Law ............................................................................... 3 

Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia University 

Law School ............................................................................................................ 4 

Gallagher, Michael J., Chairman, Professional Practice Executive Committee, 

Center for Audit Quality (CAQ) .......................................................................... 5 

Hatfield, Jeffrey S., President and Chief Executive Officer, Vitae Pharmaceuticals, on behalf of the Biotechnology Industry Organization (BIO) .......... 6 

Hollein, Marie N., President and Chief Executive Officer, Financial Executives International (FEI) ..................................................................................... 8 

APPENDIX 

Prepared statements: 

Garrett, Hon. Scott ........................................................................................... 30 

Bachus, Hon. Spencer ...................................................................................... 32 

Moore, Hon. Gwen ............................................................................................ 34 

Berlau, John ...................................................................................................... 55 

Bullard, Mercer E. ............................................................................................ 61 

Coffee, John C., Jr. ........................................................................................... 82 

Gallagher, Michael J. ....................................................................................... 93 

Hatfield, Jeffrey S. ........................................................................................... 108 

Hollein, Marie N. .............................................................................................. 115 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of The Institute of Internal Auditors (IIA) ..................... 119 

Attestation provisions of Lehman Brothers, JPMorgan, Bear Stearns, 

MF Global, Fannie Mae, and Freddie Mac ................................................. 122 

(1) 

THE 10TH ANNIVERSARY OF 

THE SARBANES-OXLEY ACT 

Thursday, July 26, 2012 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:36 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Royce, 

Biggert, Hensarling, Campbell, Pearce, Posey, Fitzpatrick, 

Hayworth, Hurt, Dold; Waters, Sherman, Lynch, Maloney, Himes, 

and Green. 

Chairman GARRETT. Good morning, everyone. The Subcommittee 

on Capital Markets and Government Sponsored Enterprises will 

come to order. Today’s subcommittee hearing is entitled, ‘‘The 10th 

Anniversary of the Sarbanes-Oxley Act.’’ Normally, you think of anniversaries are good things. After we hear from this panel today, 

we will see how amused we should be about this anniversary. 

First, we are going to handle a couple of housekeeping items. We 

have a lengthy series of votes on the Floor that we have been advised of beginning as early as 10:30, so in order to accommodate 

all of the members of our panel, it has been agreed to by us and 

the Minority that all Members’ opening statements that we normally would give are going to be waived at this point as far as 

reading them, and they are going to be submitted for the record. 

In addition, the Minority has also agreed with us that—I guess 

you guys know this already, unfortunately—your opening statements have also been shortened from 5 minutes down to 3 minutes. 

For us up here, I advise the Members that I am going to strictly 

enforce the 5-minute rule. So if you have questions, make sure your 

questions get asked and answered within your 5 minutes so that 

we can go onto the next person’s questions. 

Finally, it is my intention that we will release the panel and release the committee at the call to votes. Hopefully, the votes will 

go a little bit late. But when the votes are called, we have to go. 

So, thank you, everyone, for your accommodations. With that, I 

thank the entire panel for being here with us today. And we will 

start, as we always do, on the left hand side of our panel. 

Welcome. And for those of you who have not been here before, 

you have 3 minutes, not 5 minutes. As always, we ask you to 

please bring the microphone as close to you as you can because 

2 

some of us cannot hear you up here if you do not speak into the 

microphone. 

Mr. Berlau, welcome, and you are recognized for just 3 minutes. 

And thank you very much for coming to the panel today. 

STATEMENT OF JOHN BERLAU, SENIOR FELLOW, FINANCE 

AND ACCESS TO CAPITAL, THE COMPETITIVE ENTERPRISE 

INSTITUTE (CEI) 

Mr. BERLAU. Thank you, Chairman Garrett. And thank you, 

Ranking Member Waters and all the honorable members of this 

subcommittee for inviting me here to testify on behalf of my organization, the Competitive Enterprise Institute, a think tank founded 

in 1984 that fights and advocates and educates about freedom and 

opportunity for investors, entrepreneurs, and the economy as a 

whole. 

And I must say I agree with you, Mr. Chairman, that on past anniversaries there really was not much for investors and entrepreneurs, with Sarbanes-Oxley and the way its provisions had been 

implemented, to celebrate. As the Obama Administration’s Council 

on Jobs and Competitiveness recognized in a recent report, ‘‘wellintentioned regulations aimed at protecting the public from the 

misrepresentations of a small number of large companies have unintentionally placed significant burdens on a large number of 

smaller companies.’’ 

And it made the connection and fingered Sarbanes-Oxley, or 

SOX, as a culprit in the long-term decline in IPOs, something that 

happened long before the recession in the first few years after 

SOX’s passage—you can even look at the number of IPOs lower in 

the boom years after SOX than in the early years that were slow 

growth years of the 1990s—and made the connection between IPOs 

and job growth. 

But actually, on this anniversary we do have a little bit to celebrate because this House, virtually all the members of this subcommittee, and President Obama have enacted into law the 

Jumpstart Our Business Startups Act, and we are already seeing 

that pay dividends for investors, entrepreneurs, and the economy 

as a whole. 

The JOBS Act creates an on-ramp that among other things exempts newly public companies for their first 5 years from the internal control mandates of Section 404. And we are already seeing 

well-respected companies list under the JOBS Act such as Kayak, 

last week—the travel booking site—and Five Below, the teen retail 

discounter, which had very successful IPOs that are trading above 

their share price in contrast to the Facebook IPO, which was not 

subject to the JOBS Act; it was too large. 

So, we are seeing—we have already seen, I have in an appendix, 

46 companies that are listing here because of the JOBS Act. They 

are designating themselves as emerging growth companies under 

the law. I think that is evidence that SOX was choking off IPOs 

both the sheer number and actually smaller IPOs. But there is 

more we can do. And H.R. 6161 would keep a small company in 

revenues and profits from being designated as large just because 

of market volatility as a large company. 

Thank you, and I am happy to answer any questions. 

3 

[The prepared statement of Mr. Berlau can be found on page 55 

of the appendix.] 

Chairman GARRETT. And thank you for your testimony. 

Mr. Bullard, welcome to the family. And you are recognized for 

3 minutes. 

STATEMENT OF MERCER E. BULLARD, PRESIDENT AND 

FOUNDER, FUND DEMOCRACY, INC., AND JESSIE D. 

PUCKETT, JR., LECTURER AND ASSOCIATE PROFESSOR OF 

LAW, THE UNIVERSITY OF MISSISSIPPI SCHOOL OF LAW 

Mr. BULLARD. Thank you, Chairman Garrett. Thank you, Ranking Member Waters, and members of the subcommittee for the opportunity to appear before you today on the anniversary of Sarbanes-Oxley. It is an honor and a privilege to appear before the 

committee again today. 

Before addressing the Act itself, it is worth revisiting the bipartisan context in which it was enacted. House and Senate votes in 

favor of Sarbanes-Oxley totaled 522, with only 3 votes cast against. 

This is remarkable in view of the major reforms the Act entailed, 

in particular, the creation of an entirely new regulatory entity, the 

PCAOB, that has become a leading force in the regulation of public 

accounting both in the United States and abroad. Some provisions 

have generated controversy, however. For example, Section 404 has 

been criticized for imposing excessive costs on issuers. 

In my view, this criticism is substantially misplaced. The cost of 

compliance derives not from Section 404 itself, which imposes very 

generic monitoring requirements. Rather, compliance costs derive 

from the implementation of Section 404 by regulators. And this is 

where any changes should be made. 

Nonetheless, Congress has granted wholesale exemptions from 

Section 404, which I believe are inconsistent with the very concept 

of a public company, which really has meaning only if public companies are subject to a consistent set of default rules. This problem 

would be exacerbated by the Fostering Innovation Act, which would 

make existing Section 404 exemptions essentially swallow the rule. 

In conclusion, I would like to address four other areas of concern 

relating to Sarbanes Oxley. 

First, PCAOB Chairman Doty has rightfully argued that PCAOB 

disciplinary proceedings should not be conducted in secret. It is not 

appropriate to ask issuers’ audit committees to choose their auditors with care, while depriving them of information about alleged 

auditor misconduct. Congress should amend Sarbanes-Oxley to require that PCAOB proceedings be public, as SEC proceedings 

against auditors have been for 25 years. 

Second, I encourage Congress not to adapt a statutory prohibition against mandatory auditor rotations. The PCAOB should be 

afforded the deference due to an expert regulator to make findings 

and adopt rules in this area as appropriate. 

Third, Congress should amend the whistle-blowing provision of 

Sarbanes-Oxley to clarify that disclosing the misconduct of public 

companies will be protected, even when the whistleblower is employed by a private company. The SEC, the Department of Labor, 

and numerous DOL arbitrations have all agreed with this view, but 

a divided First Circuit panel has taken the opposite position. The 

4 

court’s holding allows a public company to neutralize the whistleblowing provision simply by hiring a nonpublic accountant or other 

entity to conduct its compliance activities. 

Finally, Congress should inquire into companies’ compliance with 

a requirement to report executive stock option grants within 2 

days. This requirement has been instrumental in preventing the 

options backdating that was pervasive prior to 2002. But research 

shows that backdating persists because up to a quarter of option 

grants are being reported in violation of the 2-day requirement. 

Thank you again for the opportunity to appear before you today. 

I would be happy to answer any questions you may have. 

[The prepared statement of Professor Bullard can be found on 

page 61 of the appendix.] 

Chairman GARRETT. Thank you. 

Mr. Coffee, good morning, and welcome to the panel. 

STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE 

PROFESSOR OF LAW, COLUMBIA UNIVERSITY LAW SCHOOL 

Mr. COFFEE. Good morning. Thank you, Chairman Garrett, and 

members of the subcommittee. I am happy to be here for the 10th 

anniversary of SOX. 

I will start with this general observation: Since SOX was enacted, there has been a robust debate, indeed an intellectual war 

between those who argue that the declining competitive position of 

U.S. capital markets was caused by overregulation, an alleged avalanche of overregulation; and the other side, which says that investors basically have lost confidence in U.S. capital markets both because of a host of scandals and because of underregulation, as overworked and underfunded regulatory agencies have failed repeatedly. 

In the abstract, I think both sides can be right, and can score 

points. And I will agree that there has been, at times, significant 

overregulation. 

Nonetheless, we look at our current vantage point on the 10th 

anniversary. I must tell you that the greatest obstacle to stronger 

capital markets and better access for smaller issuers to the equity 

capital market is not overregulation, but it is the loss of investor 

confidence. 

When you look at what is causing investor confidence to decline, 

we can start with the original Internet bubble back in 2001, when 

investors saw that securities analysts were conflicted and that accountants were often compromised. Sarbanes-Oxley tried to address that. But since then, we have seen a host of very recent scandals that have to have an impact on investor confidence. 

Investors are seeing over and over again that underfunded, overworked regulators cannot catch real crooks, and they only slap 

them on the wrist when they do catch them. We have all just seen 

the Peregrine Financial and MF Global scandals, and frankly it is 

hard to understand why a rational investor would put money into 

a commodities account with a commodities broker when no one 

seems to know whether the customer funds had been segregated 

from the funds placed at risk by proprietary trading. 

That scam at Peregrine Financial was a 20-year Ponzi scheme 

that went undetected. We are now watching the Libor scandal. Not 

5 

only does it show us what we already know, that creators will often 

manipulate markets, but that regulators can be very cozy and very 

equivocal in their response. 

I could go through a number of similar examples. But my point 

is again that in the wake of the JOBS Act, where we have deregulated the market for emerging growth companies, which I understand. They are given a 5-year transitional period. 

The step now being contemplated is that we are going to let companies that are not emerging and not growth companies, they are 

rather companies that I would call mature mediocrities, get a permanent exemption from Section 404. The SEC has studied this 

problem and the SEC has found that compliance with Section 404 

greatly reduces the rate of financial restatements. Thus, I would 

suggest that the case for exempting mature mediocrities has not 

yet been made. 

My time is up. Thank you. 

[The prepared statement of Professor Coffee can be found on 

page 82 of the appendix.] 

Chairman GARRETT. Thank you very much. 

Mr. Gallagher, welcome to the panel. And you, too, are recognized for 3 minutes. Thank you. 

STATEMENT OF MICHAEL J. GALLAGHER, CHAIRMAN, PROFESSIONAL PRACTICE EXECUTIVE COMMITTEE, CENTER 

FOR AUDIT QUALITY (CAQ) 

Mr. GALLAGHER. Thank you, Mr. Chairman. Mr. Chairman, 

Ranking Member Waters, and members of the subcommittee, my 

name is Mike Gallagher and I am pleased to testify today on behalf 

of the U.S. auditing profession regarding the Sarbanes-Oxley Act of 

2002. I have more than 26 years of experience in public accounting. 

I am currently the chairman of the Professional Practice Executive 

Committee, or PPEC, of the Center for Audit Quality. I am also the 

managing partner of PwC’s audit quality functions. I am speaking 

today with you in my capacity as the PPEC chairman. 

In examining Sarbanes-Oxley, let us go back to where we were 

10 years ago and the reason the Act was passed. The markets were 

roiled by a series of massive financial reporting frauds, including 

Enron and WorldCom. The fraudulent and materially misstated financial information reported by these companies drove their stock 

price up to levels that were completely unsupported by economics 

or their business performance. 

When the frauds were ultimately exposed, investor reaction was 

swift and decisive. Both companies failed in sudden and dramatic 

ways, causing a loss of investor confidence more broadly across the 

capital markets. 

To restore investor confidence and enhance protection, Congress 

responded in a near unanimous and bipartisan fashion by passing 

the Sarbanes-Oxley Act. The House vote was 423–3, and the Senate vote was 99–0. President Bush signed the bill into law, ushering in a new era of reforms that improve the integrity of financial 

reporting. 

In sharp contrast, the business failures during the more recent 

financial crisis resulted from sudden and extreme economic events, 

6 

most notably the seizing of liquidity, which caused certain companies to fail. 

So let me briefly highlight some of the significant provisions of 

the Sarbanes-Oxley Act. The Act strengthened audit committees. It 

empowered them to more effectively carry out their responsibilities. 

It made management clearly responsible for the financial statements, enhancing accountability for financial reporting. And auditing was improved through the creation of the PCAOB and 

strengthening independence rules. 

Now, the changes I described certainly came with costs. However, these costs generally have declined significantly over the last 

10 years due to company and auditor efficiencies as well as actions 

taken by the PCAOB and the SEC. The Dodd-Frank and JOBS Act 

also provided certain exemptions and further relief. 

So, in bringing this to a close, unfortunately when the public 

hears about financial reporting, the new is never good. It is about 

the restatement, the material control weakness or the business failure. 

In my position, I get to see the other side, the positives of Sarbanes-Oxley, almost every day. The restatement that was avoided 

because of a key internal control; the disclosure that was improved 

due to a great dialogue between the audit committee, the management, and the auditor; and the fraud that was identified early because of higher-quality auditing. These successes are not public, 

and they do not make news. The benefits of Sarbanes-Oxley are 

substantial. And in my view, it is serving the capital markets and 

investors very well. 

Thank you. And I am happy to answer any questions you may 

have. 

[The prepared statement of Mr. Gallagher can be found on page 

93 of the appendix.] 

Chairman GARRETT. And I thank you for your testimony. 

At this time, before we go to Mr. Hatfield, I believe Mr. 

Fitzpatrick would like to make an introduction. And before I do 

that, I will just say I wish to thank the gentleman for his efforts 

in this area and your legislation as well. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. I would like to introduce Mr. Jeffrey Hatfield with Vitae, an emerging biotech firm 

in Montgomery County, Pennsylvania. We welcome you today to 

the committee. Thank you, sir. 

Chairman GARRETT. Thank you. 

The gentleman is recognized for 3 minutes. Mr. Hatfield? 

STATEMENT OF JEFFREY S. HATFIELD, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, VITAE PHARMACEUTICALS, ON 

BEHALF OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO) 

Mr. HATFIELD. Thank you. Good morning, Chairman Garrett, 

Ranking Member Waters, and members of the subcommittee. My 

name is Jeff Hatfield. I am the president and CEO of Vitae Pharmaceuticals, as mentioned, in Fort Washington, Pennsylvania. I 

want to thank you for the opportunity to speak today about the 

unique hurdles the biotech industry faces in its quest to discover, 

7 

develop, and deliver to patients important new cures for diseases 

that plague those patients. 

Now, in finding an important balance between regulations that 

protect investors and regulatory burdens that stifle growth, the key 

is speeding breakthrough discoveries to people who desperately 

need them. Delivering new treatments to patients is difficult. It 

takes biotech more than a decade to research and over a billion dollars on average to bring novel treatments to people living with disease. 

This very long development effort is undertaken without any 

product revenue to pay for the tremendous costs. Biotech companies instead rely entirely on external investors to fund our research. Because investment dollars go directly from the investor to 

the lab, any funds devoted outside that R&D effort are by definition lost to scientific innovation. 

Biotechs are simple organizations. The overwhelming majority 

have less than 100 employees located in the same building and no 

product revenue. At Vitae, for example, my CFO personally reviews 

the documentation for and signs every check that we issue. I do the 

same for any check over $5,000. That is how capital-efficient our 

investors expect us to be. 

And yet if we went public, we would have to dedicate upwards 

of a million dollars annually to comply with requirements for internal controls for financial reporting. That is almost $20,000 per scientist at Vitae for compliance with Section 404(b) as it exists. 

Without product revenue, those funds would come directly from investors, damaging the conversion of their capital from science to 

compliance. 

Alternatively, I think about the 2010 congressional grant initiative called the Therapeutic Discovery Project. Vitae applied for and 

was fortunate to receive last year research grants totaling around 

$900,000. We used that to hire scientists to advance our work. If 

we were public, we would have had to in essence turn that money 

over to an accounting firm for auditors. It is very clear to me which 

choice our investors prefer. 

I support investor protection. In the biotech industry, an informed investor is a good one. If the information disclosures required by SOX do not align with information my investors most 

want and need—we put our historical financial reports and the 

meeting materials for every board meeting; I had one yesterday. 

Rarely, if ever, in the 8 years I have been CEO, have we discussed the historic financial numbers. What the investors focus on 

and want to know in great detail is about the science that we generate. Investors make their decisions about companies based on scientific milestones, not statements and reports mandated by Section 

404(b). 

The cost of compliance far outweighs its benefits. If Congress can 

relax this regulatory burden on small companies like those found 

in the biotech industry, it will allow innovators and entrepreneurs 

to continue working towards delivering the next generation of medical breakthroughs which can someday day cure the patients who 

need them. Thank you. 

[The prepared statement of Mr. Hatfield can be found on page 

108 of the appendix.] 

8 

Chairman GARRETT. And I thank you for that. Thank you, Mr. 

Hatfield. 

Ms. Hollein, welcome. And you are recognized for 3 minutes. 

STATEMENT OF MARIE N. HOLLEIN, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FINANCIAL EXECUTIVES INTERNATIONAL (FEI) 

Ms. HOLLEIN. Thank you. Good morning, Chairman Garrett, 

Ranking Member Waters, and members of the subcommittee. I am 

pleased to testify before you concerning the Sarbanes Oxley Act 

and its impact on Financial Executives International. FEI is a professional organization of 15,000 senior financial executives for more 

than 8,000 private and public companies. 

Integrity is the necessary first principle for effective markets, 

and an important part of FEI’s mission. Every investor depends on 

accurate and reliable financial reporting. Without the trust that 

comes with market integrity and sound corporate governance, investors withdraw, capital markets wither, companies cannot grow, 

and jobs become scarce. 

Ten years ago, Congress passed Sarbanes-Oxley to restore integrity to a tarnished market. Now, we have an opportunity to examine what has worked and how we might do better. 

During the SOX debate, FEI offered several recommendations 

which were eventually adopted into the legislation, one of which resulted in the requirement that a company’s CEO and CFO certify 

the firm’s financial statement. 

The requirement that CEOs and CFOs must personally certify 

their company’s financial statements is the crown jewel of Sarbanes-Oxley. This sets the tone from the top, increases the accountability and drives better corporate governance. 

After its passage, even SOX supporters acknowledged portions 

were costly, time-consuming, and overly prescriptive. FEI’s 2005 

survey on SOX implementation showed a 66% increase in external 

consulting costs and a 58% increase in auditor fees. In 2011, fees 

continued to rise, but at a slower 5% average rate. 

While FEI does not yet have a position on H.R. 6161, offered by 

Congressman Fitzpatrick, a number of our member benefit companies would benefit from the increase in reporting flexibility it provides. 

As we consider new laws, regulations are not the only path to 

better markets. FEI is stepping up to the plate to research, improve, and share best practices in deterring and detecting fraud 

through its work as a bonding member of COSO and the AntiFraud Collaboration. 

Thank you for the opportunity to address you this morning. And 

I look forward to your questions. 

[The prepared statement of Ms. Hollein can be found on page 115 

of the appendix.] 

Chairman GARRETT. Great. Thank you. 

We will now begin the questions. I am going to defer to the gentleman with the legislation that so many of you have been speaking 

about this morning. 

Mr. Fitzpatrick is recognized for 5 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

9 

Mr. Berlau, one of the main goals of this Sarbanes-Oxley Act, 

now 10 years old, was to protect investors. In your view, has the 

Act protected investors or protected as it was intended? 

Mr. BERLAU. No. It has not. Its costs are very high, and its benefits are hard to quantify. We have seen companies fully subject to 

SOX audits like Lehman Brothers and MF Global have scandals 

and mismanagement. 

And I think the best quote on the lack of benefits came from Hal 

Scott of Harvard University who said that it remains empirically 

unclear whether adherence to SOX 404 achieves its intended benefit. What is often cited are the increasing number of restatements—but Professor Scott makes clear that some of those may be 

due to technicalities and the market prices have not really reflected 

these were large misstatements that Sarbanes-Oxley detected. 

Mr. FITZPATRICK. So, did Sarbanes-Oxley help to prevent the financial crisis in 2008? 

Mr. BERLAU. It did not. In fact, it may have hurt. 

The lack of IPOs may have shifted more investment than would 

have otherwise occurred into real estate. It certainly kept the focus 

away of companies expanding and building a profitable firm. All of 

these technicalities, like keeping track of office keys and some of 

the other things accounting firms counted as internal controls, may 

have compromised companies’ focus on risk management. 

Mr. FITZPATRICK. Professor Bullard, in your statement, I think 

you indicated on the subject of audit firm rotation that you are in 

favor of the mandatory rotation rule that is currently being considered or being developed. That would be an expansion of SarbanesOxley. Is that accurate? 

Mr. BULLARD. I am sorry if my testimony was not clear. It is not 

that I support it. I am somewhat skeptical of whether mandatory 

rotation would be beneficial. But in reviewing the PCAOB’s review 

of this issue, and their extensive requests for information from the 

business community, I think they are handling it wisely. And I 

think it would be better to leave them the flexibility to find the 

right approach. 

Mr. FITZPATRICK. Do you think that PCAOB should engage in a 

cost-benefit analysis as a condition to going forward on the rule, to 

see what the actual cost is? 

Mr. BULLARD. Yes, it should. 

Mr. FITZPATRICK. Mr. Hatfield, the high costs associated with 

Sarbanes-Oxley Section 404(b) compliance has been listed repeatedly by small and emerging companies as one of the deterrents 

from listing in the U.S. public markets. Would you agree that it is 

not only the real dollar cost of compliance, but also the opportunity 

cost that is an issue? 

Mr. HATFIELD. Absolutely. The financial costs obviously are 

daunting for a company that is putting every investment dollar toward clients. The cost for developing breakthrough medicines or 

cures for people is daunting. Every dollar needs to go to that 

science. Every dollar that does not go there detracts from the ability to advance those cures. I would say that it is coming short, the 

opportunity costs, in a couple of ways. 

When the science does not get done, then people living with those 

diseases do not get the cures. And I think that is the most signifiVerDate Nov 24 2008 18:18 Mar 01, 2013 Jkt 076123 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\76123.TXT TERRI
10 

cant opportunity costs. If we are taking it away, we are taking it 

away from scientists, and giving it to the fulfillment of compliance. 

And people living with chronic kidney disease, with diabetes, 

with Alzheimer’s, all the things we work on, how can we tell them 

that we did not get them the cure, but we are compliant with regulations? I think that is tough to say. 

The opportunity costs over a billion dollars to be able to develop 

these medicines. Investors want protection, but they want protection to make sure the science gets done. That is why they put the 

dollars in. 

They are not investing for dividends. They are not investing for 

revenue growth. They are investing to deliver these cures. And I 

think that is the most important focus. If we are not doing that, 

we are not doing our jobs. 

Mr. FITZPATRICK. So, what are you hearing from investors, perhaps your investors, about the cost of your entity to comply with 

Section 404? 

Mr. HATFIELD. I just had a board meeting with our investors yesterday, talked to them about coming here and talking to the subcommittee. And their direction to me—these are the investors 

speaking—was to go get rid of that regulatory burden because we 

want to get to science. 

The fact of the matter is that complying with Section 404(b) has 

been for years the number one discussion point in boards as we 

think about going public. That is the number one drain, the reason 

not to do it. Private companies’ CEOs feel that it is not worth it 

to go public, often because of the burden. And CEOs say we do not 

want to go—public CEOs say we should go private because it detracts from what we intend to do. 

Chairman GARRETT. Thank you for your time. The gentleman 

yields back. Thank you. 

The gentlelady from California is recognized for 5 minutes. 

Ms. WATERS. Mr. Chairman, I have a question for Mr. John 

Berlau. 

The Dodd-Frank Wall Street Reform Act permanently exempted 

companies with the public float of less than $75 million from Sarbanes-Oxley Section 404, which effectively exempted 60 percent of 

all public companies. 

In addition to that, Congress also passed the JOBS Act, which 

would exempt newly public companies. What additional percentage 

of companies would be exempt if the Fitzpatrick bill became law, 

and if the Congress keeps passing additional exemptions? Does 

Sarbanes-Oxley become meaningless at some point? 

Mr. BERLAU. Congresswoman Waters, thank you for the question. And thank you for your support of the JOBS Act. 

Ms. WATERS. You do not have to tell everybody. 

Mr. BERLAU. Okay. 

[laughter]. 

I do not know what percentage of—I can get back to you on that. 

I think Congressman Fitzpatrick’s bill is important because say 

there were a biotech company like Mr. Hatfield’s and all of a sudden there were an FDA approval or a sign of good work or something. 

11 

The company is taking in no new revenues or new profits. But 

its—a stock price could shoot up. And all of a sudden, even though 

the assets, the profits or the revenues have not changed, the company could be classified as a large company. And then, it could 

have all these additional costs, and it is just trying to develop its 

product again and create jobs. So, I think that is why reclassifying 

what public float and market cap is, and using another measure, 

is important. 

Ms. WATERS. Mr. Coffee, what do you say to that? 

Mr. COFFEE. I would tell you we are talking right now about basically taking 1,000 companies outside of the range of having Section 404(b) compliance. The SEC elaborately studied this a year 

ago, and the SEC reported that companies that are compliant with 

Section 404(b) have a rate of restatements that is 46 percent lower 

than the rate of companies that are not compliant. 

If you take 1,000 companies, and say there is a 46 percent difference in the rate of restatements, that is an awful lot of fraud. 

And I think it is going to make investors quite nervous about that 

kind of change. 

Moreover, it is not just the 1,000 companies that are in this zone 

between $75 million and $250 million. The way the statute has 

been written, any company that has under $100 million in revenues, even though it might have a market cap or a public float of 

$690 million, would be exempt. 

So, I think you are giving a very large exemption, permanently, 

not for 5 years the way the JOBS Act does. And I think the SEC 

is right to say the case has not been made for that large an exemption. 

Ms. WATERS. Mr. Bullard, do you agree with Mr. Coffee’s analysis of Mr. Fitzpatrick’s bill? 

Mr. BULLARD. Yes, I do agree. But I would like to sort of bifurcate it. There is the point about what should be the standards that 

should apply. And I agree with Professor Coffee that the standards 

should be the existing Section 404(b) standard. 

But I would also like to add that the current approach to exemptions is essentially not taking issue with the standards as applied 

by regulators; it is essentially saying there should not be a requirement for management assessment or evaluation. There should not 

be any audit or attestation. 

The efficient way to approach this, especially for those who are 

interested in cost-benefit concerns, should be for regulators to decide what the right level is, not to grant wholesale exemptions that 

essentially make absolutely meaningless the idea of a public company for regulatory purposes. 

The issue here really should be regulatory oversight. It should 

not be the very fundamental protections that I have not heard any 

particular objection to, that are in Section 404(b) itself. 

Ms. WATERS. Thank you very much. 

Mr. Berlau, you had the first word on this. I have heard from 

Mr. Bullard and Mr. Coffee. Do you have a rebuttal? 

Mr. BERLAU. Yes. I think that this lets investors decide how 

much internal controls are worth to them. And I think you are seeing a lot of investor interest in Kayak, the travel site, and Five 

12 

Below, the discount teen retailer—I had to ask my intern what 

that was. 

And really one of the criticisms of the internal control requirements is it has been defined as things like office keys, in some 

cases, or the number of letters in employee passwords; things that 

are not exactly relevant to good corporate governance and risk 

management. So, it is letting the public as investors decide how 

much these internal controls are worth, while still policing and protecting from fraud. That’s what the JOBS Act and Mr. Fitzpatrick’s 

bill would do. 

Chairman GARRETT. I thank the gentleman. And the gentlelady 

yields back. 

Mr. Schweikert is recognized for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

First off, a fundamental issue, and I would love first an explanation from the panelists and tell me if you see something other 

than I do. I look at the aggregate data of the last decade. And yes, 

there has been some—a bit of a financial rollercoaster through 

there. 

But even when you adjust for 2008, what happened to IPOs, 

after the SOX mechanic, what happened to the U.S. IPO market, 

particularly in juxtaposition to what was happening in other places 

around the world? 

When I look at aggregate data today, there is literally one third 

fewer publicly traded companies today than there were a decade 

ago. So, this is one step off saying okay, the disclosures, the protections that were designed in SOX may be absolutely appropriate 

and justified. 

Something happened in our U.S. capital markets. And first, I 

would like to start with the professor. What happened, and is there 

a linkage? 

Mr. BULLARD. There are academics with more expertise on that. 

My survey at least is there are a lot of explanations. Probably the 

principal one is that other countries just got a lot better at attracting that kind of business, as they have with respect to a lot of 

areas of commerce. But I will leave it to Professor Coffee, who has 

a lot more expertise in this area. 

Mr. SCHWEIKERT. My friend to the left? 

Mr. BERLAU. Yes. There—certainly there has been a long—the 

data shows there has been a long-term decline. There is disagreement about the causes although I would say the return of some 

after the JOBS Act would argue that Sarbanes-Oxley was a big 

cause of that. 

But there were fewer IPOs, for instance in 2006, a relatively 

good year for economic growth, an expansion year, than there were 

in 1991 when we were coming out of recession, fewer absolute 

numbers. There has been a debate in the economic literature that 

IPOs might actually be countercyclical. And that as debt is closed 

off people will issue more equity, so we do not have this tool to help 

us come out of the recession. 

Mr. SCHWEIKERT. Mr. Coffee? 

Mr. COFFEE. Basically, and I do study IPOs, what issuers are 

looking for is not an IPO, but to raise capital by the least-costly 

13 

means. And beginning in the period of around 1998, private placement became a much cheaper means of raising capital. 

Mr. SCHWEIKERT. But doesn’t that make the point that private 

placement became less expensive than going public? And for some 

reason, going public got much more expensive in capital formation? 

Mr. COFFEE. The first thing I would tell you is that public offerings became much more difficult after the Internet bubble burst. A 

tremendous amount of money was lost and people would not go 

back to the people who sold them Pets.com. Investors learned a 

very harsh lesson— 

Mr. SCHWEIKERT. But your comment is that the same investors 

then would go through private equity. 

Mr. COFFEE. No. I am saying, first, private placement, which is 

often debt and sometimes equity became much cheaper and much 

easier to raise. 

Second, smaller issuers simply cannot do IPOs under any structure because large institutional investors, who are the principal 

purchasers in public offerings, want high liquidity. What we are 

seeing is that to the extent we have public offerings today, they are 

in the $500 million range because that is what institutional investors demand. 

I would suggest that things like— 

Mr. SCHWEIKERT. We can get back to that point, because in my 

minute-and-a-half, you may have hit on something I am heading 

for. 

Mr. Gallagher? 

Mr. GALLAGHER. Thank you, Congressman. 

As was said before, there are so many reasons. You cannot isolate one specific reason for the change in IPOs during that period. 

It is very dynamic for multiple reasons including the availability of 

capital. 

But I would also say during that period between 2006–2007, the 

requirements and how Section 404(b) in particular was implemented after that time period have been much more efficient because of some standard setting changes and the way the auditing 

profession and the way the companies are dealing with Section 

404(b). 

Mr. SCHWEIKERT. Ms. Hollein? 

Ms. HOLLEIN. Yes. First of all, our membership is more than 50 

percent private companies. And there are a variety of reasons for 

the increased number of companies that are choosing to remain privately owned rather than go public, partly because of the regulatory reporting and the internal control requirements with which 

public companies must comply. But an additional difference would 

be in the tax treatment that has motivated many of these companies to remain private. 

Mr. SCHWEIKERT. Okay. And you do understand—I do not know 

if you all were listening to each other. The cross-messaging we get 

is that Sarbanes-Oxley raised costs. It was the availability of capital. But everyone moved over to private placements and—so the 

money was over here, but it was not over here so it could not have 

been choking off of capital because they found the money over here. 

We got a mixing of messages. 

What is the— 

14 

Chairman GARRETT. Sorry. The gentleman’s time has expired. 

Mr. SCHWEIKERT. And we missed the punch line. Thank you, Mr. 

Chairman. 

Chairman GARRETT. We will come back to the punch line. 

The gentleman from Massachusetts. 

Mr. LYNCH. Thank you, Mr. Chairman. 

First of all, I want to thank all the witnesses. I want to especially thank you for your thoughtful testimony. It has been varied, 

but I think in all cases it has been very astute and thoughtful. 

I would like to focus, Mr. Bullard, Mr. Coffee and Mr. Gallagher, 

on the proposal to rotate the auditors. Mr. Bullard, you have gone 

agnostic on this, I guess. But there are a couple of factors. 

One is it is rather arbitrary to say every 5 years, for instance, 

we are going to require a company to change auditors and bring 

in a new company. There are some cost factors with that. Obviously if a company is auditing year-to-year, there is a certain efficiency that is gained by the familiarity with the way that company 

works. But there is the integrity factor that auditors are not being 

captured by the client. 

So, if you would, Mr. Bullard, Mr. Coffee, and especially Mr. Gallagher because of your position, I would like to have your thoughts 

on that, the cost and the efficacy of actually rotating auditors. 

Mr. BULLARD. I will be very brief. My main concern was that 

Congress not prevent the PCAOB from finding the right solution. 

And a statutory prohibition would place into doubt whether the 

PCAOB could take an alternative approach such as having a presumption that the audit relationship at the end after 10 years, and 

that the board had to do something to overcome that. Or that there 

would be some kind of mandatory disclosure or findings made by 

the board. 

If Congress acts in this respect, those alternative approaches 

come into question as to whether the PCAOB would have that authority. So, audits themselves, I think even the investor community 

has some ambivalence about whether this is the right way to go. 

But I see a great deal of thought given to this by the PCAOB. My 

main point would be to let the experts decide the question. 

Mr. LYNCH. Very good. Thank you. 

Mr. Coffee? 

Mr. COFFEE. I am going to give you a very equivocal answer after 

all that. I am not able to endorse the idea yet of mandatory rotation of the firm. We do rotate the auditing partner. And there are 

other countries that are now requiring mandatory firm rotation. I 

would like to see what their experience is. 

I do think this has to be given a thorough cost-benefit study. And 

I believe that the PCAOB—and I serve on one of its advisory 

boards—would not do this without a very thorough study because 

they will be subject to judicial review. So, I do not think this is 

about to happen. 

Mr. LYNCH. Okay. Fair enough. Thank you. 

Mr. Gallagher? 

Mr. GALLAGHER. Congressman, my view is that audit committees 

are in a very good position to make a decision based on the specific 

facts and circumstances that exist at a particular company about 

how to select the auditor and mandatory firm rotation would limit 

15 

the audit committee’s ability to make that judgment. Who is in the 

best position, as opposed to a one-size-fits-all solution, I think is a 

better way to go in terms of quality. 

There has never been any linkage between tenure and negative 

impacts of audit quality. In fact, if anything, history tells us otherwise. 

But that said, I do agree with Mr. Bullard that I think this is 

appropriately dealt with at the PCAOB. I think the process has 

been a good one. And I think you wind up at the right answer. 

Mr. LYNCH. Thank you. I have a minute-and-a-half left. 

Ms. Hollein, you mentioned in your testimony that you considered that the crown jewel of Sarbanes-Oxley was the fact that we 

have the CEOs and CFOs sign off on financials after the first district’s decision that said that on a whistle-blower case, a nonpublic 

company would not be bound by allegation or attestations that they 

made. 

Do you think that we should also require nonpublic contractors 

to these companies to also be bound by the same penalties and prohibitions that we place on the CEOs and CFOs? In other words, if 

I hire a nonpublic accountant, they are not bound by the same restrictions that we placed on those subject to Section 404, for example on Sarbanes-Oxley. Have you given any thought to that? I 

know that you sort of mention it in your remarks. 

Ms. HOLLEIN. Yes. We do feel—just looking at it we actually 

studied more of the public company sectors of our membership 

more than the private companies related to the Whistleblower Act. 

We do feel, however, that the CFOs and CEOs having signed off 

on it has provided a more robust process within the terms. And 

this would also possibly benefit the private companies, although we 

would have to study that further to see what the burden would be 

on those individual companies. 

Mr. LYNCH. Okay. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. Thank you. The gentleman yields back. 

The gentleman from Texas, Mr. Hensarling, is recognized for 5 

minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Berlau, in your testimony, you advocate repeal of Section 404 

of Sarbanes-Oxley. You say essentially it does not meet the costbenefit test. 

And I think, Mr. Coffee, you used the same phrase. I want to let 

you know how welcome the phrase ‘‘cost-benefit’’ is in this committee room. We rarely hear it uttered. 

On the cost side, Mr. Berlau, I guess you allude to SEC data that 

cites an average cost of compliance with Section 404 of $2.3 million. 

I think, Mr. Hatfield, you said the average compliance for a biotech 

company was about $1 million. So, I am trying to focus somewhat 

on the cost side of the equation. 

There has been some discussion. I would like to study it a little 

bit more carefully. We know that there have certainly been fewer 

IPOs and that the IPOs we have had post-SOX have been larger. 

So, we can certainly have a debate about the cause and effect of 

that. 

16 

Mr. Berlau, you also refer to the fact that—I guess you quote 

Bernie Marcus, the co-founder of Home Depot, who apparently has 

been quoted publicly on a number of occasions saying that he never 

could have taken Home Depot public had Sarbanes-Oxley been in 

effect when Home Depot was launched. 

So, again, I am trying to isolate the various costs that we have, 

not just direct cost to the companies. But there is obviously an opportunity cost for average retail investors who might have missed 

out on the next Home Depot. 

Can you elaborate on other costs that you see with respect to 

Sarbanes-Oxley? And particularly the cost of perhaps channeling 

some of these start-ups or emerging growth companies to private 

placements and debt as opposed to public equity? 

Mr. BERLAU. Yes. I think this is what the Facebook IPO and the 

flaws in that, the after effects demonstrate that maybe it was just 

too big to succeed. 

When Home Depot went public in the pre-SOX era, it had just 

four stores to its name. It used the money from going public to 

build hundreds of stores and employ the 300,000 people it does 

now. Whereas, in contrast, when Facebook went public, it was already a household name and some of these other things. And it 

was—and its IPO was $100 billion, and less than that as the share 

price has gone down. 

So I really think this shows how retail investors, ordinary investors cannot get in on a Home Depot at its growth stages or a 

Starbucks or a Cisco Systems. It all went public when they were 

relatively small. 

And the good news is that already with the JOBS Act, with just 

the 5-year exemption, we are seeing companies like ClearSign 

Combustion, a green technology company out of Seattle that has a 

$20 million market cap IPO. I do not think we have seen one this 

small since before Sarbanes-Oxley. 

So, the SEC still says—although some costs have come down 

slightly—Section 404 is 7 times as costly for a smaller company as 

in a larger company, and for its investors as well. 

Mr. HENSARLING. Mr. Bullard, in listening to your testimony, if 

I heard you properly, you did not find fault with Section 404. You 

found fault with the implementation of Section 404. And I thought 

I heard you say that you essentially believe that the regulators 

have it wrong and the cost could be much lower. Did I hear you 

properly? And if so, can you elaborate? 

Mr. BULLARD. I did say the first part, but not necessarily the second. I think that the history shows that regulators have conceded 

they probably got it wrong with respect to the first implementation 

of Section 404(b), and that is essentially the audit standards issued 

by the PCAOB. 

Today, what we have seen is the SEC economists have found 

that there have been declining costs. The PCAOB has substantially 

revised the requirements under Audit Standard 5. And I think that 

is the appropriate way for this to proceed. I do not think anyone— 

Mr. HENSARLING. If I could, I see my time is running out. I want 

to try to slip in one more question. 

Mr. Berlau quoted Professor Scott of Harvard Law School who 

says that it remains empirically unclear whether adherence to SOX 

17 

404 achieves its intended benefit. Mr. Gallagher, you spoke of some 

of the benefits that you perceive. But just how empirical are these 

benefits versus anecdotal? 

Mr. GALLAGHER. Congressman, I think if you look at the intended purpose of SOX in terms of financial reporting, and the fact 

that restatements went down after it worked itself through the system and the internal controls got significantly better, identified the 

issues that were there prior to the implementation. Restatements 

have gone down significantly, and I think that is a tribute to the 

benefits of SOX. 

Chairman GARRETT. Thank you. 

Mrs. Maloney is recognized for 5 minutes. 

Mrs. MALONEY. Thank you for calling this hearing. It is an important one. And I thank all of the panelists here today. 

I truly do believe that markets run more on trust than on capital. You see it all the time. And I believe we have to remember 

why Sarbanes-Oxley was created in the first place. It was to restore trust. Some of our most respected companies that were rated 

AAA plus, crashed in 24 hours, wiping out jobs, wiping out pensions, 401(k)’s, devastating communities in which they were located. And it was a horror. 

And I got phone calls. I believe probably everybody on this panel 

did, calling upon us to restore confidence. And it was legal, a lot 

of things. It was legal to hide tremendous losses and lack of capital. 

So, in a bipartisan way, Sarbanes-Oxley was passed and put into 

law. 

I would like to ask Mr. Bullard and Mr. Coffee—and I have to 

mention that Mr. Coffee is from the great State of New York and 

teaches at one of our very important institutions. We welcome you 

today. Thank you for your service and for being here. 

But were we successful on our primary goal of restoring confidence? We would have done nothing if there had not been a crash. 

We would not have done it. We would not have moved. But there 

was a problem, an accounting scandal. So, we worked to address 

it. 

So, Mr. Coffee, since you are from my home State, if you would 

respond first, and then Mr. Bullard, from the great State of Mississippi. I am so glad you are here. Thank you. 

Mr. COFFEE. I agree with what you were saying. Investors pay 

a price based on how they perceive the risk and return. If they 

think the risk of fraud is high, they will pay a lower price. And 

thus, companies will find capital much more expensive. 

The number of IPOs has never recovered from the Internet bubble in 2000–2001. And there is also this large impact of Enron, 

WorldCom, and the series of accounting scandals. 

Did SOX thoroughly cure the problem? Probably not, but thoroughly curing the problem would be extraordinarily expensive. So, 

SOX was a partial step in the right direction. 

The SEC studied this in response to Dodd-Frank, which they 

asked them to study what further exemptions should be done from 

Section 404. And they felt that Section 404(b) was working, and 

that giving a broader exemption would produce a lot more fraud. 

The case has not been made. 

18 

I am not in a better position than the SEC to disagree with 

them. There will be debates, continuing debates about the costs 

and benefits of Section 404. But you are quite right. It is intangible. Do investors trust companies? And I would say the series of 

scandals that we have seen recently, including the ongoing Libor 

scandal, makes them distrust not only companies, but the adequacy 

of regulatory oversight. 

Mrs. MALONEY. Mr. Bullard? 

Mr. BULLARD. I agree very much with Professor Coffee’s statements. And I would add that one of the issues, as Sarbanes-Oxley 

has matured over time, has not necessarily been problems with the 

statute in and of itself. 

We very rarely hear somebody criticizing SOX and then actually 

referring to the terms of the statute. What you see is criticism with 

respect to implementation. And as Chairman Garrett has been particularly sensitive to, part of this is an issue of the SEC’s historic 

problems with doing cost-benefit analysis. 

But I think we need to recognize it is in a revolutionary period, 

hiring many more economists as we speak. And that what we need 

to keep sight of is the appropriate structure of administrative law 

as something can actually operate efficiently. And it cannot operate 

efficiently with micromanagement at the congressional level. We 

need the SEC to evolve as it has—as it currently is in the cost-benefit frontier. 

Mrs. MALONEY. Very briefly, I would like to follow up on Professor Coffee’s statement on the SEC study, and I invite anyone to 

respond to it, that the amount now at $75 million exemption. And 

many of us in fact even had a bill at one point from $50 million 

exemption. Dodd-Frank had the $75 million at 60 percent—covered 60 percent of the companies in America. But the SEC study said that 

there was no reason to exempt anymore. If you could elaborate on 

that, or if anyone else would like to mention it. 

And as I understand it, the real cost is when you set up the infrastructure and the reporting system. And once you have set that 

up, then the cost to the companies is not— 

Chairman GARRETT. The gentlelady has 30 seconds left for an 

answer. 

Mrs. MALONEY. Mr. Coffee? Do you want to respond? 

Mr. COFFEE. I did not want to take all the time. I agree with 

what you are saying. The cost is front-loaded. The companies who 

would now be exempted have been complying with Section 404(b) 

for 5 years or more. And therefore, while they would like to have 

their costs reduced, they really are—these really are some costs. 

We are not talking about subjecting new companies to them. 

Chairman GARRETT. Thank you. 

Mrs. MALONEY. Thank you. 

Chairman GARRETT. Mr. Royce is recognized for 5 minutes. 

Mr. ROYCE. I think Mr. Coffee has had some insights, some key 

insights, and I think over the years, some of these insights have 

been included in legislation. 

Your overarching idea of applying the penalty not to the shareholder, but to those officers, those directors who are culpable—you 

have written about this in the past. You have witnessed in the past 

19 

years over the subject. That is a key component of Sarbanes-Oxley. 

And that is one that I think is very effective in terms of those disincentives. 

The premise, however, and here is where we get into a question 

of cause and effect. We can readily agree that the dot-com bubbles 

and the malfeasance that has occurred in the market have had an 

impact against IPOs. But when we look at market share, and originally the United States was the majority of IPOs, then we watch 

it go to 11.5 percent. Then we watch it go to 8.6 percent. 

And in the context of IPOs worldwide being rolled out in Europe 

and Asia, and our market share continues to fail to address amendments to the cost of Section 404(b), especially to those new companies like Mr. Hatfield’s. And I want to ask him about this because 

if you look at the biotech industry, and I read his testimony and— 

their efforts, expertise, kidney disease, Alzheimer’s, how you get a 

cure for dementia. 

What is not seen in all of this is his thesis that money taken 

away during this on-ramp out there from that type of work and applied to these kinds of costs, which is not a good fit, especially for 

a biotech company going public. Why can’t we look at amending the 

Act so that we still achieve your overarching goal, Professor Coffee, 

which is a very good one? 

But at least we begin to recognize that besides what you see in 

front of you there are these unseen costs in terms of his diabetes 

trials, which you know if there is a cure here we want this to come 

to market soon. That has to be weighed in the balance. And I think 

I would ask you about that. 

Mr. COFFEE. I agree with what you are saying. But it leads me 

to believe that you do not want an all-or-nothing approach that 

says all companies of less than $250 million public float are excluded. 

What I think you need, and the person missing from this table 

is the chairman of the PCAOB, in terms of are there more focused, 

more surgical ways of reducing these costs with smaller companies? 

Mr. ROYCE. Okay— 

Mr. COFFEE. And that kind of focuses— 

Mr. ROYCE. But I have to let Mr. Hatfield talk for a minute, too. 

Mr. Hatfield, could you explain the conundrum here, succinctly? 

Mr. HATFIELD. I will try that. But I support many of the provisions of SOX. I think investor protection is really important. The 

key issue is balance and cost-benefit for that. IPOs are down. And 

I can cite specific conversations amongst my colleagues in our 

boardroom that one of the primary reasons for that is bureaucratic 

burden that takes away from our mission. 

Mr. ROYCE. Talk about the IPOs in the biotech sector, because 

those numbers are impactful. 

Mr. HATFIELD. It is terrible. That is one of the most important 

discussions that are going on in boardrooms, whether or not to take 

on that burden, whether to divert funds from investors into compliance. 

I think the great example of whether or not this really is an 

issue is what the JOBS Act has done. If I look now at the filings 

that have occurred since the JOBS Act was enacted—and thank 

you for that—Biotech ought to be 3 percent. It is 25 percent in the 

20 

filings now. So obviously, something was relieved, pressure on the 

system that now allows biotech companies that are trying to create 

these cures to actually access— 

Mr. ROYCE. And other CEOs in your field, what is their reaction 

to this legislation that we are discussing today in terms of further 

amending Sarbanes-Oxley? 

Mr. HATFIELD. One of the comments that I got—I was talking to 

somebody who runs a public company. And he said, ‘‘Hey Jeff, what 

I regret about going public is I switched from leading the company 

to being chief compliance officer. And that really changed my life.’’ 

So, that is what I would like—balance is important, but right now, 

Section 404(b) for companies in the biotech industry is a large burden. 

Mr. ROYCE. Thank you. 

Mr. Chairman, thank you. 

Chairman GARRETT. Right. Mr. Himes will have the last 5 minutes. And then, in order to get more people in, we are going to go 

down to 3-minute questioning. 

Mr. Himes? 

Mr. HIMES. Thank you, Mr. Chairman. 

And thank you to the panel. I have actually found this discussion 

incredibly interesting. And I think anyone listening to the panel 

would arrive at the conclusion that yes, regulation does impose 

costs on companies like Mr. Hatfield’s, costs that may or may not 

be wise, depending on whether they reduce the risk premium that 

investors would subtract from Mr. Hatfield’s business to invest in 

it. 

It is that simple. And I have not heard a single thing from this 

panel saying that SOX has not actually improved investor protection. And yes, there are costs. 

My colleague Jeb Hensarling said that we do not engage in costbenefit analysis as much as we should, and I could not agree more. 

And part of the problem is that we can quantify the costs that 

someone like Mr. Hatfield bears. 

We are in disagreement here. Mr. Berlau has $2.3 million. The 

SEC study says $600,000. We can quantify that. There are 3,500 

filers who have to pay Section 404 costs. But the benefit is a little 

harder to get at. And I want to explore that a little bit. 

Mr. Berlau, in your testimony, which I found colorful, and I appreciate that, by the way— 

Mr. BERLAU. Thank you. 

Mr. HIMES. Your opening metaphor here that we need to liberate 

to stimulate, that we should think of this as grass that is growing; 

one does not need to teach or subsidize grass to grow, rather remove the rocks obstructing its growth and it will grow wide and 

tall. It makes me want to break out in song. 

[laughter]. 

Mr. Berlau, is this the metaphor we should think about that you 

should frame this debate in? And let me ask you a specific question: Have you ever come across a blade of grass that borrowed 

money that had shareholders, or that could make a decision to 

commit fraud? 

21 

Mr. BERLAU. I cannot take credit for that metaphor. That was 

my vice president, Wayne Crews, my boss. That is the way we look 

at all public policy. 

But yes, I think investors and entrepreneurs—it is sort of like a 

garden. And the question is, people come together and make different arrangements. 

But it is the government’s role to prevent—to make sure that 

there is transparency, and there is not fraud. And it is up to the 

gardeners and all of the different people who take care of the—to 

come up with— 

Mr. HIMES. My question was partly rhetorical. So, let me explore 

this question of cost-benefit. Thank you for the answer, though. It 

is hard to get your arms around what the benefits are because we 

are talking about crises averted. But I am struck by the fact that 

the numbers and the costs, and I do not in any way not take seriously how expensive a dollar is to a company like Mr. Hatfield’s. 

VCs, angel investors extract a very substantial price for that dollar. 

So, do not get me wrong on this. But the costs that we are talking about in this cost-benefit analysis are always in the hundreds 

of thousands and millions of dollars. Mr. Berlau, you say $2.3 million. The SEC study says $600,000. What about the costs? 

Mr. Berlau, what was the peak market capitalization of 

WorldCom and Enron, those two companies? What was the peak 

market cap of those two companies? 

Mr. BERLAU. Let me say first— 

Mr. HIMES. No, a simple question. Please answer it. 

Mr. BERLAU. I— 

Mr. HIMES. The peak market cap of Enron and WorldCom was 

$250 billion combined, a quarter of a trillion dollars in value obliterated by fraud. 

Now, I am not going to make the argument—I will let the panel 

make the argument if they want—that SOX is perfect. But I do not 

need to. Because if I take the 3,500 filers of Section 404 and I use 

your number of $2 million, I get about $7 billion, a very— 

Mr. BERLAU. That is the SEC’s number. I can send you the— 

Mr. HIMES. Okay. Whatever. I will give you the $2 million. Let 

us just say $7 billion, because we have 3,500 filers. That is $7 billion, expensive dollars—$250 billion in market cap obliterated in 

the meltdown which David Schweikert called a little financial 

rollercoaster, with $17 trillion in U.S. household wealth obliterated. 

So, can I take some fraction of those numbers and hold those 

against your $7 billion? 

Mr. BERLAU. Sarbanes-Oxley was in effect before the meltdown 

and it did not seem to do much. The question is, will this achieve 

its intended benefit? And as Professor Scott of Harvard said, it is 

unclear that it does. 

Mr. SCHWEIKERT. And will the gentleman yield for a second? 

Mr. HIMES. No. I am actually—I have 33 seconds, so I am not 

going to yield. 

Do you agree that I can take some fraction of the $250 billion 

of obliterated market cap of Enron and WorldCom and hold that 

on the opposite side of the scales of the $7 billion that SOX apparently costs us on Section 404? Is that a fair way to think about it? 

22 

Mr. BERLAU. Only if you can show the provision actually affects 

that and prevents that type of— 

Mr. HIMES. Do you believe that Section 404—there are studies 

that show that it reduces the rate of restatement. Do you believe— 

Chairman GARRETT. The gentleman’s time has expired. 

Mr. HIMES. —that has no effect? 

Chairman GARRETT. So, that will be a rhetorical question as well. 

[laughter]. 

The gentleman from New Mexico is recognized for 3 minutes. 

Mr. SCHWEIKERT. Mr. Chairman, quick parliamentary inquiry. 

Chairman GARRETT. Yes? 

Mr. SCHWEIKERT. Sarcasm is banned from the committee. 

Chairman GARRETT. From this point on. 

Mr. SCHWEIKERT. Thank you, sir. 

Chairman GARRETT. The gentleman from New Mexico is recognized for 3 minutes. 

Mr. PEARCE. I thank the gentleman for lowering the time to 3 

minutes just as I start. 

Mr. Coffee, you refer to an SEC study in justifying some of your 

positions about this. And so I guess my question is that this is the 

same SEC that was sitting in the room when MF Global was transferring money out of segregated accounts, and you want us to sit 

up here as policymakers and just blithely take that. 

And with just 3 minutes, we will probably move on, but—if we 

will go ahead and look at MF Global, Sarbanes-Oxley was in effect. 

And wasn’t MF Global making trades just a day before the report 

period came out so that they would understate the amount of actual debt they had in the actual— 

Mr. COFFEE. You seem to be describing the Lehman Brothers 

scam, the repo— 

Mr. PEARCE. No. I am talking about MF Global. I am talking 

about Jon Corzine. I am talking about Jon Corzine who came in 

here and testified. And yes, they were taking stuff off the balance 

sheets. And it is in place. And you are quoting the SEC— 

Mr. COFFEE. I am certainly not defending MF Global. 

Mr. PEARCE. I will tell you when it is your time to speak. You 

are trying to get—you are trying to say that the SEC is going to 

be the great protector. And I am telling you they sat in the room 

and watched MF Global take that money out of segregated accounts. They were watching them as they moved stuff on and off. 

Now, Mr. Berlau will tell you that I am not necessarily a great 

critic of Sarbanes-Oxley. But we are trying to find a balance point 

here. And when you come in and say, ‘‘the SEC, the SEC, the 

SEC,’’ and we watch from up here what the SEC has done under 

this law, and we watch what they did in the complete meltdown, 

the illegal transferring of assets out of segregated accounts. Then, 

I say that I am not sure the answer is regulation. 

Mr. Berlau, they have really brought up good points that the 

market is about trust. So, you cannot just walk away from that. 

You cannot walk away from the fact that trust is needed, and 

things do happen on balance sheets that cause a lack of trust. How 

do you, in your mind, rectify those two? 

Mr. BERLAU. I would certainly agree with that. And before this— 

MF Global was such a basic failure of rules in place even before 

23 

Sarbanes-Oxley. For decades, it was the first rule of thumb that 

you— 

Mr. PEARCE. I just need an answer. Just skip to it. We are really 

short of time. We have 15 seconds. So— 

Mr. BERLAU. I am sorry. Can you repeat the question? 

Mr. PEARCE. Yes, trust. How do you find it if you say we should 

repeal it? How do you find the trust in the market? How do you 

find the confidence because people have some more—Mr. Himes 

was asking a very good question. 

Mr. BERLAU. Well— 

Chairman GARRETT. Okay. I— 

Mr. BERLAU. —they are to police fraud and reputation. Reputation is a commodity. Like Warren Buffet, other CEOs have developed. 

Mr. PEARCE. Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. I thank the gentleman from New Mexico. 

The gentlelady from New York, Ms. Hayworth, is recognized for 

3 minutes. 

Dr. HAYWORTH. And I thank the chairman. 

I am going to follow Mr. Himes’ query regarding the—and I realize it becomes— 

Chairman GARRETT. The gentlelady will suspend. 

Can we set the clock for her 3 minutes? 

Dr. HAYWORTH. Oh. Thank you. 

Following on regarding—and acknowledging that it can be exceedingly difficult, especially from the macro level, to calculate the 

relative costs and benefits, counterfactuals; obviously, we are all 

arguing different sides of this. 

But when we talk about the relative cost to the economy, Mr. 

Berlau, would you venture a guess as to the opportunity cost that 

has been lost as a result of certain more onerous aspects, shall we 

say, of Sarbanes-Oxley in having a chilling effect on the public offering marketplace? There must be a certain number of trillions involved in that as well or a certain fraction of trillions at least. 

Mr. BERLAU. Two numbers are important. Ivy Zhang of the University of Rochester published a paper in which she estimated, as 

you said, Congresswoman Hayworth, the opportunity costs of companies not listing other things of Sarbanes-Oxley as being as high 

as $1.4 trillion. 

I would also note in the IPO Taskforce organized by the Obama 

Treasury Department that they said that the cost of the long-term 

decline in IPOs in terms of jobs lost associated with that would be 

about—could be as high as 22 million jobs not created in the past— 

it the past decade or so. And it is—so a lot of the—yes, there are 

a lot of opportunity costs. And it is hard to measure. But what 

some of the—even some of the things that have been measured and 

shown is just quite chilling. 

Dr. HAYWORTH. So, it is fair to say that there is probably room 

for improvement. And I take Mr. Gallagher’s comments very seriously, and those of others on the panel, regarding the importance 

of having accuracy in the representation of financial statements. 

Obviously, that is a very important aspect. 

But, Mr. Hatfield, would you say as an entrepreneur that there 

is a balance that we can reach and that we can provide a certain 

24 

amount of liberations like Mr. Berlau says, but also allow for that 

investor assurance that Mr. Gallagher and Professor Coffee have 

advocated for? 

Mr. HATFIELD. Absolutely. And as previously mentioned, I think 

there are very strong components of Sarbanes-Oxley that are important. The overall transparency that it creates important Section 

404(a) with management responsibility increased impact if they are 

not. I think those are all very important. And I think where the 

balance comes in on the other side is Section 404(b) and the costs 

associated with that. 

Importantly, I would just say our investors, and that is what we 

are talking about here is protecting the investors. And I have heard 

from them directly and I know what this marketplace is, the 

biotech companies. The investors want to know about the science. 

Again, for 8 years now, we have not spent material time in the 

boardroom on historical financial reports. We are focused on driving science and finding cures for people. 

Dr. HAYWORTH. As you should be. 

And Mr. Chairman, thank you all. I yield back. 

Chairman GARRETT. The gentleman from California is given 10 

seconds for coming in so late. No, 3 minutes. 

Mr. SHERMAN. Okay. Or when we have to leave for votes, we 

have to leave for votes. 

I think there has been some confusion this morning about the 

distinction between Sarbanes-Oxley Sections 404(a) and 404(b). 

Why is the audit required under Section 404(b) important? I do not 

know which member of the panel? Mr. Coffee? 

Mr. COFFEE. Yes. Did you address me? Okay. I think that Section 404(b) requires the auditor to attest to the adequacy of management’s internal compliance efforts. Section 404(b) does seem to 

relate to the percentage of restatements that subject companies experience. The SEC study did find that if you are compliant under 

Section 404(b), the rate of restatements goes down by something 

like 46 percent. That is not a small number. 

I agree we can debate costs and benefits for a long time. But 

what I would point out is that in the wake of Sarbanes-Oxley, a 

number of companies went private. More recent studies have found 

that even those companies who went private continued to remain 

reporting companies and to comply with Section 404(b) because 

debt investors insisted upon it. That suggests that debt investors 

saw some value in reporting and in Section 404(b). 

So, I do think that there is some value to this. And the SEC 

made many mistakes. But it was not MF Global because the principal regulator of MF Global was the CFTC. So, I want to give 

credit where credit is due. And that probably belongs to a different 

agency’s failure. 

Mr. SHERMAN. I will ask Mr. Gallagher to quickly respond, and 

then we have to go vote. 

Mr. GALLAGHER. Congressman, I think Professor Coffee is dead 

on. If you look at the numbers and the rigor of the internal control 

analysis by management, knowing that somebody is going to come 

in and provide that audit, and provides the assurance to the capital 

markets. And to Mr. Himes’s point, you know the benefit of the 

25 

cost of capital because of that assurance, because of that confidence 

in the higher level of rigor of that internal control analysis. 

Mr. SHERMAN. So, you would pay more to the accountants and 

you pay less to your bank. 

I yield back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Dold is recognized for 3 minutes. 

Mr. DOLD. Thank you, Mr. Chairman, for the 3 minutes that we 

have. And I certainly want to thank all the panelists for coming. 

My colleague from Connecticut was talking about cost-benefit 

analysis, certainly something that I also agree with. I also want to 

talk—I do think this is largely about trust. 

But I do think that if we—in talking to a number of companies 

and talking to some public officials, some of the concerns that I 

have are not just about the lack of IPOs that have been coming, 

or lack thereof, into the marketplace. But we have actually seen 

companies de-list from U.S. exchanges to go to other exchanges, 

whether it be to Ireland or someplace else, because of this overregulatory burden that is being placed upon these companies. And 

certainly, that is an enormous concern that I have. 

Now, we talked a little bit about the cost-benefit analysis, and 

certainly when we look at the cost of Enron. But I am not so sure. 

If we had had Sarbanes-Oxley, if SOX had been in place, Mr. Coffee, would Enron not have happened? 

Mr. COFFEE. I cannot tell you that it would not have happened. 

And I think it is more likely than not that it would have happened. 

Mr. DOLD. Okay. And I think that is the point. Good companies 

are going to do good things. Bad companies certainly are one of 

those things that we have to be looking out for. Trust is going to 

be one of those critical things. 

So, in terms of that cost-benefit analysis, I am not so sure that 

my colleague is 100 percent correct in saying all of that would have 

been saved; there would not have been fraud going on out there because we have things like MF Global that happen. And certainly 

people are doing bad things and things which are against the law. 

And from my opinion, and I think hopefully somebody will be 

brought to justice. We are also seeing that again the cost of compliance is significantly more expensive as a percentage as Mr. Berlau 

had talked about for smaller companies and larger companies. 

In the last little bit of time that I have, one of the things that 

I do want to talk about is the mandatory rotation for audit terms. 

Does anybody really think that if somebody is intending on committing fraud or hiding it, they are not going to hide it from the 

auditors as well? 

And if a Big Four accounting firm, let us just say, were to be 

caught up in an accounting fraud scandal, does anybody think that 

would not be devastating to that company? Would any other major 

Fortune 1000 company use that auditing firm again? Does anybody 

think that would not be a self-regulated type entity? 

Or do we think that the government needs to come in and mandate that no, you have to rotate? Is it 5 years? Is it 7 years? Is it 

10 years? Why not 15 years? What is the actual number? 

And what my real point is, is the government not weighing in a 

little bit too deeply here? Because certainly the auditing firms, they 

26 

absolutely want to make sure that they are following the letter of 

the law because that is going to be critical for their business model. 

Because if they are caught up in some sort of a scandal, if they do 

things wrong and the light is shone upon them, trust me, that is 

going to be devastating to that firm. 

Mr. Coffee, do you want to comment? And then, Mr. Bullard? 

Mr. COFFEE. As I said earlier today, I was not endorsing mandatory rotation of firms— 

Mr. DOLD. I did not say— 

Mr. COFFEE. —and I would point out— 

Mr. DOLD. I am asking if you would comment on that quickly— 

Mr. COFFEE. I would point out that if you rotate the auditor, that 

is an opportunity to capture the new auditor. I do not know that 

you will get a better, stronger auditor when you rotate, because if 

you are a corrupt CEO, you may go out and solicit the auditor who 

will be most acquiescent. So, I am not testifying that will be the 

perfect answer. 

Chairman GARRETT. Mrs. Biggert, for 3 minutes or one question. 

Mrs. BIGGERT. Thank you. I will try one question, Mr. Chairman. 

Ms. Hollein, SOX attempted to improve companies’ internal controls and deter fraud. That said, are there comments since private 

sector initiatives, education efforts or better communication between the PCAOB and audit committees that could be done instead 

of adding costly regulations? 

Ms. HOLLEIN. Yes. I think as the private sector, we have actually 

stepped up. And we have been in collaboration with the Center for 

Audit Quality helping to educate. We have done a roadshow with 

all of our members throughout the Nation just helping to educate 

them on the deterrence and detection of fraud. And we will continue to provide those types of opportunities and thought leadership to them. In addition, we are part of the COSO framework addressing internal controls and actually refreshing that to detect 

fraud. 

Mrs. BIGGERT. Thank you very much, and I yield back. 

Chairman GARRETT. Thanks. Since the gentlelady yields back, I 

will yield myself 3 minutes for the final word of the day. 

So, there are some things that are good with SOX and there are 

certainly some things that are terrible about it. And there are certainly some things that were good about Dodd-Frank, and certainly 

some things that were terrible about it. I guess the ironic part of 

all this is that one of the best parts of Dodd-Frank was the repeal 

or the lowering of the limits—raising the limits for SOX. So, that 

is the irony there. 

Let us begin with Mr. Hatfield. When these crises occurred back 

like when Enron and WorldCom and all those things, Congress 

rushes in, tries to pass legislation to do it right away. One of those 

people—one of the Senators who helped pass SOX was Jon Corzine, 

who then went on to become CEO of MF Global. And so the question there is did having him in—having Sarbanes-Oxley in place, 

did that solve or prevent the losses over there? 

Mr. HATFIELD. It would seem to be that they did not. I think regulation has its purpose. But if we are to protect against every outcome and the bad actors that inevitably are going to be out there 

in some measure, we can increase regulation to the point where no 

27 

one will ever go public. And public companies, particularly those in 

the less than $250 million float range that Congressman 

Fitzpatrick has sponsored legislation on, those companies will go 

back to being private. And I think we need to establish the balance. 

Chairman GARRETT. Right. And so just in line with that, and I 

know the other side of the aisle believes that Section 404(b), we 

have talked about that, is the answer to all these things. Without 

objection—I guess I will not get any objection—I will put into the 

record the attestation provision from the compliance with that for 

Lehman Brothers right before their bankruptcy, and also put into 

the attestation provision from JPMorgan right before their recent 

London Whale trade. 

I will also put into the record the attestation provision for Bear 

Stearns & Company right before their bailout. Also again, the attestation provision with regard to MF Global right before Jon 

Corzine as CEO apparently transferred millions of dollars from investors’ accounts, customers’ accounts. And also, the two attestation provisions, one from Fannie Mae and one from Freddie Mac, 

right before each one of their bailouts in the past. 

Without objection, obviously it is clear that those attestations in 

compliance with SOX did nothing in all of those circumstances. 

Mr. Coffee, in your written testimony, and you just touched on 

it very briefly; you used the words ‘‘mature mediocrities.’’ There we 

go mediocrities. These are companies that have been in place for 

about 5 years or more and just sort of stayed about the same. 

And whereas we are saying that maybe the small companies, and 

I think you even said maybe need that growth pattern and the exemption to get up there that these do not. Is there something about 

companies that want to stay at that level that they do not deserve 

the same sort of exemption and abilities to continue to grow that 

the small companies do? 

Mr. COFFEE. I think the differences between a brand new startup 

company that might use a 5-year transitional experience in order 

to comply with Federal securities laws. That is what the JOBS Act 

said. And I think that is a stronger rationale than saying a company that has already been subject to Section 404(b) for at least 

5 years should get a complete immunity. 

And do they want to stay at that level? I assume that all companies would like to get their market capitalization up and their 

stock price up. But we will see a certain amount of gaming if we 

use this rigid test of $250 million. 

The SEC has made that finding in its report that any time we 

use a rigid market cap test, we are likely to see a lot of gaming 

around that key line. And because there are more companies, there 

will be more gaming. 

Chairman GARRETT. Right. And I guess we could see if you go 

back to what was the impetus behind Sarbanes-Oxley in the first 

place was not the small companies, was not the mid-size companies; it was not even these mature mediocrity type companies. 

It was the huge companies. It was the Enron’s. It was the 

WorldCom’s. It was some of the other companies that were literally 

huge companies that initially was the trigger for Congress to do 

their typical knee-jerk reaction in these things and pass SOX. And 

28 

it was not these mid-size companies and was not the small companies. 

And the last point, and Mr. Himes is not here, is the costs and 

the cost-benefit analysis, which is one of my driving home points. 

And there is really—this is a rhetorical point. While if we can pass 

legislation and try to do a cost-benefit analysis and say on the one 

hand is the expense, millions or billions of dollars. 

And on the other hand is the entire collapse of the world marketplace. What you are never going to have a reason not to pass legislation to do so because you can never outweigh that. But what is 

intangible is—and a couple of you talked about this—the opportunity costs. 

And the fact that we are seeing so many IPOs going overseas 

and not going over here—what is that expression: It is priceless. 

The businesses that are not in this country, the jobs that are not 

in this country, the families who have been dislocated because they 

cannot get a job anymore, the communities that have been decimated because they do not have jobs whether it is in manufacturing, construction, biotech or the like. How do you put a price on 

that? 

That is called opportunity costs. I do not know. The economists 

probably cannot do it. But that would be the rhetorical question 

back to Mr. Himes. And that is the question that we have to grapple with in any legislation when we do a price-benefit analysis. 

But with that, I have to go vote, hopefully before the board 

closes. 

I ask unanimous consent to make a statement from the Institute 

of Internal Auditors a part of the record. 

Without objection, it is so ordered. 

Again, thanks so much to the panel for putting up with the abbreviated portion here. But all your testimony has already been 

considered and will continue to be considered. I thank the panel. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

The hearing is now adjourned. 

[Whereupon, at 11:00 a.m., the hearing was adjourned.] 

(29) 

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