[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                      SARBANES-OXLEY: TWO YEARS OF
                      MARKET AND INVESTOR RECOVERY

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 22, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-106


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 22, 2004................................................     1
Appendix:
    July 22, 2004................................................    43

                               WITNESSES
                        Thursday, July 22, 2004

Caplan, Mitchell H., Chief Executive Officer, E*TRADE Financial..     4
Del Raso, Joseph V., Partner, Pepper Hamilton LLP................     8
Hills, Hon. Roderick M., former SEC Chairman and White House 
  Counsel........................................................     6
Quigley, James H., Chief Executive Officer, Deloitte & Touche....     2
Trumka, Richard L., Secretary-Treasurer, AFL-CIO.................    12

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    44
    Gillmor, Hon. Paul E.........................................    46
    Hinojosa, Hon. Ruben.........................................    48
    Caplan, Mitchell H...........................................    49
    Del Raso, Joseph V...........................................    61
    Hills, Hon. Roderick M.......................................    67
    Quigley, James H.............................................   111
    Trumka, Richard L............................................   137

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn B.:
    "Not an Option'', article, The Wall Street Journal, July 22, 
      2004.......................................................   144
Quigley, James H.:
    Written response to questions from Hon. Richard Baker........   146

 
                      SARBANES-OXLEY: TWO YEARS OF
                      MARKET AND INVESTOR RECOVERY

                              ----------                              


                        Thursday, July 22, 2004

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:04 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Baker, Bachus, Castle, 
Kelly, Ryun, Biggert, Fosella, Capito, Tiberi, Feeney, 
Hensarling, Waters, Maloney, Velazquez, Watt, Hooley, Lee, 
Inslee, Hinojosa, Lucas of Kentucky, Clay, Matheson, Miller of 
North Carolina, Davis, and Bell.
    The Chairman. [Presiding.] The committee will come to 
order.
    It has been 2 years since the Congress passed and President 
Bush signed the most sweeping corporate reform law in our 
nation's history. The Sarbanes-Oxley Act of 2002 was designed 
to curb accounting fraud, make financial statements more 
transparent and understandable, and hold company executives and 
directors accountable. I am pleased to say that the early 
returns are in and they are positive.
    We all know that no law will stop certain determined bad 
actors from violating the trust of shareholders. Indeed, if 
that were shareholders we would have passed such legislation a 
long time ago. But Congress can establish incentives and 
disincentives for certain behavior. It does have the ability 
and the obligation to establish a baseline of professional 
conduct for American business. If these minimum standards are 
not met, Congress can help ensure that there will be swift, 
certain and severe punishment.
    Sarbanes-Oxley was passed during a period in which a 
majority of Americans had lost faith in the pillars of 
corporate life: company executives, public accountants, 
investment bankers, stock and bond analysts, and attorneys. 
This mistrust, I would point out, was well founded. Too many 
failed to act ethically. Indeed, we have learned that many 
violated criminal laws and will serve time in prison. Sadly, it 
was more than a few bad apples.
    That is the climate in which Sarbanes-Oxley was debated and 
passed. Remarkably, considering the overheated political 
environment at the time, it is measured and responsible 
legislation. Many of its provisions require companies to do 
things that they were already doing or should have been doing. 
As companies find that certain mandates like the internal 
control standard are particularly costly, maybe that is because 
they were deficient in that particular area.
    Numerous parts of the act appear to be working extremely 
well. Certifications of company financials by chief executives 
and finance chiefs, independent and empowered audit committees, 
officer and director bars, and the FAIR fund have all had a 
very powerful and positive impact, to cite just a few 
provisions.
    Are there increased costs? Yes. Do the benefits of improved 
financial reporting, more active and engaged boards and trusted 
markets outweigh these added costs? I believe yes. But do not 
take my word for it. Recent surveys indicate that a majority of 
corporate directors believe the act has had a positive impact 
on their companies and boards. That is not to say that this is 
a perfect statute. It certainly is not. No legislation ever is, 
or at least none have been in my two decades here in 
Washington. But it does appear to be working quite well and for 
that we should be very proud.
    I look forward to hearing from our distinguished panel 
today. We have heard from many of you before and we obviously 
like what we have heard because we have invited you back. 
Welcome.
    I now look to other members for an opening statement. Are 
there other members seeking an opening statement? The gentleman 
from Alabama.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 44 in the appendix.]
    Mr. Bachus. Mr. Chairman, I do not have an opening 
statement.
    The Chairman. We will turn then to our distinguished panel. 
Let me introduce them, from my left to right: Mr. James H. 
Quigley, chief executive officer of Deloitte & Touche; Mr. 
Mitchell H. Caplan, chief executive officer of E*TRADE 
Financial Corporation; the Honorable Roderick M. Hills, former 
SEC Chairman and White House Counsel, welcome back; Mr. Joseph 
V. Del Raso, partner of Pepper Hamilton, LLP; and Mr. Richard 
L. Trumka, secretary-treasurer, AFL-CIO.
    Gentleman, to all of you we are in your debt for appearing 
today and giving us a good review 2 years later of the 
Sarbanes-Oxley legislation. Mr. Quigley, we will begin with 
you.

     STATEMENT OF JAMES H. QUIGLEY, CEO, DELOITTE & TOUCHE

    Mr. Quigley. Thank you, Mr. Chairman and members of the 
House Committee on Financial Services.
    I am pleased with the opportunity to appear before you on 
behalf of the partners of Deloitte. Deloitte has 30,000 people 
in the U.S. and we audit more than 20 percent of the Fortune 
1000 companies. I have served in several roles in our audit 
practice and have first-hand experience on many levels, 
including as a lead audit partner responsible for signing the 
firm's name.
    As the CEO, I interact with our largest clients and attend 
approximately 40 audit committee meetings per year, including 
two this week. I will provide my perspective and insight from 
the frontline. Sarbanes-Oxley is having a positive impact on 
the financial reporting process at public companies. I believe 
the risk of fraudulent financial reporting has been reduced.
    The effectiveness of financial reporting requires 
management, audit committees and auditors each to perform their 
essential role. The requirements in the act are directed to 
each participant. Management has strengthened their process in 
part to support the certifications by CEOs and CFOs of the 
financial disclosures. In addition, disclosure committees have 
been put in place and they are working effectively each quarter 
to improve the transparency and completeness of the financial 
disclosures. And the internal control documentation and related 
processes which have attracted significant attention when 
discussions of cost occur is also having a positive impact. It 
has led to broader acceptance of the responsibility for 
controls. Line management no longer defers solely to the 
controller or the internal audit department with respect to 
controls. This is progress.
    Audit committee effectiveness has also improved 
dramatically. We have seen many well-intentioned efforts to 
improve audit committee performance, 15 years ago, the Treadway 
Commission report and more recently the Blue Ribbon Panel. But 
I observed many audit committees viewed those best practices as 
good ideas for someone else. The force of law through Sarbanes-
Oxley has made it different this time. I see and feel the 
difference.
    The number of meetings is up by 50 percent. The duration of 
the meetings has also increased by 50 percent, fundamentally 
doubling the amount of time that audit committees are spending 
in overseeing the financial reporting process. Members are 
better informed. They are better prepared and they better 
understand their essential role. They ask focused, probing 
questions. Prior to the act, the audit committee chairman would 
rarely call the lead audit partner in between meetings or in 
preparation for an upcoming meeting. Since the act over the 
past 2 years, this has become a very common practice.
    Auditors are also stepping up. They have embraced both the 
letter and the spirit of this new law. We are working more 
effectively with audit committees and our new regulator the 
PCAOB. We have built our capacity to handle the Section 404 
attestation requirements. At Deloitte, the number of internal 
control and systems assurance specialists in our firm have been 
increased by 20 percent and we have provided extensive training 
to each of our assurance professionals.
    With respect to cost-benefits, some are honestly 
questioning whether the benefits exceed the costs. Most 
questions point at the Section 404 requirements. I believe we 
need to work through a full cycle of implementation before we 
revisit the standards, the law or the regulations related to 
Sarbanes-Oxley and then, after we have made our way through 
that first full cycle of implementation and have all of those 
learnings under our belt, we can again revisit and ask if 
changes are needed.
    I believe in the cost-benefit question we need to view this 
in the spirit of the market cap of each of the registrants. 
Based on a recent survey by FEI that indicates the average cost 
of compliance, both costs that will be incurred by the 
registrant as well as costs that they will pay to the auditor, 
will average about $5 million per member of the S&P 500. When 
you view that cost in relation to the market capitalization of 
that group of companies, it is a very, very, very tiny fraction 
of 1 percent, .03 of 1 percent of the market cap. When we think 
about the opportunity that we have to reduce the risk of 
fraudulent financial reporting, I believe that is a cost that 
is well paid.
    Separate from Sarbanes-Oxley, the SEC issued a rule to 
shorten the number of days between a company's fiscal year end 
and the filing of its annual report, from 90 days in 2002 to 75 
days in 2003 and to 60 days for 2004. This plan for accelerated 
filing requirements was conceived before section 404 was 
enacted. Having to address both these new and significant 
requirements in the same year is very challenging and will put 
unusual pressure on all parties concerned that could impact the 
quality of financial reporting, the audit, and the internal 
control assessments. Frankly, it might also increase further 
these costs.
    Next week, we will recommend in a letter to the SEC that it 
delay by 1 year the acceleration to the 60-day filing 
requirement, making it applicable for 2005 annual reports. This 
would allow companies and auditors an additional 2 weeks this 
year to focus on these significant new internal control 
requirements of the act.
    Let me conclude. We are making progress, and I believe 
anytime you assess the impact of a change as sweeping as 
Sarbanes-Oxley, it is as important to consider the direction 
you are moving, as well as assess where we are. The risk of 
fraudulent financial reporting has been reduced by the actions 
taken to implement the act by management, by audit committees, 
by the PCAOB, by auditors. I believe it is time to absorb this 
massive change represented by Sarbanes-Oxley. Let's sustain our 
commitment to restore investor confidence and avoid future 
legislation, regulation, or scope of services limitations.
    Costly, yes, but I believe these are costs that registrants 
should be willing to pay in return for the privilege of being 
the stewards of the public's money.
    Thank you, Mr. Chairman.
    [The prepared statement of James H. Quigley can be found on 
page 111 in the appendix.]
    The Chairman. Thank you, Mr. Quigley.
    Mr. Caplan?

    STATEMENT OF MITCHELL H. CAPLAN, CEO, E*TRADE FINANCIAL 
                          CORPORATION

    Mr. Caplan. Good morning. I am Mitchell Caplan, CEO of 
E*TRADE Financial. We are a leading provider of online, 
personalized and fully integrated financial services, including 
investing, banking, lending, planning and advice. A key tenet 
of our business strategy is to use our proprietary technology 
and the Internet to deliver an integrated, personalized and 
value-added financial services experience to all our customers.
    I would like to thank Chairman Oxley and the committee for 
inviting us to share our company's experience with the 
implementation of the Sarbanes-Oxley Act as your committee 
examines the law's effectiveness since its enactment 2 year 
ago. Our experience with this law has clearly been a positive 
one. At the time this committee was debating the legislation, 
which became known as Sarbanes-Oxley, E*TRADE Financial was 
confronted with a serious corporate governance issue.
    Our former CEO had taken an $80 million pay package amidst 
a number of unfolding corporate scandals. This excessive 
compensation package was frankly a surprise to many in the 
company and revealed flaws in our corporate governance policies 
and structure. Trust is especially important for the customers 
and shareholders of financial services companies. This breach 
of trust for us was a call to action. In 2003, the board of 
directors aggressively put in place changes to restore the 
confidence of our employees, our customers, our investors and 
our analysts. With the resignation of our former CEO, E*TRADE's 
board of directors took action to address those issues.
    The board first separated the titles of chairman and CEO. 
It brought on four new members to our board of directors. We 
revamped entirely the audit and compensation committees of the 
board. We eliminated interlocking directors. We rationalized 
executive pay. We added a chief risk officer to our management 
team. We greatly enhanced the internal control processes by 
establishing additional checks and balances in compliance with 
Sarbanes-Oxley's Section 404, and we rotated our auditors.
    When I assumed the role of CEO, we clearly had lost the 
confidence of both the investment community and our employees. 
While excessive executive compensation was the obvious problem, 
it drove the company to recast the composition and structure of 
the board and to realign incentives by focusing on rewarding 
actions that add value to our shareholders.
    Today, after working to adhere to the strict guidelines of 
corporate governance, we have restored investor confidence and 
investor trust. We have been able to refocus on our core 
strength, providing innovative products and technology to self-
directed investors.
    Our implementation of Sarbanes-Oxley 404 has progressed 
very well, although the process has not been painless. The 
value we have received from documentation and testing has 
reinforced management's understanding of accountability for 
processes and financial reporting across the entire company. It 
has helped us identify where those processes were deficient or 
inadequate, and we have designed the necessary improvements to 
correct those inadequacies.
    E*TRADE commends the committee for reviewing the Sarbanes-
Oxley Act. We would urge you to resist any wholesale changes to 
the law. No one can fully predict the consequences of a new law 
until enough time has passed to determine whether it is working 
as Congress intended. Our management team and our board 
strongly believe that good corporate governance is a key 
contributor to shareholder value. The time and effort our 
management and board has taken to comply with Sarbanes-Oxley 
has fostered a vigorous, yet healthy internal debate over the 
company's direction and how to deliver innovative products to 
our customers, further adding value to our shareholders.
    The changes we have implemented reflect the company's 
transition from a dot com organization into today a mature 
financial services business. It allows us to focus once again 
on our business of bringing the best new innovative products 
and technology to our customers, such as our rebate program for 
12b-1 fees and our mortgage on the move product.
    Thank you for the opportunity to testify. I would be happy 
to answer any questions.
    [The prepared statement of Mitchell H. Caplan can be found 
on page 49 in the appendix.]
    The Chairman. Thank you, Mr. Caplan.
    Mr. Hills, welcome back.

 STATEMENT OF HON. RODERICK M. HILLS, FORMER SEC CHAIRMAN AND 
                      WHITE HOUSE COUNSEL

    Mr. Hills. Thank you, Mr. Chairman and members of the 
committee.
    I would like to offer you the perspective of spending 32 
years working with 18 audit committees and chairing 10 of them. 
I suppose the first thing I would say is that as the Enron 
scandal fades from memory, it is fairly natural that a whole 
lot of complaints about the act might spring up. It costs too 
much, say many people. Thousands of honorably run companies 
should not have to bear the burden caused by a dozen bad 
companies. Board members and audit committee members have been 
forced to do much more than they can do. And by the way, some 
say the public did not really demand this legislation anyway.
    The fact is that something was badly broken and it needed 
fixing. A corporate system, a system of corporate governance 
that was crafted by the SEC back in the middle 1970s had run 
out of gas. Back then, there were hundreds of American 
companies, U.S.-based companies that had off-the-books bank 
accounts, secret bank accounts where monies were disbursed 
without oversight. Much of that money was used to pay bribes.
    The SEC took three steps. It mandated internal controls. It 
required external auditors to bring anything of a suspicious 
nature to the attention of somebody independent of suspicion, 
and persuaded the New York Stock Exchange to require 
independent audit committees.
    Why did that run out of gas? Well, today a quarter of a 
century later, we have a knowledge-based economy whose assets 
are determined in large part by the judgments, the assumptions, 
the estimates made by management, with some oversight by the 
auditors. It is not the bricks and mortar economy of the past, 
where historical costs were used to fix those values. So 
management today has had much greater discretion in fixing the 
values used in their financial statements.
    As management became more innovative in developing their 
values, the FASB, the Financial Accounting Standards Board, 
created ever more complex accounting standards and even more 
complex interpretations of those standards. Accountants to some 
degree became rule-checkers and to a large extent the basic 
audit became a commodity. The growing maze of rules became a 
magnet for the fertile minds of lawyers, bankers and 
consultants who created these complex corporate structures that 
wended their way through the maze of rules, satisfying maybe 
the letter of the rules, but certainly not the spirit.
    Audit committees were passive during that period. Auditors 
did not sit down with the audit committees and explain the 
alternatives that were available to management in constructing 
a financial statement. The audit committees did not play a 
meaningful role in selecting the auditor or selecting the 
engagement partner, or in fixing the audit fees except in those 
rare occasions where they suggested the fee be lowered by 5 
percent.
    They did not, in short, take charge of the audit. The 
auditors for the most part knew that and did not expect to be 
protected from management were they to begin disagreeing with 
the estimates, assumptions and judgments made by management. A 
substantial number of companies took advantage of those 
circumstances and intentionally manipulated their financial 
statements. An even larger number, probably acting in good 
faith, regularly presented a more optimistic view of their 
financial statement than a realistic appraisal would have 
called for, simply because the rules allowed them to be that 
optimistic.
    So the question is, will the Sarbanes-Oxley Act fix that? 
In one sense, the act really rejuvenated the three ideas of the 
SEC in the middle 1970s. Section 404 surely puts strength into 
the notion that there must be internal controls. The Public 
Company Accounting Oversight Board puts enormous teeth into the 
notion that the auditors have a responsibility to come forward 
when something is wrong, when something is suspicious. Of 
course, the act institutionalizes the independent audit 
committee that was created by the New York Stock Exchange.
    It has already had a substantial benefit. Auditors now sit 
down with the audit committees and say, by the way, here are 
the other alternatives that were available to management. The 
audit committee really must take a look at those alternatives 
and conclude that the way management did it was fair. If the 
act had been in place, I sincerely believe that Enron and Waste 
Management, two serious cases, would never have occurred.
    In addition, the act says in no uncertain terms the audit 
committee is responsible for the hiring and the firing of the 
auditors. It has already had a substantial impact. For one 
thing, the chief financial officers do not get asked to play 
golf by the engagement partner anymore.
    [Laughter.]
    Will 404 cost too much? The danger here is that companies 
will treat 404 as a kind of compliance tax, a word used by 
Ernst & Young in a publication recently, a bureaucratic 
requirement of no practical value. Just as too many companies 
have treated the audit as a commodity, 404 can be an expensive 
appendage if companies do not understand that it can be used 
and have positive effects. Ernst & Young recently noted that 
there are a number of companies that believe their investments 
in rule 404 can have a meaningful return on that investment. 
That is my experience and that is the experience of the several 
chief accounting officers with whom I have spoken in the last 
couple of weeks. The point is that companies can realize 
substantial value of the 404 effort if they utilize it as a 
management tool.
    The most persistent and legitimate complaint about 404 
relates to timing. A lot of companies just did not understand 
the degree of change that was necessary. When they came to 
understand it, they could not find the talent in the accounting 
firms needed to complete it. The SEC I hope will give 
consideration to this problem and where important and 
necessary, give some extension. That is an issue that I think 
should be of particular interest to this committee. The 
problem, of course, is particularly severe with respect to the 
smaller companies.
    Is the burden on directors too great? As Mr. Quigley said, 
the audit committee members certainly must better understand 
their responsibility, their job. They have to spend more time 
at it with more meetings. But the notion that some impossible 
burden has been created is just not correct. Audit committees 
need to establish firm control over the external and internal 
auditors. They have to select their candidates and they have to 
take charge of the fee negotiations. In particular, they must 
pay far more attention to the selection, retention and 
compensation of the internal auditor. If they take those steps, 
they will have a large, competent and experienced staff that 
will keep them well informed of all their responsibilities as 
members of the audit committee.
    One final comment, concern has been expressed, particularly 
by Peter Wallison of the American Enterprise Institute. He 
expresses a fear that the SEC and the PCAOB will use the act to 
insist upon strict adherence to existing accounting standards 
and will therefore preserve that maze of rules that contributed 
to the accounting problems of recent years. I hope not. Both 
agencies should take note of the growing body of thought today 
that seeks fewer accounting rules and more judgment to be used 
in the constructing of financial statements.
    I have attached to my testimony a copy of a report done by 
an unusually experienced group of professionals with respect to 
the accounting profession called the Future of the Accounting 
Profession. It discusses this problem at length and then it 
endorses a theme the Chairman may have heard me use before, 
expressed by Economist magazine, that warns us not to continue 
to rely upon the brittle illusion of accounting exactitude 
which tends to collapse in periods of economic strain. I very 
much hope that this committee would accept that theme.
    Thank you.
    [The prepared statement of Hon. Roderick M. Hills can be 
found on page 67 in the appendix.]
    The Chairman. Thank you, Mr. Hills.
    Mr. Del Raso, welcome back to the committee. I think you 
were here 2 years ago.

 STATEMENT OF JOSEPH DEL V. RASO, PARTNER, PEPPER HAMILTON LLP

    Mr. Del Raso. Yes, I was. Thank you.
    Good morning, Chairman Oxley and distinguished members of 
the committee. Thank you for this opportunity to present my 
views on the impact of the Sarbanes-Oxley Act over the last 2 
years.
    I am Joseph Del Raso, a partner in the law firm of Pepper 
Hamilton, LLP. My practice focuses on corporate and securities 
matters, particularly matters related to securities regulation. 
I served as an attorney-adviser with the Securities and 
Exchange Commission in the 1980s and I have served as a member 
of the board of directors of both public and private companies. 
Having experience on the regulatory side, as a lawyer in 
private practice, and as a corporate board member, I believe I 
offer the committee an important perspective on the practical 
effect of the Sarbanes-Oxley Act over the last 2 years.
    Overall, I believe the impact has been a positive one. 
While there are costs, in some cases material costs, and 
occasionally perceived regulatory overkill associated with the 
implementation of the act, it has done much to restore the 
faith of investors in the way in which public companies operate 
and report financial results.
    Just as importantly, it has helped give directors and 
corporate officers the tool they need to meet their obligations 
and be accountable to shareholders. I commend the committee for 
its levelheaded and responsible approach to this act.
    On the topic of positive changes. I would first like to 
address the positive impact of the Sarbanes-Oxley Act on 
domestic issuers. The act has increased the awareness of the 
need for corporate accountability and transparency and given 
greater attention to best practices in corporate governance. It 
has prompted procedures to establish internal controls to 
ensure compliance. It has highlighted the need to take prompt 
remedial action when problems are uncovered in order to 
reassure the global markets of the safety and integrity of our 
capital markets in those issuers who access them.
    It has increased the protection of shareholder interests, 
thereby increasing shareholder confidence. It has highlighted 
the need for improved risk management and should produce the 
long-term effect of mitigating the costs of insurance, 
indemnities and potentially large awards, including punitive 
damages and governmental fines for systemic failure of the 
corporate entity. It has increased attention to the need for 
accountability directly to shareholders in matters of corporate 
governance.
    On the topic of costs and the perception of regulatory 
overkill, the implementation of the Sarbanes-Oxley Act has not 
entirely been a bed of roses for some. The costs of compliance 
often can be burdensome. Reviewing internal financial controls, 
improving those mechanisms when necessary, and ensuring that 
the processes are well documented is time consuming and costly, 
in some cases, costing companies millions of dollars and 
thousands of hours annually. However, I believe that what 
corporate officers and directors need to keep in mind is that 
the cost of compliance is not nearly as burdensome as the cost 
of failing to comply.
    What was at risk in 2002? What this act was designed to 
prevent was the threatened loss of confidence by investors 
throughout the world in our capital markets. That loss of 
confidence does not just affect companies with poor corporate 
governance or negligent or outright criminal leadership. Good 
companies as well as bad and millions of investors suffer the 
consequences when people lose faith in how companies operate 
and result their results.
    I look at the costs associated with compliance as a 
necessary and prudent investment in the long-term stability and 
success of our capital markets. However, we must be careful not 
to stifle entrepreneurship and capital formation for emerging 
businesses. The initiatives of the SEC in the early 1980s to 
adopt rules to allow smaller companies's access to the public 
capital markets produced very positive outcomes. Some may argue 
that smaller issuers may not be suited for public ownership if 
they cannot afford the cost of Sarbanes-Oxley compliance. But 
that is not the appropriate focus. We should always encourage 
small businesses to grow and not overburden them with intrusive 
regulation.
    On the other hand, we have learned that an environment of 
careless behavior and lack of respect for both the investor and 
the government's oversight and regulation produces nothing but 
financial and societal losses. We must balance the need for 
entrepreneurial freedom and reasonable government oversight, 
and for that reason it may be necessary to revisit and fine-
tune this legislation from time to time.
    I urge this committee as it examines future regulatory 
actions to be careful not to overburden the average issuer with 
overzealous enforcement and unreasonable intervention, to not 
pile on with additional regulations that make compliance more 
difficult, that are simply not practical. Further regulatory 
action should be adopted only after a thorough analysis shows 
that the benefits of the new regulations outweigh the risks 
that will make compliance overly burdensome on the average 
issuer.
    Overzealous regulatory action and enforcement can also 
poison the atmosphere between regulators and industry and 
stifle the discipline and sense of cooperation between the 
government and those it regulates. The vast majority of 
corporate officers and directors act ethically and take their 
fiduciary responsibilities seriously and will welcome 
legislation, regulation and guidance that helps them meet their 
obligations to shareholders. However, when the regulators and 
the regulated find themselves in a constant adversarial 
atmosphere, the spirit of compliance and good corporate 
citizenship may erode into one of combat mentality. Operating 
in that environment is not consistent with our democratic 
traditions of creativity and free enterprise.
    In the area of corporate governance, the impact of 
Sarbanes-Oxley has been profound. Independent directors are 
exercising their responsibilities and paying much more 
attention to detail. I can tell you from personal experience 
that board meetings are longer and have much broader agendas. 
Audit committees are meeting more frequently and are increasing 
the number of executive sessions with auditors. Special 
committees, especially those charged with internal 
investigations, are moving very quickly when troubling matters 
surface. No longer are independent directors satisfied with the 
assurances of management that everything is in order, or worse, 
sweeping corporate problems under the rug.
    The act has also increased shareholder activism. In 
general, this may be viewed as a good thing. Boards need to be 
careful not to confuse, though, the political and social 
agendas of shareholder initiatives with their obligations to 
meet the goals of the majority of shareholders and to adhere to 
best practices.
    Impact on global markets. I would like to particularly note 
that the impact of the Sarbanes-Oxley Act on the global 
financial markets. When first enacted into law, this 
legislation was met with some trepidation by foreign issuers. 
In speaking with foreign diplomats and issuers, I was impressed 
with their positive reaction to the responses of our regulators 
in this area. The SEC in particular worked quickly and 
effectively to harmonize the effective compliance with the 
special concerns of foreign issuers.
    I had the opportunity last March to organize a symposium 
related to this topic in Italy at the American University of 
Rome. The participants included high-level securities 
regulators and issuers from several foreign countries. The 
consensus of the participants was to America's credit, when 
faced with the severity of a crisis such as the corporate 
scandals of 2002, we are quick to react and remedy situations. 
The swiftness both in prosecution and in legislation reassured 
the global markets that America was serious about protecting 
the interests of all investors.
    It is also interesting to note that issuers who sought to 
bypass their Sarbanes-Oxley responsibilities by listing on 
foreign exchanges have not been able to find much relief. For 
example, regulatory requirements for listing companies on the 
exchange in London have also been intensified.
    Long-term effects. Returning for a moment to the cost of 
compliance, I would offer one more comment. I view the cost of 
implementing compliance systems as similar to that of 
installing fire protection systems in buildings. While it may 
be cheaper to build an office building without sprinklers, in 
the long run the increased costs of insurance would likely 
outweigh the initial savings. More to the point, if a fire 
starts to smolder, it can either be quickly extinguished with 
little loss when the alarm is tripped if the building is so 
equipped with an effective fire protection system, or ignite 
into a raging inferno that consumes the entire edifice. The 
corporate entity is no different. Early detection and action is 
obviously preferred to the risk of a catastrophic loss.
    I have also noticed an increased interest in developing 
programs to educate officers and directors. Professional firms, 
and more importantly academic institutions, have already 
designed and offered to support corporate directors and 
executives in these areas.
    In conclusion, Mr. Chairman and distinguished members of 
this committee, thank you again for the opportunity to testify 
on the impact of this important piece of legislation. Much of 
the commentary after the passage of the act called it the most 
sweeping securities reform since the passage of the exchange 
acts of 70 years ago. I believe that is true. No law can 
completely prevent scandals such as the collapse of Enron, 
WorldCom and Global Crossing. In the end, you cannot legislate 
personal character and morality. But I strongly believe that 
the Sarbanes-Oxley Act has reduced the risk of such scandals. 
Like many corporate officers, directors and professionals, they 
may not agree with or like every aspect of this legislation, 
but if it continues to have the desired effect, the ongoing 
restoration of public confidence in the capital markets, then 
the Sarbanes-Oxley Act has indeed met its objectives.
    [The prepared statement of Joseph V. Del Raso can be found 
on page 61 in the appendix.]
    The Chairman. Thank you, Mr. Del Raso.
    Mr. Trumka?

  STATEMENT OF RICHARD L. TRUMKA, SECRETARY-TREASURER, AFL-CIO

    Mr. Trumka. Good morning, Mr. Chairman and members of the 
committee.
    Two years after its enactment, the Sarbanes-Oxley Act 
remains an outstanding example of government acting in the 
public interest. While the work of reform remains unfinished, 
America's retirement savings are substantially more secure 
today because of Sarbanes-Oxley. Both Houses of Congress and 
both sides of the aisle have reason to be proud of this act.
    Working families's retirement security is, in large part, 
dependent on the integrity of our capital markets. We estimate 
that union members' pension funds lost over $35 billion in 
Enron and WorldCom alone. But for those with the bad luck to 
work directly for those companies and other problem companies, 
the consequences were far more serious: lost jobs, lost health 
care, and for many the complete loss of their 401(k) retirement 
savings invested at the urging of their employer in what 
ultimately became worthless company stock.
    So we are particularly pleased that the Sarbanes-Oxley Act 
addressed many of the systematic issues that we had urged this 
committee and the SEC to address in our December 2001 testimony 
on Enron's collapse, issues like auditor and director 
independence. But the success of Sarbanes-Oxley stems not only 
from its specific provisions, but also from the tone it set and 
the message that it sent. Since its enactment, the act has been 
impressively augmented by the work of the SEC, the Public 
Company Accounting Oversight Board that the act created, the 
New York Stock Exchange and the NASDAQ and the work of state 
attorneys general, most notably Eliot Spitzer of New York.
    Equally important, the message was heard in corporate 
boardrooms across the country. In the two proxy seasons since 
the act's enactment, investors themselves have pushed companies 
to have truly independent boards to rein in executive pay and 
to manage their audit process more effectively. The AFL-CIO is 
very proud of the role that unions and worker pension funds 
have played in the efforts by sponsoring over 360 such 
proposals, 48 of which received majority votes at company 
annual meetings.
    Of course, Sarbanes-Oxley has its critics. Some companies 
seem unhappy with the act's requirement in Section 404 that 
companies strengthen their internal controls. There is no 
question that compliance with Sarbanes-Oxley imposes costs on 
American business. But there is ample evidence that these costs 
are far less than the alternative costs of more Enrons and 
WorldComs, evidence cited in more detail in my written 
testimony.
    Recently, Senator Sarbanes noted that the job is not done. 
One could conclude this simply by looking at the data on the 
one issue of financial statement integrity. Last year, a record 
206 public companies revised their annual financial statements 
according to preliminary figures compiled by the Hudson 
Consulting Group. And PCAOB Board Chairman William McDonough 
announced last month that his examiners are still finding 
significant problems with auditor compliance.
    But there is a deeper sense in which corporate reform is an 
unfinished task, Mr. Chairman. We believe the underlying causes 
of the corporate governance crisis lie in the weakness of 
corporate boards and the short-term orientation of public 
company CEOs. As long as CEOs completely dominate the selection 
process for company directors, we simply will not see at 
problem companies the kind of vigorous independent boards that 
we need and that Sarbanes-Oxley called for.
    The SEC has proposed to address this problem by giving 
long-term investors with a substantial stake in public 
companies the right to have their board nominees included on 
management's proxy. The commission's proposed rule on proxy 
access is an example of real bipartisan leadership. It has 
received more public comment than any other proposal in the 
commission's history, over 14,000 comments, with the 
overwhelming majority supporting the Commission's rule.
    Second, investors still have inadequate disclosure of the 
facts on executive pay and the financial impact of that pay on 
the companies that award it. The most important step in this 
area is the proposal by the Financial Accounting Standards 
Board for mandatory stock option expensing. Executive stock 
options reward short-term decision-making and, as Enron 
painfully demonstrated, encourage stock price manipulation 
through creative and even fraudulent accounting. They should 
not be subsidized by dishonest accounting rules. Yet we 
believe, in our opinion, the House bill that passed on Tuesday 
truly attacks the integrity of our financial accounting system.
    It appears that the battle against option expensing is 
being waged on behalf of CEOs with option mega-grants who 
frankly want to hide the true costs of their compensation from 
their shareholders and would-be investors. According to SEC 
filings, the CEOs of the 11 public companies who are the 
members of the International Employee Stock Option Coalition 
hold on paper a combined $977 million in unexercised stock 
options. The CEOs are going against the express wishes of their 
shareholders. In 2003, a majority of shareholders at 30 
companies voted for stock option expensing. So far this year, 
shareholders at Hewlett-Packard, Intel, PeopleSoft and Texas 
Instruments have done the same. Clearly, as reform efforts get 
closer to the heart of what is going wrong in the corporate 
governance system, resistance from the CEO community will 
intensify.
    However, only by truly creating transparency and 
accountability in the boardroom can the underlying dynamics 
that brought us Enron and WorldCom be addressed and the 
purposes of Sarbanes-Oxley be fulfilled.
    Let me conclude, Mr. Chairman, by expressing my deepest 
appreciation to the committee on behalf of the working families 
of the AFL-CIO for not only inviting the AFL-CIO to appear 
today, but for the actions you have taken in making the 
pensions of America's working people more secure.
    Thank you, Mr. Chairman.
    [The prepared statement of Richard L. Trumka can be found 
on page 137 in the appendix.]
    The Chairman. Thank you, Mr. Trumka. I do not often get 
that kind of praise from the AFL-CIO. We are recording this.
    [Laughter.]
    Before I begin the questions, I just want to comment. This 
is almost the 2-year anniversary now of passage and signing of 
the Sarbanes-Oxley Act. A lot of folks in this room truly made 
it happen. This was a classic example, I think, of bipartisan 
legislation where we faced up to a very severe loss of 
confidence in our capital markets, something that I had not 
seen certainly in my lifetime. Our committee was the first 
committee to hold a hearing on the Enron situation. That was 
back in December of 2001. That process began with a bill that 
we introduced early the next year, 2002, that we called the 
Corporate Accountability and Responsibility and Transparency 
Act, CARTA.
    Ultimately, that was the vehicle that this committee 
ultimately passed out by a better than three-to-one margin, and 
then took to the floor a few weeks later with virtually the 
same success on the floor, with over a three-to-one margin, 
which I think made all of us on the committee quite proud. I 
want to say to my colleagues that were participants in that it 
was one of the best experiences I have had as a legislator here 
in my 23 years. I think all of us who had a part in that can 
look back with a great deal of pride. All of you gentlemen were 
quite praiseworthy and we really do appreciate it. It was, I 
think, in the best tradition of legislating and hopefully doing 
it right.
    Let me begin with Mr. Hills, who has been here before, and 
he has been Chairman of the SEC. He has been around the block. 
He served on boards. We could not have a better witness than 
Rod Hills. I get a lot of questions, particularly regarding 404 
and the costs. The questioner is always careful to couch it in 
rather benign terms, but the fact is that there are, 
particularly among smaller and medium-size companies some 
concerns about costs. I have had some very interesting 
discussions with corporate CEOs who at least have entertained 
the thought of going private. Some actually have, although I 
think it is a relatively small number, about the same number 
probably of European companies that threatened to de-list after 
passage of the act.
    Let me ask you this. Did we give enough flexibility to the 
PCAOB and the SEC to try to ameliorate some of those costs with 
small-and medium-size companies? Or is that something that 
perhaps we need to study further?
    Mr. Hills. Mr. Chairman, I believe that there is enough 
flexibility. Just as we have to learn how the act works, we 
have to learn what the flexibility is. There are a couple of 
issues that could be dealt with. There is a particularly sore 
point between the requirement that the external audit attest to 
the efficacy of the work done internally. In a sense, there is 
a feeling that you have to do it twice. So the company gets an 
external consultant, usually one of the big four. They already 
have a big four company as an external auditor, and then they 
have the internal auditor do the work. So there is a hesitancy 
in these organizations to give the attestation that people 
want.
    My own sense is that it is working out, that the external 
auditors are relaxing a little bit and see that the internal 
auditors are doing a pretty good job in creating systems. I do 
think that when we finish this season, that it may be possible 
for the PCAOB to see that some relaxation is possible. I am 
really quite convinced that more and more companies are 
understanding this can be a management tool.
    I have watched the headlines, as you have, from some of the 
more prominent critics of the act. I have called their chief 
financial officers to say, well, is it really as bad as your 
CEO said? On most occasions, I have found that the audit 
committee of that company has been told by the chief financial 
officer, well, there are some problems with it, but there 
really are very positive aspects to 404.
    So the question is a good one. I think that this committee 
should ask it. I am quite confident that both Chairman 
Donaldson and Chairman McDonough both understand that there may 
be some flexibility, some adjustment needed. But I am quite 
satisfied there is the capacity to do that.
    The Chairman. Thank you.
    I would like to ask each one of you to comment if you would 
like. One of the provisions that was added in the other body 
that was retained in the conference report, which I had some 
real concerns about, was the whole issue of corporate loans and 
how they would be addressed. I have heard some legitimate 
criticisms about that particular provision, how difficult it is 
in terms of moving expenses for officers of the corporation, 
that kind of thing, insurance coverage and everything. Is that 
a legitimate concern? If so, are there ways that we can deal 
with that problem to make it work?
    I think everybody understood the reason for that provision 
being added in the Senate because it was during the WorldCom 
meltdown, and this committee had a hearing with Bernie Ebbers 
and the top people from WorldCom, who took the Fifth, so they 
were not much help. But the fact is that in this case Bernie 
Ebbers had gotten a $400 million loan from the board and the 
amendment that was offered by Senator Schumer I think was going 
at that issue, that abuse, which is understandable. My sense is 
it might have gone beyond just that, and included a lot more in 
that. I just wonder if we could start with Mr. Quigley and just 
go down the panel as to what kind of reaction you have.
    Mr. Quigley. I think that perhaps that is one example where 
we want to try to swing the pendulum, moving from do not loan 
$450 million to Bernie Ebbers, to do not loan anyone a penny 
for any purpose, perhaps is going too far. There are legitimate 
business purposes where you are trying to relocate an executive 
and it is very customary to be able to provide some form of an 
advance to pay the costs associated with that relocation, which 
is then repaid by the executive at the time that the relocation 
is completed.
    But I think some moderation with respect to that provision 
would be prudent, and it would facilitate business in the 
ordinary course. I think we can still have prohibited the 
abusive practices that that provision was intended to shut 
down.
    The Chairman. Thank you.
    Mr. Caplan?
    Mr. Caplan. Mr. Chairman, I would tell you at the time that 
Sarbanes-Oxley was passed, our company was dealing with that. 
We had an extraordinary number of loans outstanding to our 
executives for a variety of reasons. We have chosen to actually 
shut down the process entirely. We are of the view that it is 
just not appropriate and that, frankly, if we need to recruit 
somebody who needs compensation for the move, we pay it like we 
would pay for anybody else. It is part of their compensation 
and we report it accordingly. So we are actually quite 
comfortable with it. I think it is easier to adhere going 
forward to not have any of these loans.
    Mr. Hills. I think there are probably two or three 
different problems here. One is that understandably law firms 
give very broad opinions about what you can and cannot do, and 
law firms are very careful never to be wrong, so I do believe 
they have pulled the noose too tight. Company credit cards are 
now coming under fire because the theory is that if I have 
taken a trip and charged it on my credit card, I might have had 
my suit pressed. The hotel bill may have been legitimate, but 
my suit press was an advance or a loan. So some of that can be 
taken care of just by, I would think, the SEC's general counsel 
could issue a few statements and you could get there.
    I am in agreement with Mr. Caplan's comment. In 1970, I 
became the accidental chairman of Republic Pictures. The first 
thing I found was that the stock had gone from $80 to $2. The 
top five executives of the company had borrowed over $8 million 
from the bank for themselves using their stock as collateral. 
That was just the practice throughout America, that you got to 
be rich, you got your stock blown up pretty high, you borrowed 
money against it, the collateral was the stock, and the bank 
that loaned the company money loaned you the money. And it was 
a disaster.
    So saying you cannot do it is a pretty good rule. Chances 
are that if a year from now the chances are that it will sort 
out and there may be very well something that this Congress 
should do to open it up a little bit. But right now, I think it 
is sweating out some very serious problems.
    Mr. Del Raso. As the lawyer speaking, we are very careful 
about the opinions we give out. I would say that anecdotally 
you will hear a lot of these stories, but the example we used 
at our firm was, if you are traveling on business and you watch 
pay-for-view, which is not reimbursable, you have taken an 
impermissible loan from the company. That is where the pendulum 
I think may have swung too far.
    But I think the real core of the problem was the example of 
the employee relocation. Reasonable and customary expenses of 
operating the corporation that either if expensed out as 
compensation or advanced as a loan, were much different than 
its senior executives using the company's bank lines as their 
margin account. The problem developed with large fortunes being 
built up in the company's stock, a reluctance to realize those 
gains either to pay tax or to not depress the value of the 
stock in the market, and ultimately leverage works well when it 
is working, and it is catastrophic when it does not.
    I think that is where the idea of some type of safe harbor 
guidance Q&A from the SEC would help to distinguish 
appropriate, and especially, I do not want to call them de 
minimus, but more in the ordinary course of loans for a broader 
group of employees than just, again, using the company's bank 
account as your own margin account for your stock holdings.
    Mr. Trumka. Yes, Mr. Chairman, we support the existing 
rule. First of all, we think that there is no way to start 
policing exceptions to the rule as they start coming up. They 
may be well intentioned at the beginning, but they quickly get 
out of hand. We think that corporate reform is only starting to 
take root right now, and it would send the wrong message to 
change that provision at this time.
    The Chairman. Thank you. My time has long expired. We 
appreciate your patience.
    We are going to recognize the members in order of 
appearance. The first questioner is the gentleman from Texas, 
Mr. Bell.
    Mr. Bell. Thank you very much, Mr. Chairman. I greatly 
appreciate the testimony offered here today, coming from 
Houston which offered the world the poster child for bad 
corporate behavior. Obviously, we were glad to see the 
legislation and I am glad to hear what you all had to say about 
it today, in that it seems to be having a positive effect.
    I do think going forward you have to look at it and see if 
there is any room for change and look at perhaps some of the 
negative effects. One thing that I have heard, and Mr. Del Raso 
I will start with you, and perhaps you have either from clients 
or from your own personal experience, some smaller 
corporations, some smaller businesses having difficulty finding 
qualified people to now serve on boards because of the 
heightened liability and the fears associated with that 
increased liability. I am curious as to whether you have heard 
anything like that, and if you believe that it is a problem 
that needs to be addressed.
    Mr. Del Raso. It was especially a concern with the passage 
of the legislation. I think it still is a concern because 
qualified individuals who would be willing to take a corporate 
board directorship are going to be a lot more careful about 
where they want to get involved. The downside to that is if you 
have a situation where an emerging business is seeking public 
access to the markets, new technology initiatives or what have 
you, are these people who really should serve there, too, as 
the stewards of the corporation going to be willing to step up 
and take that risk? Because as we all know, the chances for a 
problem in the smaller startup companies traditionally were 
thought to outweigh those of the larger, more seasoned 
companies. In a number of areas we were proven wrong, though, 
in the last few years because some very large perceived deep 
companies had their problems.
    So I think that that is a problem. But the one thing I 
would point out is, again, we need the long-term approach. I 
think we are seeing now a swing in insurance rates for director 
and officer liability insurance, which was just reported in the 
last couple of weeks. From a risk management underwriting 
standpoint, I think the more these best practices and these 
safeguards are in place, we may find that with the perception 
that the catastrophic litigation occurs, those losses, either 
in derivative suits against the directors directly are actions 
that could really damage the corporation. We may find that this 
legislation may mitigate that, and you will see then a return 
of people more willing to step up to those positions.
    Mr. Bell. Mr. Hills, do you have any thoughts on that?
    Mr. Hills. I do. It is an extremely good question. For 
about 60 years or so, directors were brought on board for their 
resumes, not their knowledge. What has happened in these recent 
years, both because of Sarbanes-Oxley and because the New York 
Stock Exchange has stepped up to the question of governance 
committees is that corporate boards are trying to decide what 
they need on a board. All of a sudden, the incentives of our 
capitalistic world work, all the headhunting firms have hired 
all kinds of people, but look much deeper for candidates.
    What you have now is a way better quality of person being 
considered for boards, not people you may have read about in a 
headline, but scientists, doctors, professors who have real 
experience. So you have a growing body of people with the 
background that should be on these boards. It is an adjustment, 
as Mr. Del Raso said. We are going through an adjustment 
period, but there is a body of people coming forward as 
candidates for boards way better and way bigger than we have 
ever seen before.
    Mr. Bell. And a willingness to serve by those individuals?
    Mr. Hills. Yes. I have, sadly, had more trouble with 
companies than anybody would ever want to have, and I still see 
a willingness to step up. If quality is wanted on a board, 
people of quality will go on the board.
    Mr. Bell. So some of the individuals who may be refusing to 
serve would be of a lesser quality in some instances?
    Mr. Hills. I think this. I get asked a lot about whether 
they should go on a board. My answer is, who chose you? If 
there is an intelligent governance committee that is really 
working the problem to find a competent board, then it is a way 
better board to serve on. If you are there at the whim of the 
CEO, even a good CEO who played golf last weekend with somebody 
and would like that person on the board, then it is probably 
not a good board to serve on.
    Mr. Bell. Mr. Quigley, I was going to ask you. In a recent 
poll, a slim majority of CPAs said management is more 
accountable because of Sarbanes-Oxley, but less than a quarter 
said shareholders are getting better information. Moreover, 
less than 10 percent said investors are making better 
decisions. In your opinion, why are the positive effects of 
Sarbanes-Oxley apparently not trickling down to those it was 
intended to protect in that particular instance?
    Mr. Quigley. I did not hear when you said ``more than.'' I 
just did not pick up your question exactly. If you would 
please, just one more time?
    Mr. Bell. Less than 10 percent said investors are making 
better decisions, and then only a slim majority of CPAs said 
management is more accountable because of Sarbanes-Oxley.
    Mr. Quigley. With respect to the majority about management 
being more accountable, I certainly would be strongly with that 
majority because I have watched the behavior change as the 
certification process has unfolded. I have watched how CEOs 
act. I have watched how those cascading representations move 
through the organization. I truly believe that management 
broadly, very, very deep in the organizations, understands the 
importance of transparent financial disclosures and those 
financial results. It is no longer the purview solely of 
financial management. I think that is very positive.
    In terms of the quality of investor decisions, I just do 
not have a comment on that element of the survey. I think the 
transparency and the completeness of the financial disclosures 
that are available to investors to consider as they make their 
investment decisions, it is absolutely there for them to take 
advantage of. If they choose not to, I cannot comment on that.
    Mr. Bell. Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The gentleman from Alabama, Mr. Bachus.
    Mr. Bachus. Thank you, Mr. Chairman.
    Mr. Chairman, my first question, well really I want to make 
a comment to Mr. Quigley. I want to commend the entire public 
accounting profession. I believe that public accounting has 
been really at the forefront of restoring public confidence in 
corporate governance and investor confidence in financial 
statements, in auditor independence and in internal controls. I 
would say that in response to that survey, I think that among 
knowledgeable people in the financial community, they believe 
that things are working much better.
    So my question is this. In your statement you talked about 
the PCAOB's oversight of public accounting. Have you had your 
inspection thus far?
    Mr. Quigley. First of all, as I mentioned in the testimony, 
the PCAOB is the new regulator for the accounting profession. 
After 100 years of self-regulation, we now have a new 
regulator. Last year, Deloitte along with the other big four 
firms voluntarily submitted to a preliminary inspection. We did 
that without it being required, even though we had just simply 
registered as a public accounting firm under the act. We were 
not at that point required to submit to that initial 
inspection. We, along with the other big four firms, 
voluntarily submitted to this preliminary initial inspection.
    Mr. Bachus. How did that inspection process work?
    Mr. Quigley. I believe it was healthy and helpful in terms 
of the visibility throughout our firm that our regulator was 
inspecting our performance on some selected engagements. We are 
in the process right now of reviewing a draft report from those 
initial preliminary investigations. Again, I think we are 
absolutely committed to improving audit quality. I think we are 
making progress and I believe that our new regulator, the 
PCAOB, is a very important catalyst in helping us continue to 
take these steps forward.
    Mr. Bachus. So I take it that the inspection process was, 
in your opinion, effective?
    Mr. Quigley. I think it was constructive and helpful and 
supplemented the existing internal inspection that we have 
ongoing every year within our firm. Now our first formal 
required inspection is currently under way. I have had my 
interview as the inspectors were reviewing and meeting with me, 
to assess the tone at the top of our organization. Again, I 
think they are an important, constructive catalyst to help hold 
us accountable and to continue our efforts at sustained 
improvements in audit quality.
    Mr. Bachus. If there anything about them that you would 
change?
    Mr. Quigley. I think it is just too early to tell right now 
at this point. I really believe and feel strongly that we have 
a shared responsibility to strengthen investor confidence and 
to improve trust and confidence that our capital markets 
require in order for them to be effective. I think there are 
obligations of the regulated, the accounting profession, and 
obligations of the regulator to work collaboratively with that 
goal in mind, improved trust and confidence. I think we are in 
the right direction right now.
    Mr. Bachus. Okay.
    Mr. Caplan, E*TRADE has extensively revamped its board 
structures, as you indicated. Has it been more difficult to 
find acceptable board members since Sarbanes-Oxley was enacted?
    Mr. Caplan. In fact, it has been easier. As a matter of 
course at the time at which we were revamping our board, quite 
frankly I had concerns about our ability to get really 
qualified new board members because of everything we had been 
through. Although we had no issues whatsoever from either a 
financial reporting or accounting irregularities perspective, 
we certainly had a lot of notoriety with respect to executive 
compensation.
    As we went through the process, the board worked very 
diligently on trying to determine who was missing from a skill 
set and what we needed to really round out the board exactly, 
as had been described before. In that process when we went out 
to look, we were able to find 40 qualified candidates. In fact, 
when we began we thought we would only add two new board 
members. As a result, we added four because there were so many 
really qualified candidates.
    Mr. Bachus. Okay.
    Mr. Trumka, there is a recent Harris poll of investors that 
said almost 60 percent, 59 percent found Sarbanes-Oxley would 
help them safeguard their investments. Actually, 57 percent of 
investors say they are unlikely to invest in a company not in 
compliance with the act. Is that basically your experience?
    Mr. Trumka. We are finding more and more investors looking 
to Sarbanes-Oxley as a guideline as the minimum that they do 
for investment. So the answer is yes, and I think you will see 
that percentage increase. Shareholders at existing companies 
are urging that, and many of the private companies that are not 
subject to Sarbanes-Oxley are now adopting it voluntarily. We 
think it made foreign investors, it makes things more 
transparent and more likely that, for instance, pensions funds 
that do their investing are likely to realize a gain and 
protect their beneficiaries.
    Mr. Bachus. Okay, thank you.
    Mr. Trumka. Thank you, sir.
    The Chairman. The gentleman's time has expired.
    The gentlelady from Oregon, Ms. Hooley.
    Ms. Hooley of Oregon. Thank you, Mr. Chair. I have a couple 
of questions.
    We have just heard from Representative Bell that said 10 
percent of investors feel they have more information as a 
result of Sarbanes-Oxley. That is not a very high percentage. 
Mr. Caplan, what other information might be useful for 
investors so that would not be terribly burdensome on 
companies? And what can all of us do to improve transparency in 
disclosure?
    Mr. Caplan. One of the things that we were challenged with 
as we began to go about improving corporate governance was a 
perception in the marketplace with both our investors and our 
analysts that we were not as transparent as we could be. So we 
have taken it upon ourselves not only in dealing with how we 
report in ours Q's and our A's, but also we do monthly 
reporting as to a lot of our key metrics in our business. When 
we do our quarter reporting as a public company, we have 
attached now our press release in terms of the information. It 
is about a half a page and we have about nine pages of 
additional information that we attach, really outlining all of 
the key drivers of our business and how we are succeeding or 
doing, both on a quarter-over-quarter basis and year-over-year 
basis.
    So I think it really is incumbent upon companies today to 
ensure that investors are getting timely information about the 
key drivers of their business and the success or failure 
thereof.
    Ms. Hooley of Oregon. I think it is really important that 
we make sure that investors have confidence in the companies. I 
do not think you can give them too much information. We need to 
raise that confidence level still now.
    Mr. Caplan. I agree.
    Ms. Hooley of Oregon. Mr. Quigley, what is your assessment 
of the future of the accounting profession? Has Sarbanes-Oxley 
changed that perception as a profession? Are you having success 
in recruiting people to the profession that have the kind of 
depth that we all count on in the accounting profession?
    Mr. Quigley. First of all, I am very optimistic about our 
future. I believe Sarbanes-Oxley has contributed in a very 
constructive way to the relationship that we enjoy with our key 
clients, and especially as has been discussed, this new client, 
the audit committee. We are finding on campuses very, very 
qualified candidates looking forward to the challenge of a 
career in public accounting and the increased visibility that 
the act has brought has contributed in a positive way to the 
quality of the students that are attracted to the profession, 
and I believe the career opportunities that we can provide for 
them. So we continue to be successful competing in the 
marketplace for experienced hires and also competing on 
campuses for the very best students.
    Ms. Hooley of Oregon. Thank you.
    Mr. Hills, I understand that a number of the provisions of 
the Sarbanes-Oxley Act are similar to requirements that are 
already applicable to banks. Are there increased compliance 
requirements for banks because of these dual layers of 
requirements? Are there significant costs associated with that 
requirement? And the second part of the question, many banks 
are not publicly held and therefore not subject to many of the 
Sarbanes-Oxley requirements. Are the bank regulators imposing 
those requirements on private banks?
    Mr. Hills. I can quickly tell you know more than I know.
    [Laughter.]
    The bank examiner's role is a different role than we have 
historically had in the publicly traded industries. I do not 
know anything significant by reason of Sarbanes-Oxley has 
affected that relationship. I think the question you raise, 
though, is kind of interesting both because of its own 
background and because of the nature of the Public Company 
Accounting Oversight Board. The Chairman Bill McDonough, was 
the President of the New York Fed. I think he is approaching 
the job not unlike the manner in which bank examiners approach 
the job, by going to the accounting firms and by looking at the 
high-risk audits to try to find the problems before they erupt, 
and in one sense of the word substitute prior examination for 
later enforcement.
    So having now ducked the question, I will leave it to 
somebody else to tell you just exactly what is happening.
    [Laughter.]
    Ms. Hooley of Oregon. Mr. Del Raso?
    Mr. Hills. I would like to add one more thing, though.
    Ms. Hooley of Oregon. Yes?
    Mr. Hills. In my written testimony, I added this report 
called The Future of the Accounting Profession. I surely would 
like more people to read it and I hope Mr. Quigley has read it. 
There is much to be said for the future of the accounting 
profession.
    Ms. Hooley of Oregon. Good.
    Mr. Del Raso, do you have anything to add to the question 
that I just asked?
    Mr. Del Raso. I would say that your observation, comparing 
the requirements for bank regulatory oversight at the 
governmental level, there are some similarities, but not all. 
When you work in the field of financial regulation, whether it 
is banks, investment companies, broker-dealer operations, you 
have much more of an aggressive government regulatory scheme 
within which they operate. Especially with banks, the review 
goes to safety and soundness, whereas general corporate issuers 
under our securities laws, both in the sale of and the 
secondary market trading of the securities, was mostly, it not 
primarily driving by a disclosure regimen. I think what 
happened was, when there was a failure of transparency, the 
disclosure failed, and that is what really impinged the 
markets.
    I do not think you really want to jump into a situation 
where you include industries that may not require the same 
level and type of regulation as others. But on the other hand, 
if you are out from under that very strict and careful 
regulation, then the mandate in this legislation is, if you are 
only in a disclosure regimen, make sure that transparency 
works.
    The Chairman. The gentlelady's time has expired.
    Ms. Hooley of Oregon. Thank you.
    The Chairman. The gentlelady from Illinois, Ms. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    My first question is for Mr. Hills. Do you see any 
perception or feeling in the corporate community that the 
improved practices of companies, like more frequent and 
lengthier meetings of the audit committees, are just a 
temporary effect and soon that the companies and their 
directors will let down their guard?
    Mr. Hills. I think here is always a possibility that people 
get bored sometimes with doing the same thing every year. But I 
think we have created a dynamic with the combination of not 
only the revitalization of the audit committee, but the 
extraordinary role now played by the governance nominating 
committees. This is a real change. We hope that 27 years later 
that audit committees will do now what Sarbanes-Oxley has told 
them to do. But the nominating committee and the governance 
committee is an extraordinarily vital forum. It will keep 
people on their feet.
    I think we are in good shape. There is a problem that 
people have mentioned, and that is with all these directors 
with all this new authority to do stuff with respect to 
compensation and governance, will they start exercising that 
with respect to the management of the business? Will they butt 
in where they really should butt out? That is a problem.
    As I say, if you sit down and all of a sudden you are 
really a powerful person with respect to the outside auditors 
and the compensation, you are hiring the compensation guy and 
you are hiring the outside auditors, the temptation is to go in 
and talk about the engineers and how to design something. So 
there is a bridge that still has to be crossed properly.
    Mrs. Biggert. It would be kind of like education, where we 
all think we know more than we do because we have been parents 
and been in school. Thank you.
    Mr. Del Raso, have there been complaints about the increase 
in insurance costs? I think you have said something about that, 
particularly for directors and officers insurance. You state in 
your testimony that one of the long-term effects of the act is 
that these costs, along with those of indemnity and fines will 
decrease. Can you elaborate a little bit more on that? I think 
it is a point that is not usually brought up in that matter.
    Mr. Del Raso. There was a real spike in premium costs, 
especially for business lines related to director and officer 
liability coverage issues and the like. Now, I think what we 
are going to see, in fact we even see some signs of it now that 
may be abating. The interesting thing about that is, too, I 
think from a risk-management standpoint, the more this 
legislation, is in effect, and again since insurance is written 
on experience, the experience shows that the system is working 
and the losses are not occurring, then the premiums will adjust 
accordingly.
    Quite interestingly, I was approached by the dean of a 
prominent Philadelphia-area business school who asked for some 
advice on structuring an academy for directors. He was going to 
start the program. I said one of the things he should really do 
is consult with the insurance industry because I think that if 
you actually have a formal program of continuing education for 
directors and they have an academic program for maintaining 
close touch with best practices, you may even find from an 
underwriting standpoint insurers will look at the broader 
picture of how that whole interplay takes place.
    Mrs. Biggert. Thank you.
    Mr. Caplan, in your testimony you have something about the 
signing of the certificates regarding internal controls and 
what your company does. Could you talk a little bit about what 
your senior management does for the certification? My other 
question is, could other companies be able to do what E*TRADE 
does?
    Mr. Caplan. Within the last year-and-a-half, we have 
actually put a couple of procedures in place. The first thing 
we did was we internally built our own financial disclosure 
committee. It has as its members the most senior of our 
financial employees in terms of the accounting department, as 
well as the internal audit department. So before every 
certification, that group meets independently to review all of 
the numbers and all of the reporting.
    Immediately thereafter, there is a meeting of the entire 
senior-level leadership team. At that meeting, we ask each of 
the senior leaders of the company who represent different 
business units to attest to their numbers as well, given the 
comfort that they have reviewed the numbers, as well as their 
corresponding financial partner in the company. And then only 
as a result of doing all of that do we actually then attest or 
sign, both myself as the CEO and also the CFO.
    What is interesting is that at that attestation process or 
certification process, we make it very clear to everybody in 
the finance department, as well as all the leaders of the 
company that they can or should consult with anybody in the 
organization, whether it is outside as the audit committee, 
whether it is our general counsel, whether it is our internal 
auditor, if they have any concerns whatsoever.
    The other thing that we have done is we have engaged an 
outside third party company to allow us, and have then 
broadcast it throughout the entire organization pretty 
regularly, that if any employee in our company is concerned in 
any way about anything going on from a financial perspective, 
they should call that number. It is totally anonymous and then 
gets reported to the audit committee. I think as a result of 
that, it has greatly enhanced the level of not only 
accountability, but also a willingness and an understanding 
that if there is a concern, they should speak up and express 
it.
    The Chairman. The gentlelady's time has expired.
    Mrs. Biggert. Thank you.
    The Chairman. The gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    Let me first thank the Chair for convening this hearing. As 
one who voted for the Sarbanes-Oxley bill out of committee, on 
the floor, and participated in the conference committee, it is 
always good to hear favorable results of something that we did. 
We do not get a chance to do that very often. I think sometimes 
we can also overdo patting ourselves on the back. I would like 
to raise a couple of questions that may be a little more 
forward-looking than patting ourselves on the back about how 
successful we have been in this legislation.
    Mr. Caplan and Mr. Trumka put their finger, or at least 
mentioned in their testimony, an issue that I think by public 
perception at least is a major, major concern, and that is 
rationalized executive pay, as Mr. Caplan referred to it, or 
excessive executive compensation. Most of my constituents when 
I talk to them liken, it is kind of a visceral response, but it 
is a public perception at least that athletes are overpaid and 
corporate executives are overpaid, and something needs to be 
done about that.
    So one question I would have, and I am going to pose both 
of these questions and then make you all go at them, whoever 
wants to address them. In your assessment, is there still a 
problem of irrational executive pay or excessive executive 
compensation? Is there some way to get a handle on this without 
doing it legislatively? Or is there some way to get a handle on 
it legislatively? That would be one question that I have, 
looking forward. Not that I am advocating anything, I would 
just like to get your perception about it.
    Second, obviously everybody on this panel thinks that 
Sarbanes-Oxley has been exceedingly successful in a number of 
areas. I would like for the panel members to identify 
additional steps beyond Sarbanes-Oxley, either legislatively or 
from a regulatory perspective, that we should be talking about, 
not necessarily implementing. But if you were to identify one 
thing that you perceive to be either still a public perception 
problem, by public perception, or a real problem that is still 
in play in this whole corporate governance or accounting 
process, what would that one problem still be? What ought this 
committee be talking about or thinking about or having hearings 
about going forward to try to address that one problem that you 
would identify?
    I will start with Mr. Trumka, since Mr. Quigley has been on 
the hot seat a lot today.
    Mr. Trumka. Thank you, sir. My answer succinctly to, is the 
excessive executive compensation problem still around? The 
answer is yes. It continues to grow. If you look at the CEO 
pay, it is still not long-term performance-based. It is still 
based on things like stock options. That, I think, is one of 
the reasons why we still need something done with expensing 
those stock options and reining in that pay, because once it 
becomes transparent, plus accountable----
    Mr. Watt. Be quick, if you can. I know these are two tough 
questions.
    Mr. Trumka. The second thing, if you asked me for one 
thing, I would say for long-term significant shareholders to 
have the right to nominate directors on management's proxy. The 
only way you get an independent board is for people to know on 
that board that there were two routes to get there: one by 
management, and then if you do a good job by the shareholders, 
the other one is if you do not do a good job, from the 
shareholders themselves.
    Mr. Watt. Mr. Del Raso?
    Mr. Del Raso. I would be very careful about legislation 
that tries to regulate executive compensation. I think the call 
went out after the problems in 2002. I can tell you that 
compensation committees of boards are paying very careful 
attention to compensation. I think we should let this 
legislation ride out longer. I think you are going to see that 
the long-term effects of it are going to be quite beneficial. 
But when the government gets in the business of regulating 
executive compensation, I think that is a slippery slope that 
we have to be really careful about.
    In the area also of expensing options, even though I do 
have a degree in accounting, I never practiced the way Mr. 
Quigley did, one question I have is and I think that has 
confronted a number of those of us who sit in the board room as 
opposed to the accounting experts, at a time when we are 
looking for clarity and transparency, I think the idea of 
attempting to expense an option when you are really trying to 
deal with a future value could be problematic without a very 
complex set of rules attached to it.
    Mr. Hills. The compensation committee, which is also new in 
2 years, has come to believe I think almost universally that it 
must have its own consultant, and that that consultant cannot 
really work for management. That is going to have a leavening 
effect, whether it is enough or not, I cannot tell you. There 
are enough speeches going on. There can be more speeches. 
Chairman Donaldson, Chairman McDonough, Chairman Oxley, all can 
make note of the fact that pay should be for performance. So we 
need a bully pulpit and we need the compensation committees to 
work.
    What should we do next? I will just keeping pushing my 
Future of the Accounting Profession. If you read that, you will 
see some thoughts that I would love to have any or all parts of 
this committee be interested in that subject.
    Mr. Caplan. Although it is hard for me to comment outside 
of my experience directly at our own company, I will tell you 
that certainly I have seen dramatic changes with respect to the 
board and specifically the compensation committee and how they 
look at executive pay. Very quickly, I will tell you in the 
past when we had our problem, the executive pay was set 
entirely by the compensation committee and the full board was 
unaware of it. Today, not only do all the leaders of the 
company deal with the compensation committee, but also the full 
board approves and endorses everything related to me and 
understands it.
    I would agree very much with Mr. Hills that the 
compensation committees are now looking for outside 
consultants. They are looking for guidance. They are taking 
their job very seriously. I think both management and comp 
committees at well-run companies are understanding it should be 
performance-linked.
    The change, I would tell you that it is probably most 
imperative, and I think it is happening anyway on its own, is 
that you need to rotate directors. At a certain age, directors 
need to leave. At a certain point in time, if they have been on 
the board long enough, they can become stale in terms of their 
efficacy. I think it is important to constantly get new talent.
    Mr. Hills. Not age-related.
    Mr. Caplan. No.
    Mr. Hills. Thank you.
    Mr. Caplan. No, age in terms of performance.
    Mr. Quigley. I would just very briefly say, I believe in 
the free market system and I believe in the transparency of the 
executive compensation that is there. I think shareholders have 
the opportunity to vote with their feet if they do not like the 
practices that they see. I think the governance processes are 
becoming increasingly effective, as has been stated. I think we 
ought to sustain that process.
    When I look forward for that future issue, one issue that I 
think needs more airing is just simply the enormous cost on our 
economy, certainly the enormous cost on our profession of the 
explosion of all of the litigation that is out there on every 
issue. That has an enormous cost and an enormous drag on this 
economy.
    The Chairman. The gentleman's time has expired.
    Mr. Watt. Mr. Chairman, I know my time is over, but I did 
want to make it clear that most of my constituents think that 
members of Congress are overpaid, too. So it is just not 
athletes and corporate executives. I did want to add that.
    The Chairman. That will be noted.
    [Laughter.]
    You must be talking about your own constituents.
    [Laughter.]
    The gentleman from the first state.
    Mr. Castle. Thank you, Mr. Chairman. If I am going to be 
overpaid, I would rather be overpaid like an athlete, rather 
than like a member of Congress, but that is all a different 
story.
    [Laughter.]
    I think this is a great panel. I say ``great panels'' when 
panels agree with what I am thinking, regardless of what you 
said, which is the case here. I am one who believes that 
Sarbanes-Oxley is extraordinarily important, and it may be an 
inconvenience, I am sure it is an inconvenience and expense for 
that matter to corporations in America, but the clarity and 
transparency that we have gotten from that makes it in my 
judgment abundantly worthwhile. I praise it greatly.
    I did hesitate a little bit on praising the panel, though, 
after Mr. Caplan's comment about the age-related circumstances 
of directors, because that can be translated to members of 
Congress as well. I am starting to get a little edgy about 
that. So I would just as soon keep that discussion down.
    Actually, I would like to go back to Mr. Caplan because in 
his written testimony he struck a chord with something I have 
introduced and am concerned about, which is a little bit 
different, Mr. Chairman, than the subject of the hearing 
directly, but it pertains. It pertains to what corporations are 
doing, and that is 12b-1 fees. It is something which actually 
until we prepared for this, I did not know about, that E*TRADE 
is doing, which is a 12b-1 fee rebate program. I have 
introduced legislation to eliminate 12b-1 fees for closed 
funds. If I thought I could get away with it, I would eliminate 
all 12b-1 fees, to be candid, but I do not think anybody would 
consider that right now, so I am trying to do it on a more 
limited basis.
    I think by the fact that E*TRADE is doing this, it shows 
that perhaps there is not a need for this. I think most of us 
here know that 12b-1 fees are in lieu basically of sales 
commissions. They were never structured to be that to begin 
with. They were put into place at a time when more advertising 
was needed for mutual funds. Now I think they are being used in 
a way that was unintended. I think it is frankly a burden to 
the shareholders. I think it comes to close to $10 billion a 
year now or something of that nature.
    So I am very pleased that you are doing this. But I 
understand that a number of the mutual fund companies you deal 
with have also dropped you, I guess, or listing E*TRADE as a 
result of that, which also bothers me somewhat. I would like 
your comments on the program in general, why you did it, why 
some are staying with it, why some are dropping out of it. I 
hope this is an area that evolves and gets changed over the 
next two or three years.
    Mr. Caplan. I think we agree with you very much. One of the 
things that we were quite pleased about is that in this past 
quarter, in the past three months we were able to give $1 
million back to our customers in connection with the 12b-1 
rebate. The premise, as I stated in my earlier comments, for 
E*TRADE and its core tenet was always just using technology to 
have a lower cost, and taking a significant portion of that 
cost savings in its operation and putting it back in the hands 
of customers, and trying to evolve itself as a customer 
champion.
    Earlier this year, we thought one of the interesting and 
dynamic ways to do that was to look at the fact that we have a 
lower cost platform and take those 12b-1 fees that we would be 
paid as a distributor and put 50 percent back in the hands of 
customers. We were actually quite hopeful when we did it that 
it would spur competition, and that you would see other 
distributors thinking about how they wanted to distribute, and 
really compete head-to-head with us.
    Mr. Castle. Has that happened?
    Mr. Caplan. In fact, we are a little disappointed that it 
has not. It is one of the things that has been most interesting 
about our core business, for example, on the brokerage side. As 
you have seen with online brokers, it has spurred competition 
and you have seen prices come down. To date, anecdotally I 
guess, we are disappointed because as we have had some fund 
families withdraw, we are hearing that they may feel pressured 
from other distributors. I think that disappoints us. We would 
be much happier if in fact there was a healthy competition out 
there which benefited each of us as businesses, as well as 
certainly the customers, by putting money back in their 
pockets.
    To your point, it is about $6 billion a year, and we would 
love to be able to give $3 billion back. So that has been our 
premise.
    Mr. Castle. Good. Do you do this with any funds? I mean, do 
you do it with closed funds as well as still open funds? You do 
not distinguish between the two?
    Mr. Caplan. No, we do not. Our view is that we are just 
operating as the intermediary, as a platform.
    Mr. Castle. Good.
    I will just close with this. I feel very strongly that if 
you look at mutual funds, and I think it is over 50 percent of 
Americans now are someway or another involved with mutual 
funds, there are just huge cost aspects to it. To the extent 
that anybody, be it a distributor of the mutual fund itself, 
the holders of mutual funds can somehow interact in such a way 
that we can diminish these costs are even eliminate some of 
these costs which are unnecessary, and perhaps first just 
understanding them. Who really understands what a 12b-1 fee is? 
They see it and they do not even know what the heck it is. To 
the extent that we can do that and still allow all the 
businesses to be profitable, my judgment is that the American 
investor is going to be far better off.
    So I wish you luck and success with this. Frankly, I hope 
all of your competitors imitate you because I think in the long 
term it is going to benefit the people who need to be 
benefited, and those are the shareholders and mutual funds in 
America.
    With that, I yield back, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The gentlelady from California, Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I am very appreciative for this hearing. I, too, am very 
proud of the bipartisan effort that we displayed in this 
committee as we passed Sarbanes-Oxley. I like the discussion. 
We are beginning to have some transparency. I think there needs 
to be a lot more.
    I want to ask Mr. Caplan, who indicated that they had taken 
some steps to help with transparency. You mentioned better 
composition of board members. What do you mean by that?
    Mr. Caplan. One of the things that we did for the first 
time, really and it was spurred on very much by Sarbanes-Oxley, 
was instead of just taking for granted the board and who was on 
it, we stepped back and really did an assessment of the 
strengths and weaknesses of every board member. By way of 
example, as I said in my comments, we completely transformed 
our audit committee, our nominating and corporate governance 
committee, and our compensation committee.
    In the process of adding new directors, we really looked 
for what skill sets were missing and assessed what we needed. I 
think very much as Mr. Hills said, rather than looking for 
names out there, we were looking for skill sets. We were 
looking for people who were interested, who were dedicated, who 
understood the time commitments. Our board meetings have gone 
from what would have been as quick as a half-a-day every 
quarter, to 3 days a quarter now. Last year, we did, including 
committee meetings, 39 different meetings. So it is an 
understanding on the part of all of our board members that it 
is a significant time commitment. We looked for those board 
members who wanted to give it and also had skill sets that we 
viewed were missing.
    Ms. Waters. As you know, there are some of us who have been 
involved at one time or another in trying to diversify 
America's boards of directors. I still think that it is a 
problem. It is not to place anyone in any uncomfortable 
position, but even as I look out among you today, I walk into 
this room committee meeting after committee meeting, and I just 
do not see the diversity represented, really, that is 
synonymous with what America is all about.
    What can we do in dealing with the selection of board 
members of the various boards of companies in this country to 
diversify them, to get more women, to get more people of color? 
I think that if boards are to have the kind of input and 
expertise that is needed, that this diversity is very 
important. What can be done?
    Mr. Caplan. I can tell you that when we looked to add new 
directors, that was one of the key criteria for us. As we were 
interviewing directors, not only did we look at specific skill 
sets, but we recognized that we had no African Americans and we 
had no women on our board and we added both. The view was 
exactly what you are expressing. There is a diversity of 
thought and a diversity of opinion which can only help us as we 
think about how we want to build out our business.
    I would certainly encourage all other companies to do the 
same thing. I think it is imperative. Again, when you were 
asking before, when I was asked before about what could change, 
I think as you see turnover, the problem is there is sometimes 
just not enough turnover on boards, you will see more of a 
focus. I know on our board it is a topic of conversation as we 
look at those board members who will in turn retire, what are 
we looking for, and part of that is diversity.
    Ms. Waters. Would you agree with me that it is not 
difficult to find women and people of color who have expertise, 
who have the desire, who have the time, all that is required to 
serve? That is not a problem, is it?
    Mr. Caplan. I would agree with you completely. When we 
identified, as I said in my earlier comments, 40 different 
candidates who were both capable from a skill set and 
interested in dedicating the time, we had many choices that 
were both women, as well as African American.
    Ms. Waters. Any of our other panelists have any thoughts 
about this discussion that I am having with Mr. Caplan about 
how to diversify boards? What do you do with the power that you 
have, Mr. Trumka, to encourage boards to diversify?
    Mr. Trumka. We are very, very cognizant of that in 
everything we do. We try to diversify more both along racial 
and gender lines as well. I think one of the things we can do, 
although Sarbanes-Oxley did not mandate this, the experts now 
say that it takes about 250 hours per year per board that you 
sit on. You hit the nail I think right on the head. People with 
the skill sets and the time, that are willing to do this, we 
need to make more training available for those people with the 
expertise and to develop that pool. We are trying to do that.
    On one board that I sit on, we have quarterly training for 
board members, but we opened that training to anybody else who 
wants to come in as well. I think that is one thing we could 
do, but also using just our moral suasion as leaders to demand 
that there be better diversity, and that America is more 
reflected not only in the streets, but in the boardrooms of 
America's corporations, and quite frankly, America's unions.
    Ms. Waters. Unanimous consent for 30 more seconds, Mr. 
Chairman.
    The Chairman. Without objection.
    Ms. Waters. I would like to hear from each of our panelists 
whether or not you think there is a need to diversify and that 
absolutely it can be done.
    Mr. Quigley. I would encourage you to continue to speak 
about this very, very real issue. I will say on our own board 
we have four women, and on our executive committee we have two 
African Americans, one Latino and then two women. I believe, it 
is a critical business issue for us because I want everyone in 
our organization to be able to look up and see someone who 
looks like them. And then and only then can we become the kind 
of firm that I want us to be.
    Ms. Waters. Thank you. Anyone else?
    Mr. Hills. I think we can take some comfort from what has 
happened in the last 25, 26 years. I think we can have some 
hope that the authority now in the nominating committees of 
boards, as distinguished from the CEO, will make a big 
difference. I think if you look on almost every single large 
consumer company board, you will find African Americans and 
women. In my own family, my wife sits on more boards than I do, 
so I am safe.
    [Laughter.]
    Ms. Waters. Thank you very much, Mr. Chairman.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    I want to speak again to the task you accomplished with 
Chairman Sarbanes in a very difficult timed environment to come 
to conclusions that I think have ultimately shown to be a very 
wise direction for not only corporate governance, but for 
investors and our general economic recovery.
    Mr. Quigley, I want to just pose a question for your later 
written response, not today because time is so limited. There 
has been a great deal of controversy circling the question of 
auditor independence, scope of service and tax consulting, 
particularly in creation of taxation opportunities. Can you at 
some point send me just what Deloitte has propounded as to its 
own internal policy with regard to that matter going forward?
    Mr. Trumka, I listened very attentively, but when you got 
to page six of your testimony, particularly attentively as to 
your comment about the stock option expense bill passed by the 
House. You go on page six to say, it is encouraged that overuse 
for executive compensation, contributing to widening gaps 
between executives and ordinary workers, the House is bent 
again, not just the first time, again, on subverting the 
integrity of our financial accounting system by giving runaway 
CEO pay less special legislative protection. This battle is 
being waged on behalf of CEOs who frankly want to hide the true 
cost. You then cite, according to SEC filings, which is a 
required disclosure, the amount of $977 million in unexercised 
options, the fact that is required to be disclosed, the fact 
that it is required to be disclosed today in footnotes makes it 
evident to anyone who chooses to find out they can get that 
knowledge.
    But there is clearly a misread or a no-read of the bill. 
The bill requires executives to expense. It does not exempt 
them. In fact, what we are attempting to preserve is the right 
of employees's ability to participate in broad-based stock 
option plans. You go on to say a majority of the shareholders 
at 30 companies voted in favor of expensing. The bill not only 
preserves, but makes an express declaration that anyone who so 
chooses, board shareholders or otherwise, the company may be 
required to expense.
    In light of this, I thought it particularly ironic in where 
my original line of questioning was going with Mr. Caplan, and 
I have to be brief, relative to E*TRADE's reforms. I noted on 
page four that you cite that the board had to adopt a 
requirement that any compensation for its chief executive 
officer must be approved by the entire board of directors. I 
found that very enlightening that in today's corporate world 
that the board may not know what their own CEO is earning in 
direct compensation.
    I, for the purposes of the record, would just only make the 
point that I would very much appreciate receiving the corporate 
governance model relative to CEO compensation and other matters 
that you think appropriate for the committee to be made aware 
of in going forward, because Mr. Everett from Alabama has 
proposed a reform for my attention relative to pension plan 
approvals that I found of some interest.
    I think this swirls in the bigger question that maybe was 
raised by Mr. Watt. We should not be legislating necessarily, 
but I think the bright focus of examination does a great deal 
to bring about responsible governance. To the extent you can 
help us with that effort, I would be most appreciative.
    Finally, Mr. Hills, I am very taken by your testimony, and 
particularly the area where you are discussing non-financial 
metric disclosure and the analysis of current GAAP standards 
giving us a retrospective historical analysis, and not much of 
a forward-looking view about where the company is going. For 
example, if you know that there were 10,000 units sold in the 
last quarter at whatever price, but you did not know from 
customer satisfaction surveys that 8,000 of them were returned 
for refund, which piece of information might be more helpful in 
knowing what is going on at that corporation.
    You did say, however, that you did not think disclosure of 
nonfinancial metrics ought to be necessarily a function of 
required disclosure. I want to get your thoughts where the FDIC 
is now engaged in a project known as expensible business 
reporting language, with about 300 banks. Next year, we will 
roll it out to all 8,000 insured depositories if it works, the 
idea being we are getting away from beating the street every 90 
days with earnings expectations, taking the pressure off the 
CEO-CFO by having hopefully more real-time, material fact 
disclosure of things that shareholders should know in a 
timeframe in which they should know it, as opposed to the 
arbitrary, beat the street pressure that I think was an 
inordinate contributor to the problems we now face in trying to 
rein in through Sarbanes-Oxley.
    Can you give me a quick view on that because I am just 
about out of time?
    Mr. Hills. The demand for more information is pretty clear. 
The problem is that the buying community, the buy-side analysts 
and the sell-side analysts, are not causing it to happen. As 
you have seen from this book, the need to have more 
nonfinancial disclosure and the need to recognize the so-called 
brittle illusion that the financial disclosure has is not as 
helpful as you think it is. Those two things seem to be coming 
together. There is quite an important committee going on now 
which I think Paul Volcker, he is not the chairman of it, but 
it is to develop more incentives for nonfinancial disclosure.
    The passage of Sarbanes-Oxley and the role of the audit 
committee and the obligation now of the auditor to tell the 
audit committee, hey, the management could have done it 
differently, they could have said something differently, all of 
a sudden people understand that we are dealing with ranges of 
numbers, not precise numbers. The idea that you can have the 
profits of the company go up by 1 percent every quarter for 50 
companies, I think the world now understood that that is 
ridiculous. It did not happen.
    Mr. Baker. Thank you.
    Mr. Chairman, just unanimous consent request, Mr. Everett 
asked that I insert into the record his statement regarding his 
proposal on compensation.
    The Chairman. Without objection.
    The gentleman from Alabama, Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Let me try to pose three sets of questions for you all, and 
get you to give fairly succinct answers to them. The first one 
I would direct to Mr. Caplan and Mr. Hills. It deals with the 
level of knowledge or intent that is required for a CEO to be 
liable under Sarbanes-Oxley. Let me get first of all your 
answer to the question, what do you understand the level of 
mens rea to be, the level of knowledge to be? Is it sufficient 
if a CEO signs a financial statement and the statement is 
false, for that CEO to be liable? Or what is the extra level 
that is required? Does it have to be a willful disregard 
standard? That seems to be something that is not 100 percent 
clear, and we have had so few prosecutions that we have not yet 
developed a good answer to that.
    The follow-up to that, if you feel that the standard is one 
that is something other than knowledge, if it something other 
than the usual criminal standard, is that problematic? Is there 
a discomfort level that we have or should have with holding 
CEOs liable unless we can show deliberate disregard or 
willfulness on their parts? This is the first set of questions.
    The second one, Mr. Del Raso, I would direct to you. There 
was a period of time last year when the SEC was considering a 
new set of regulations involving attorneys. There was a lot of 
talk about a noisy withdrawal requirement. As you and the other 
lawyers in the room know, in the overwhelming class of cases 
around this country attorneys have very little leeway to get 
out of cases even permissively. Attorneys are able to get out 
of cases if there is a possibility of imminent physical harm or 
if a lawyer has knowledge of imminent wrongdoing.
    As I understood what the SEC was contemplating, there was 
some consideration that if an attorney became aware of 
corporate misconduct, that there was actually not just as 
permission to get out of the case, but an affirmative duty to 
withdraw in some instances. As a lawyer, that struck me as a 
radical change from the normal rule of special responsibility. 
Can you briefly comment on that?
    The final set of questions would be to Mr. Hills and Mr. 
Del Raso. It deals with the sentencing guidelines. We know 
because of the recent decision that the guidelines are very 
much in flux right now. We do not know what will eventually 
come about. But one of the things that was worked in the 
Sarbanes-Oxley, as I understand it, is a dramatic ratcheting-up 
of the penalties and the collapse of any distinction between 
theft and between fraud. As I understand the guidelines right 
now, pre-Blakely, if a wrongdoer causes a certain amount of 
loss, whether or not he or she receives any direct financial 
benefit from it, it is treated the same as if he or she had 
received benefit. Are we comfortable with collapsing fraud and 
theft together? Does it create problems either in terms of 
getting plea bargains efficiently? Or does it create some 
broader problem if we dramatically ratchet-up the sentences for 
people who are not financially benefiting themselves from the 
fraud?
    Those are the three sets of questions. The first would be 
to Mr. Hills and Mr. Caplan.
    Mr. Hills. The standard for Sarbanes-Oxley compliance with 
respect to signing the document, the principal change, which is 
so important, is that the CEO cannot win simply if he says, I 
did not know anything about it. He has to be bloody certain 
that that company has done everything possible to uncover the 
problem. That is what 404 does also. He has to make certain 
that every possible effort has been made to surface problems 
with it.
    So if he sits there and says, I did not know anything about 
it, and he does not have a compliance situation in place, he is 
in trouble. I think that is the way to look at that part. I am 
sure somebody else is going to answer the second question.
    Mr. Davis. Mr. Caplan, do you have anything to add to that?
    Mr. Caplan. I would agree completely. I think that 
Sarbanes-Oxley has worked quite effectively in terms of its 
intent. There is very little doubt in my mind that in 
certifying either on my behalf as a CEO or the CFO, there 
really is an understanding of the severity that is intended 
when you certify, whether it is quarterly or whether it is with 
respect to 404. I would tell you that it is impossible, 
particularly the larger the organization gets, to know 
everything that is going on at all times. But the duty to 
investigate, as Mr. Hills has said, is dramatically escalated. 
The amount of work that goes into the processes I described 
earlier, whether it is quarterly or with respect to 404, has 
really transformed the way companies are looking at these 
checks and balances.
    Mr. Davis. Mr. Del Raso, can you comment on the attorney 
issues?
    Mr. Del Raso. Sure. One of the more discussed aspects of 
Sarbanes-Oxley was the notion of the responsibility of the 
attorney, this concept of reporting up and then reporting out. 
The responsibility of reporting up at the attorney level inside 
the corporation is one that was a little easier to deal with. 
But the idea that if you are not listened to and then reporting 
out, as you know, the American Bar Association and even some 
states really took opposite positions from what was required in 
the act. They are issues that I think were very troubling to a 
number of practitioners at the time, but I think we are working 
our way through them.
    I would recommend to you one of my partners was actually 
appointed by the court to be the special SEC examiner in the 
Spiegel case last year. A large part of that report deals with 
the role of the attorneys in reporting. That was probably one 
of the last major cases before the enactment of legislation 
that dealt with these issues.
    Mr. Davis. Can you just quickly comment on the fraud-theft 
issue?
    Mr. Del Raso. I think that is one that really does require 
attention. I am sure you are referring to the Dynegy case and 
maybe the sentence that was imposed there, big distinction 
between outright fraud or negligent responsibility in the chain 
of command in the certification process, and really quite 
frankly weighing and balancing the societal effects again, too. 
I mentioned even in my testimony, one of my concerns is that 
outside of the framework of the legislation, when you get to 
regulatory enforcement, if you have prosecutorial misjudgment 
and in discretion, you could really start then to have a 
deleterious effect on this legislation if it is not properly 
enforced.
    The Chairman. The gentleman's time has expired.
    The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    I have long since been convinced of the absolute necessary 
and profound benefits of Sarbanes-Oxley and what it means to 
the protection of our free market system. But let me take my 
limited time to focus on what some may perceive as the cost or 
risk and unintended consequences of the legislation.
    Obviously, the subject of corporate board independence, 
independent members of the board, is discussed often these 
days. Sarbanes-Oxley has required that the audit committee be 
comprised totally of independent members. If we look at what I 
think my colleague from Houston described as the poster child 
for corporate malfeasance, Enron, I am told that 86 percent of 
their board was independent and had a dozen non-employee 
outsiders. This included four CEOs, four academics, and the 
board was chaired by an accounting professor from the Stanford 
Business School.
    Just for the sake of argument, I am told Berkshire Hathaway 
would not pass anybody's test of having an independent board, 
yet I do not believe they have had a hint of corporate scandal, 
and except for 4 years out of 40, they have always beat the S&P 
500.
    So my question really focuses on where theory meets 
empiricism. The question is, with our limited history, what do 
we know about the impact of having independent members and what 
that means to corporate governance? Why don't we start with 
you, Mr. Quigley.
    Mr. Quigley. I believe that we need independent directors, 
but we also need audit committee effectiveness, understanding 
and executing their effective role. If it is an audit committee 
composed on the golf course, the likelihood of it being 
effective is much, much lower.
    Mr. Hensarling. Mr. Hills, how about you?
    Mr. Hills. Independence does not at all guarantee quality. 
I think if you go back to 1976 and just see the impact on 
corporate America by simply having an audit committee be 
required, so you had three independent people on the board at 
least, it has had a substantial impact. But independence is not 
enough. You need to have a sufficiently independent quality on 
every board to deal with those matters that need that 
independent quality. I do not see anything wrong with having 
employees on the board. It is a matter that each company is not 
the same.
    But if the background for the question is, can we carry the 
independence question too far, of course we can. I think if we 
stay with the principle that every board needs a sufficiently 
independent quality to deal with those things that need that 
independence, then we are fine. At Berkshire Hathaway, the 
board is a very good example. They do have a substantial 
independent quality on that board.
    Mr. Hensarling. I have a lot of different studies crossing 
my desk. I am never quite sure of their reliability or their 
methodology. But I saw a Wall Street Journal article that dates 
back to about a year-and-a-half ago saying that since the 
advent of Sarbanes-Oxley, D&O insurance has quadrupled. I have 
seen another study saying that the cost of going public for 
mid-size companies has now doubled. Directors's fees have 
doubled. Accounting, audit and legal fees have doubled.
    Again, I am uncertain of the methodology and reliability of 
these reports, but I am curious about the hard data out there 
on the cost of compliance. More specifically, what does that 
mean as far as companies making their decision to go public, 
not to go public, and the impact of that on job and wealth 
creation? Do you have any hard data on what these actual costs 
may be and how CEOs and boards are deciding on the decision of 
going public? Again, why don't we start with you, Mr. Quigley.
    Mr. Quigley. I view the cost of Sarbanes-Oxley compliance 
as a new element of the cost of capital. It is an issue that 
management must evaluate as they look at their various 
financing alternatives for their growth plans. I believe that 
in return for the privilege of becoming the steward of the 
public's money, if that is in fact the vehicle you use to 
finance your growth plans, you have to be willing to step up 
and pay these costs that go with that stewardship 
responsibility.
    There is lots of liquidity in private equity. There is lots 
of liquidity in banks and insurance companies to finance growth 
plans through private transactions if you do not want to pay 
the cost of participating in the public markets.
    Mr. Hensarling. I see my time is just about to run out. 
Perhaps other answers could be submitted in writing. I had one 
other question. I saw a particularly critical report from a 
study from the Cato Institute on Sarbanes-Oxley that says it 
has so many ambiguities and contradictions that companies are 
faced with draconian punishments for vaguely defined offenses, 
which is somewhat following up on my colleague Mr. Artur Davis' 
line of questioning. I was just curious to know to what extent 
do you see ambiguities and contradictions that need to be 
addressed in the legislation? Having said that, I see I am out 
of time, Mr. Chairman, so those answers will have to wait for a 
later time.
    The Chairman. I would have the witnesses respond, if 
anybody has a particular response. Mr. Del Raso?
    Mr. Del Raso. As the lawyer, I would tell you that this is 
not really a lot different than any other regulatory or 
legislative act that we work with. We have had the securities 
laws around for all these years, and Mr. Hills knows this all 
too well. That is why you have a system in place where you deal 
with the regulators. You either request positions from them, 
either in interpretive letters or through rulemaking, or you 
come back to the legislative side and ask for changes.
    But I think what you are finding here is every day that 
passes since the act went into effect, the questions are 
probably a little more easily answered. There was a lot of work 
that was done in the very beginning. So I think that you will 
never get to ground zero with respect to having no issues or no 
questions with regard to any type in either the legislative or 
regulatory framework you are working in.
    The Chairman. Thank you.
    The gentlelady from New York.
    Mrs. Maloney. Thank you.
    Mr. McDonough in testimony before this committee brought up 
the idea that possibly we should have two standards, one for 
larger companies and one for smaller companies for the 
enforcement of Sarbanes-Oxley. Many smaller companies are 
complaining that the burden is too great for them. I would like 
a response in writing to that.
    But in my brief time, I would like to focus on something 
that Mr. Trumka brought up in his testimony and ask the other 
witnesses to comment on it further. We made a promise in 
Sarbanes-Oxley, but broke it this week on the floor. That 
promise was our promise to insist that companies tell investors 
the truth about their financial status. We said that we would 
insist on transparency and that we would empower the SEC to 
enforce that promise.
    Yet just 2 days ago, the House passed legislation that has 
the exact opposite purpose and effect. H.R. 3574, the stock 
options bill, walks away from our commitment to investors. It 
walks away from our commitment to independent standard setting, 
in the interest of a few companies that do not want to show 
investors the true cost of their stock options that they pay 
their employees. The bill passed the House overwhelmingly, 
despite the opposition from every single financial luminary 
from Alan Greenspan, who reiterated his opposition to the bill 
yesterday literally in this room before the committee in a 
hearing, to Arthur Levitt, to Warren Buffett, to John Bogel, to 
Bill Donaldson, John Snow, all four big accounting firms and 
many others.
    Today, it is getting slammed in the financial press 
precisely because that bill violates the premise of Sarbanes-
Oxley. I request permission to place that article in the 
official record of this committee.
    The Chairman. Without objection.
    Mrs. Maloney. I deeply believe, and I have really been 
extremely upset about this vote, that Sarbanes-Oxley is the 
most important and significant corporate governance bill that 
Congress has passed since the 1934 act. Like the 1934 act, it 
was a necessary response to a grave situation in order to 
restore investor confidence.
    Although we have made some improvement, we have some 
unfinished business. My main question to the panel today is, do 
you believe that the principle of independent standard setting 
and SEC oversight was a critical part of Sarbanes-Oxley, and I 
would say the 1934 act? And if so, how much damage did we do 
with the stock options bill? On this precise point, I had an 
amendment which likewise failed on the floor, which merely 
reinstated the authority that the SEC has had since 1934 to 
override rules if they see fraud or the public interest 
jeopardized. That failed on the floor.
    So I invite all the panelists to answer. I would like to 
start with Mr. Trumka and Mr. Hills, since he is a former chair 
of the SEC, and then of course the big four, Deloitte Touche, 
and everyone if you would like. Thank you.
    Mr. Trumka. My testimony, I think you have just reiterated 
most of my written testimony. We think it sends the absolute 
wrong message at this time. We think it paints a roadmap for 
CEOs that want to cover and prevent investors and would-be 
investors from knowing what the real costs of their salary is, 
and what the real costs to the corporations are, and allows 
them to hide it.
    The bill that was passed only purports to make the top five 
people report those expenses. The other people at the bottom, 
it pretends like it does not exist, so it is intellectually 
incompatible. Then it does something that I think is the 
world's greatest fiction. It says that stocks are nonvolatile. 
If anybody believes that stocks are nonvolatile, I have some 
beachfront property in southwestern Pennsylvania that I would 
sell them.
    We think it has done tremendous damage and we think it 
sends the wrong message. It says to CEOs that if you put on a 
big enough effort, you can overturn all the good and the 
momentum that has been built up by Sarbanes-Oxley and in fact 
reverse what the experts in the field say is necessary.
    The Chairman. The gentlelady's time has expired. We would 
ask for just some brief responses to the gentlelady's question. 
We are going to have votes momentarily on the floor of the 
House and I would like to complete the hearing.
    Mrs. Maloney. Mr. Hills?
    Mr. Hills. Of course, it has not done any damage yet. I am 
very much in favor of independent standards. I am very much in 
favor of allowing information in, not keeping it out. The fight 
over options pricing is in many respects a sad fight. The 
information in a balance sheet in the 10Ks tells any analyst 
worth his salt how many options are there and what it costs. 
The question is, why not put it in the profit-and-loss 
statement? It should be in the profit-loss statement because 
everything else is in there.
    The issue is how do you treat the profit-and-loss 
statement. I will just go back to the quote I gave you at the 
end of my testimony, and that is this constant reliance upon 
the brittle illusion of accounting exactitude. The problem is 
that by throwing it in there, too many analysts are going to 
take more from it than they should, and therefore much of the 
industry does not want it in there. My own view is that the 
world has wised up to the fact that whether it is in or not is 
not going to make much difference because the analysts now do 
understand that stock options have a cost.
    So I am in favor of it. I am sorry there is such a fight 
about it.
    Mr. Quigley. Congresswoman, I would just quickly comment 
that I, along with the other three CEOs of the big four firms, 
signed the letter that you referenced. I support fully private 
sector standard setting and believe it is one of the factors 
that has made our capital markets the envy of the world.
    The Chairman. The gentleman from Ohio, Mr. Tiberi.
    Mr. Tiberi. Mr. Del Raso, we have heard since the passage 
of Sarbanes-Oxley from some different public companies 
complaining about the legislation. You have counseled foreign 
companies. You have traveled overseas. What are you telling 
them? Can you give us the state of foreign affairs right now 
with respect to this issue?
    Mr. Del Raso. I think when the legislation first passed, 
there was some real concern and trepidation about the fact that 
the foreign issuers, especially larger ones, thought it was 
intrusive. Why should they have to comply? Well, if they want 
to access our capital markets, that is a cost of doing business 
here, but more importantly it was to stabilize global markets 
because we are such a large player.
    I think, though, in the light of some of their own scandals 
that came home to roost in their countries, most notably just 
in the last year or so, the Parmalat scandal in Italy and some 
others, they are even more keenly aware of what we were faced 
with and the importance of this type of legislation. If you do 
take a look at what has happened overseas, they will in their 
legal process set up their own investigation and prosecution. I 
do hear from the diplomats or even the foreign business 
executives, than they do envy our system because it works much 
more efficiently and fairly than their inquisitorial systems 
which in some countries are worse.
    Mr. Tiberi. Thank you.
    Mr. Quigley, in your testimony you stated that a final 
human resources aspect of Sarbanes-Oxley that is worthy of note 
is the increased personal risk that our partners and 
professionals perceive about our profession. The stress creates 
long-term impact on the ability to attract and retain people.
    In addition to that statement, are you concerned about the 
future of the your industry, with that issue and the issue of 
the increase of liability that you face and your partners face?
    Mr. Quigley. It is the single biggest cloud associated with 
the future of the profession. I, though, am very optimistic 
about that future and believe we will find a way to try to 
manage our way through that. I hope one day we can have 
meaningful securities law and other tort reform that can take 
that very, very large cloud off the horizon.
    Fifteen cents of every audit dollar that we collect is 
required for litigation, claims and insurance costs. That is an 
enormous cost on our business, on our operation, and frankly 
does reflect somewhat the burden that our partners feel 
associated with this aspect of practicing public accounting.
    Mr. Tiberi. Mr. Chairman, I yield back my time.
    The Chairman. The gentleman yields back.
    The gentleman from Staten Island.
    Mr. Fossella. Thank you, Mr. Chairman. Welcome and thank 
you to the panel. I thank you, Mr. Chairman, being the last, I 
know I get unlimited amount of time to ask questions. I 
appreciate that as always.
    The Chairman. Yes, we always play that game.
    [Laughter.]
    Mr. Fossella. I thank the panel, and especially welcome Mr. 
Caplan in moving so aggressively at E*TRADE and doing the right 
thing. And my friend Mr. Quigley, thank you for coming and 
offering as always insightful testimony.
    Briefly following up on what Mr. Tiberi just talked about, 
and that is, to what degree, if at all, should we be concerned 
with the flow of capital from foreign countries? For example, I 
know John Thain, who is the CEO of the New York Stock Exchange, 
has argued that some of the new governance requirements may 
scare some of the foreign firms. I think he has indicated that 
the number of IPOs have been down relative to prior years. 
Whereas the head of NASDAQ has said there should not be 
concern, or more to the point, has not slowed down the IPO 
pipeline.
    Just out of curiosity, why is there a disconnect? Is it 
because, as has just been indicated, that now these nations are 
going to their own problems, so therefore we should not lower 
our standards until they raise theirs? I was wondering if you 
can offer anything on that.
    Secondly, from Mr. Quigley, a two-prong question. One, in 
your testimony you seem concerned about the new requirements, 
the shortening of filing time, as opposed to the concern 
regarding internal control assessments and attestations. I 
guess as you say, you are concerned about the quality of 
financial reporting, again not intended, but that could be in 
place. And next week, you are going to offer to the SEC that 
that extension on the filing deadline be delayed by a year.
    If you can shed some light on why you think that is a 
concern and why that should be modified. I will just leave it 
at that. So for the first question, if someone can chime in.
    Mr. Caplan. I would say it is probably not the first and it 
will not be the last time you will have a difference of opinion 
between NASDAQ, Mr. Greifeld and Mr. Thain with respect to the 
New York Stock Exchange. Having lived first-hand some of the 
issues around governance, I would tell you that certainly our 
view is that corporate governance really should have no 
boundaries. Watching first-hand in the part of our business 
that deals with equity trading, the importance of investor 
confidence and the return of that investor confidence, nothing 
should be allowed to shake that.
    I think if you do not extend it to companies who want to 
access capital in the United States, regardless of where they 
are abroad, you really pose too great a risk, because if 
ultimately there is a problem, it will shake investor 
confidence again. I have watched the behavior of our customers 
in these last 2 years. One of the things that is interesting is 
that we sent a survey out to our customers about a year after 
Sarbanes-Oxley was enacted, and asked them were they more 
willing in light of general governance to trade. There was a 37 
or 38 percent increase as a result of that.
    So generally speaking, I think you are seeing the recovery 
in the marketplace due to what is happening economically, but I 
also think you are beginning to see a rebound in confidence. I 
really feel confident that we should not allow anything to 
shake that. If somebody wants to access capital in the United 
States, it is the cost of doing business.
    Mr. Quigley. Just to comment quickly with respect to the 
Sarbanes-Oxley 404 and its impact with respect to the 
accelerated filers, as we shorten that filing period to 60 
days, I do not know how many, but some registrants are going to 
find as we get towards the end of February an enormous 
pressure. I believe that additional 2 weeks could be valuable 
to the registrants, to the auditors and could contribute to the 
quality of reporting this year. Accelerating from 75 to 60 days 
and overlaying the internal control reporting are two very 
significant changes that were not contemplated at the time the 
initial accelerated dates were put in place by the SEC. That is 
why we are going to recommend deferring for 1 year.
    Mr. Fossella. Just finally, Mr. Quigley, are there any 
State provisions that in your opinion conflict with Sarbanes-
Oxley? If so, is this a problem?
    Mr. Quigley. There are States that are talking about 
broadening the application of Sarbanes-Oxley provisions to 
other than public companies. There are some States that are 
also debating whether they need their version of Sarbanes-
Oxley. I am concerned about the complexity and the cost that 
continuing to layer additional levels of regulation on top of 
this through the States would not be a good move at this 
juncture.
    Mr. Fossella. Okay. Thank you, Mr. Chairman.
    Thank you, gentlemen.
    The Chairman. The Chair wants to thank all of you profusely 
for what has been an excellent tutorial and review of the 
Sarbanes-Oxley Act. I think it was an opportunity for all of us 
to talk about the highlights and perhaps some of the changes 
ultimately that we need to make, though it has never been 
perfect legislation. For that, we are most appreciative of your 
candor and your expertise.
    The committee stands adjourned.
    [Whereupon, at 12:21 p.m., the committee was adjourned.]


                            A P P E N D I X



                             July 22, 2004


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