[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                        THE 10TH ANNIVERSARY OF

                         THE SARBANES-OXLEY ACT
=======================================================================


                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 26, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-152




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76-123                    WASHINGTON : 2012
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
BILL POSEY, Florida                  AL GREEN, Texas
MICHAEL G. FITZPATRICK,              EMANUEL CLEAVER, Missouri
    Pennsylvania                     GWEN MOORE, Wisconsin
LYNN A. WESTMORELAND, Georgia        KEITH ELLISON, Minnesota
BLAINE LUETKEMEYER, Missouri         ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan              JOE DONNELLY, Indiana
SEAN P. DUFFY, Wisconsin             ANDRE CARSON, Indiana
NAN A. S. HAYWORTH, New York         JAMES A. HIMES, Connecticut
JAMES B. RENACCI, Ohio               GARY C. PETERS, Michigan
ROBERT HURT, Virginia                JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
FRANK C. GUINTA, New Hampshire

           James H. Clinger, Staff Director and Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
KEVIN McCARTHY, California           JOE DONNELLY, Indiana
STEVAN PEARCE, New Mexico            ANDRE CARSON, Indiana
BILL POSEY, Florida                  JAMES A. HIMES, Connecticut
MICHAEL G. FITZPATRICK,              GARY C. PETERS, Michigan
    Pennsylvania                     AL GREEN, Texas
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 26, 2012................................................     1
Appendix:
    July 26, 2012................................................    29

                               WITNESSES
                        Thursday, July 26, 2012

Berlau, John, Senior Fellow, Finance and Access to Capital, the 
  Competitive Enterprise Institute (CEI).........................     2
Bullard, Mercer E., President and Founder, Fund Democracy, Inc., 
  and Jessie D. Puckett, Jr., Lecturer and Associate Professor of 
  Law, the University of Mississippi School of Law...............     3
Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia 
  University Law School..........................................     4
Gallagher, Michael J., Chairman, Professional Practice Executive 
  Committee, Center for Audit Quality (CAQ)......................     5
Hatfield, Jeffrey S., President and Chief Executive Officer, 
  Vitae Pharmaceuticals, on behalf of the Biotechnology Industry 
  Organization (BIO).............................................     6
Hollein, Marie N., President and Chief Executive Officer, 
  Financial Executives International (FEI).......................     8

                                APPENDIX

Prepared statements:
    Garrett, Hon. Scott..........................................    30
    Bachus, Hon. Spencer.........................................    32
    Moore, Hon. Gwen.............................................    34
    Berlau, John.................................................    55
    Bullard, Mercer E............................................    61
    Coffee, John C., Jr..........................................    82
    Gallagher, Michael J.........................................    93
    Hatfield, Jeffrey S..........................................   108
    Hollein, Marie N.............................................   115

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of The Institute of Internal Auditors (IIA)   119
    Attestation provisions of Lehman Brothers, JPMorgan, Bear 
      Stearns, MF Global, Fannie Mae, and Freddie Mac............   122


                        THE 10TH ANNIVERSARY OF

                         THE SARBANES-OXLEY ACT

                              ----------                              


                        Thursday, July 26, 2012

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:36 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Biggert, Hensarling, Campbell, Pearce, Posey, 
Fitzpatrick, Hayworth, Hurt, Dold; Waters, Sherman, Lynch, 
Maloney, Himes, and Green.
    Chairman Garrett. Good morning, everyone. The Subcommittee 
on Capital Markets and Government Sponsored Enterprises will 
come to order. Today's subcommittee hearing is entitled, ``The 
10th Anniversary of the Sarbanes-Oxley Act.'' Normally, you 
think of anniversaries are good things. After we hear from this 
panel today, we will see how amused we should be about this 
anniversary.
    First, we are going to handle a couple of housekeeping 
items. We have a lengthy series of votes on the Floor that we 
have been advised of beginning as early as 10:30, so in order 
to accommodate all of the members of our panel, it has been 
agreed to by us and the Minority that all Members' opening 
statements that we normally would give are going to be waived 
at this point as far as reading them, and they are going to be 
submitted for the record.
    In addition, the Minority has also agreed with us that--I 
guess you guys know this already, unfortunately--your opening 
statements have also been shortened from 5 minutes down to 3 
minutes.
    For us up here, I advise the Members that I am going to 
strictly enforce the 5-minute rule. So if you have questions, 
make sure your questions get asked and answered within your 5 
minutes so that we can go onto the next person's questions.
    Finally, it is my intention that we will release the panel 
and release the committee at the call to votes. Hopefully, the 
votes will go a little bit late. But when the votes are called, 
we have to go.
    So, thank you, everyone, for your accommodations. With 
that, I thank the entire panel for being here with us today. 
And we will start, as we always do, on the left hand side of 
our panel.
    Welcome. And for those of you who have not been here 
before, you have 3 minutes, not 5 minutes. As always, we ask 
you to please bring the microphone as close to you as you can 
because some of us cannot hear you up here if you do not speak 
into the microphone.
    Mr. Berlau, welcome, and you are recognized for just 3 
minutes. And thank you very much for coming to the panel today.

STATEMENT OF JOHN BERLAU, SENIOR FELLOW, FINANCE AND ACCESS TO 
      CAPITAL, THE COMPETITIVE ENTERPRISE INSTITUTE (CEI)

    Mr. Berlau. Thank you, Chairman Garrett. And thank you, 
Ranking Member Waters and all the honorable members of this 
subcommittee for inviting me here to testify on behalf of my 
organization, the Competitive Enterprise Institute, a think 
tank founded in 1984 that fights and advocates and educates 
about freedom and opportunity for investors, entrepreneurs, and 
the economy as a whole.
    And I must say I agree with you, Mr. Chairman, that on past 
anniversaries there really was not much for investors and 
entrepreneurs, with Sarbanes-Oxley and the way its provisions 
had been implemented, to celebrate. As the Obama 
Administration's Council on Jobs and Competitiveness recognized 
in a recent report, ``well-intentioned regulations aimed at 
protecting the public from the misrepresentations of a small 
number of large companies have unintentionally placed 
significant burdens on a large number of smaller companies.''
    And it made the connection and fingered Sarbanes-Oxley, or 
SOX, as a culprit in the long-term decline in IPOs, something 
that happened long before the recession in the first few years 
after SOX's passage--you can even look at the number of IPOs 
lower in the boom years after SOX than in the early years that 
were slow growth years of the 1990s--and made the connection 
between IPOs and job growth.
    But actually, on this anniversary we do have a little bit 
to celebrate because this House, virtually all the members of 
this subcommittee, and President Obama have enacted into law 
the Jumpstart Our Business Startups Act, and we are already 
seeing that pay dividends for investors, entrepreneurs, and the 
economy as a whole.
    The JOBS Act creates an on-ramp that among other things 
exempts newly public companies for their first 5 years from the 
internal control mandates of Section 404. And we are already 
seeing well-respected companies list under the JOBS Act such as 
Kayak, last week--the travel booking site--and Five Below, the 
teen retail discounter, which had very successful IPOs that are 
trading above their share price in contrast to the Facebook 
IPO, which was not subject to the JOBS Act; it was too large.
    So, we are seeing--we have already seen, I have in an 
appendix, 46 companies that are listing here because of the 
JOBS Act. They are designating themselves as emerging growth 
companies under the law. I think that is evidence that SOX was 
choking off IPOs both the sheer number and actually smaller 
IPOs. But there is more we can do. And H.R. 6161 would keep a 
small company in revenues and profits from being designated as 
large just because of market volatility as a large company.
    Thank you, and I am happy to answer any questions.
    [The prepared statement of Mr. Berlau can be found on page 
55 of the appendix.]
    Chairman Garrett. And thank you for your testimony.
    Mr. Bullard, welcome to the family. And you are recognized 
for 3 minutes.

  STATEMENT OF MERCER E. BULLARD, PRESIDENT AND FOUNDER, FUND 
   DEMOCRACY, INC., AND JESSIE D. PUCKETT, JR., LECTURER AND 
   ASSOCIATE PROFESSOR OF LAW, THE UNIVERSITY OF MISSISSIPPI 
                         SCHOOL OF LAW

    Mr. Bullard. Thank you, Chairman Garrett. Thank you, 
Ranking Member Waters, and members of the subcommittee for the 
opportunity to appear before you today on the anniversary of 
Sarbanes-Oxley. It is an honor and a privilege to appear before 
the committee again today.
    Before addressing the Act itself, it is worth revisiting 
the bipartisan context in which it was enacted. House and 
Senate votes in favor of Sarbanes-Oxley totaled 522, with only 
3 votes cast against.
    This is remarkable in view of the major reforms the Act 
entailed, in particular, the creation of an entirely new 
regulatory entity, the PCAOB, that has become a leading force 
in the regulation of public accounting both in the United 
States and abroad. Some provisions have generated controversy, 
however. For example, Section 404 has been criticized for 
imposing excessive costs on issuers.
    In my view, this criticism is substantially misplaced. The 
cost of compliance derives not from Section 404 itself, which 
imposes very generic monitoring requirements. Rather, 
compliance costs derive from the implementation of Section 404 
by regulators. And this is where any changes should be made.
    Nonetheless, Congress has granted wholesale exemptions from 
Section 404, which I believe are inconsistent with the very 
concept of a public company, which really has meaning only if 
public companies are subject to a consistent set of default 
rules. This problem would be exacerbated by the Fostering 
Innovation Act, which would make existing Section 404 
exemptions essentially swallow the rule.
    In conclusion, I would like to address four other areas of 
concern relating to Sarbanes Oxley.
    First, PCAOB Chairman Doty has rightfully argued that PCAOB 
disciplinary proceedings should not be conducted in secret. It 
is not appropriate to ask issuers' audit committees to choose 
their auditors with care, while depriving them of information 
about alleged auditor misconduct. Congress should amend 
Sarbanes-Oxley to require that PCAOB proceedings be public, as 
SEC proceedings against auditors have been for 25 years.
    Second, I encourage Congress not to adapt a statutory 
prohibition against mandatory auditor rotations. The PCAOB 
should be afforded the deference due to an expert regulator to 
make findings and adopt rules in this area as appropriate.
    Third, Congress should amend the whistle-blowing provision 
of Sarbanes-Oxley to clarify that disclosing the misconduct of 
public companies will be protected, even when the whistleblower 
is employed by a private company. The SEC, the Department of 
Labor, and numerous DOL arbitrations have all agreed with this 
view, but a divided First Circuit panel has taken the opposite 
position. The court's holding allows a public company to 
neutralize the whistle-blowing provision simply by hiring a 
nonpublic accountant or other entity to conduct its compliance 
activities.
    Finally, Congress should inquire into companies' compliance 
with a requirement to report executive stock option grants 
within 2 days. This requirement has been instrumental in 
preventing the options backdating that was pervasive prior to 
2002. But research shows that backdating persists because up to 
a quarter of option grants are being reported in violation of 
the 2-day requirement.
    Thank you again for the opportunity to appear before you 
today. I would be happy to answer any questions you may have.
    [The prepared statement of Professor Bullard can be found 
on page 61 of the appendix.]
    Chairman Garrett. Thank you.
    Mr. Coffee, good morning, and welcome to the panel.

 STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF 
              LAW, COLUMBIA UNIVERSITY LAW SCHOOL

    Mr. Coffee. Good morning. Thank you, Chairman Garrett, and 
members of the subcommittee. I am happy to be here for the 10th 
anniversary of SOX.
    I will start with this general observation: Since SOX was 
enacted, there has been a robust debate, indeed an intellectual 
war between those who argue that the declining competitive 
position of U.S. capital markets was caused by overregulation, 
an alleged avalanche of overregulation; and the other side, 
which says that investors basically have lost confidence in 
U.S. capital markets both because of a host of scandals and 
because of underregulation, as overworked and underfunded 
regulatory agencies have failed repeatedly.
    In the abstract, I think both sides can be right, and can 
score points. And I will agree that there has been, at times, 
significant overregulation.
    Nonetheless, we look at our current vantage point on the 
10th anniversary. I must tell you that the greatest obstacle to 
stronger capital markets and better access for smaller issuers 
to the equity capital market is not overregulation, but it is 
the loss of investor confidence.
    When you look at what is causing investor confidence to 
decline, we can start with the original Internet bubble back in 
2001, when investors saw that securities analysts were 
conflicted and that accountants were often compromised. 
Sarbanes-Oxley tried to address that. But since then, we have 
seen a host of very recent scandals that have to have an impact 
on investor confidence.
    Investors are seeing over and over again that underfunded, 
overworked regulators cannot catch real crooks, and they only 
slap them on the wrist when they do catch them. We have all 
just seen the Peregrine Financial and MF Global scandals, and 
frankly it is hard to understand why a rational investor would 
put money into a commodities account with a commodities broker 
when no one seems to know whether the customer funds had been 
segregated from the funds placed at risk by proprietary 
trading.
    That scam at Peregrine Financial was a 20-year Ponzi scheme 
that went undetected. We are now watching the Libor scandal. 
Not only does it show us what we already know, that creators 
will often manipulate markets, but that regulators can be very 
cozy and very equivocal in their response.
    I could go through a number of similar examples. But my 
point is again that in the wake of the JOBS Act, where we have 
deregulated the market for emerging growth companies, which I 
understand. They are given a 5-year transitional period.
    The step now being contemplated is that we are going to let 
companies that are not emerging and not growth companies, they 
are rather companies that I would call mature mediocrities, get 
a permanent exemption from Section 404. The SEC has studied 
this problem and the SEC has found that compliance with Section 
404 greatly reduces the rate of financial restatements. Thus, I 
would suggest that the case for exempting mature mediocrities 
has not yet been made.
    My time is up. Thank you.
    [The prepared statement of Professor Coffee can be found on 
page 82 of the appendix.]
    Chairman Garrett. Thank you very much.
    Mr. Gallagher, welcome to the panel. And you, too, are 
recognized for 3 minutes. Thank you.

   STATEMENT OF MICHAEL J. GALLAGHER, CHAIRMAN, PROFESSIONAL 
  PRACTICE EXECUTIVE COMMITTEE, CENTER FOR AUDIT QUALITY (CAQ)

    Mr. Gallagher. Thank you, Mr. Chairman. Mr. Chairman, 
Ranking Member Waters, and members of the subcommittee, my name 
is Mike Gallagher and I am pleased to testify today on behalf 
of the U.S. auditing profession regarding the Sarbanes-Oxley 
Act of 2002. I have more than 26 years of experience in public 
accounting. I am currently the chairman of the Professional 
Practice Executive Committee, or PPEC, of the Center for Audit 
Quality. I am also the managing partner of PwC's audit quality 
functions. I am speaking today with you in my capacity as the 
PPEC chairman.
    In examining Sarbanes-Oxley, let us go back to where we 
were 10 years ago and the reason the Act was passed. The 
markets were roiled by a series of massive financial reporting 
frauds, including Enron and WorldCom. The fraudulent and 
materially misstated financial information reported by these 
companies drove their stock price up to levels that were 
completely unsupported by economics or their business 
performance.
    When the frauds were ultimately exposed, investor reaction 
was swift and decisive. Both companies failed in sudden and 
dramatic ways, causing a loss of investor confidence more 
broadly across the capital markets.
    To restore investor confidence and enhance protection, 
Congress responded in a near unanimous and bipartisan fashion 
by passing the Sarbanes-Oxley Act. The House vote was 423-3, 
and the Senate vote was 99-0. President Bush signed the bill 
into law, ushering in a new era of reforms that improve the 
integrity of financial reporting.
    In sharp contrast, the business failures during the more 
recent financial crisis resulted from sudden and extreme 
economic events, most notably the seizing of liquidity, which 
caused certain companies to fail.
    So let me briefly highlight some of the significant 
provisions of the Sarbanes-Oxley Act. The Act strengthened 
audit committees. It empowered them to more effectively carry 
out their responsibilities. It made management clearly 
responsible for the financial statements, enhancing 
accountability for financial reporting. And auditing was 
improved through the creation of the PCAOB and strengthening 
independence rules.
    Now, the changes I described certainly came with costs. 
However, these costs generally have declined significantly over 
the last 10 years due to company and auditor efficiencies as 
well as actions taken by the PCAOB and the SEC. The Dodd-Frank 
and JOBS Act also provided certain exemptions and further 
relief.
    So, in bringing this to a close, unfortunately when the 
public hears about financial reporting, the new is never good. 
It is about the restatement, the material control weakness or 
the business failure.
    In my position, I get to see the other side, the positives 
of Sarbanes-Oxley, almost every day. The restatement that was 
avoided because of a key internal control; the disclosure that 
was improved due to a great dialogue between the audit 
committee, the management, and the auditor; and the fraud that 
was identified early because of higher-quality auditing. These 
successes are not public, and they do not make news. The 
benefits of Sarbanes-Oxley are substantial. And in my view, it 
is serving the capital markets and investors very well.
    Thank you. And I am happy to answer any questions you may 
have.
    [The prepared statement of Mr. Gallagher can be found on 
page 93 of the appendix.]
    Chairman Garrett. And I thank you for your testimony.
    At this time, before we go to Mr. Hatfield, I believe Mr. 
Fitzpatrick would like to make an introduction. And before I do 
that, I will just say I wish to thank the gentleman for his 
efforts in this area and your legislation as well.
    Mr. Fitzpatrick. Thank you, Mr. Chairman. I would like to 
introduce Mr. Jeffrey Hatfield with Vitae, an emerging biotech 
firm in Montgomery County, Pennsylvania. We welcome you today 
to the committee. Thank you, sir.
    Chairman Garrett. Thank you.
    The gentleman is recognized for 3 minutes. Mr. Hatfield?

STATEMENT OF JEFFREY S. HATFIELD, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, VITAE PHARMACEUTICALS, ON BEHALF OF THE BIOTECHNOLOGY 
                  INDUSTRY ORGANIZATION (BIO)

    Mr. Hatfield. Thank you. Good morning, Chairman Garrett, 
Ranking Member Waters, and members of the subcommittee. My name 
is Jeff Hatfield. I am the president and CEO of Vitae 
Pharmaceuticals, as mentioned, in Fort Washington, 
Pennsylvania. I want to thank you for the opportunity to speak 
today about the unique hurdles the biotech industry faces in 
its quest to discover, develop, and deliver to patients 
important new cures for diseases that plague those patients.
    Now, in finding an important balance between regulations 
that protect investors and regulatory burdens that stifle 
growth, the key is speeding breakthrough discoveries to people 
who desperately need them. Delivering new treatments to 
patients is difficult. It takes biotech more than a decade to 
research and over a billion dollars on average to bring novel 
treatments to people living with disease.
    This very long development effort is undertaken without any 
product revenue to pay for the tremendous costs. Biotech 
companies instead rely entirely on external investors to fund 
our research. Because investment dollars go directly from the 
investor to the lab, any funds devoted outside that R&D effort 
are by definition lost to scientific innovation.
    Biotechs are simple organizations. The overwhelming 
majority have less than 100 employees located in the same 
building and no product revenue. At Vitae, for example, my CFO 
personally reviews the documentation for and signs every check 
that we issue. I do the same for any check over $5,000. That is 
how capital-efficient our investors expect us to be.
    And yet if we went public, we would have to dedicate 
upwards of a million dollars annually to comply with 
requirements for internal controls for financial reporting. 
That is almost $20,000 per scientist at Vitae for compliance 
with Section 404(b) as it exists. Without product revenue, 
those funds would come directly from investors, damaging the 
conversion of their capital from science to compliance.
    Alternatively, I think about the 2010 congressional grant 
initiative called the Therapeutic Discovery Project. Vitae 
applied for and was fortunate to receive last year research 
grants totaling around $900,000. We used that to hire 
scientists to advance our work. If we were public, we would 
have had to in essence turn that money over to an accounting 
firm for auditors. It is very clear to me which choice our 
investors prefer.
    I support investor protection. In the biotech industry, an 
informed investor is a good one. If the information disclosures 
required by SOX do not align with information my investors most 
want and need--we put our historical financial reports and the 
meeting materials for every board meeting; I had one yesterday.
    Rarely, if ever, in the 8 years I have been CEO, have we 
discussed the historic financial numbers. What the investors 
focus on and want to know in great detail is about the science 
that we generate. Investors make their decisions about 
companies based on scientific milestones, not statements and 
reports mandated by Section 404(b).
    The cost of compliance far outweighs its benefits. If 
Congress can relax this regulatory burden on small companies 
like those found in the biotech industry, it will allow 
innovators and entrepreneurs to continue working towards 
delivering the next generation of medical breakthroughs which 
can someday day cure the patients who need them. Thank you.
    [The prepared statement of Mr. Hatfield can be found on 
page 108 of the appendix.]
    Chairman Garrett. And I thank you for that. Thank you, Mr. 
Hatfield.
    Ms. Hollein, welcome. And you are recognized for 3 minutes.

 STATEMENT OF MARIE N. HOLLEIN, PRESIDENT AND CHIEF EXECUTIVE 
       OFFICER, FINANCIAL EXECUTIVES INTERNATIONAL (FEI)

    Ms. Hollein. Thank you. Good morning, Chairman Garrett, 
Ranking Member Waters, and members of the subcommittee. I am 
pleased to testify before you concerning the Sarbanes Oxley Act 
and its impact on Financial Executives International. FEI is a 
professional organization of 15,000 senior financial executives 
for more than 8,000 private and public companies.
    Integrity is the necessary first principle for effective 
markets, and an important part of FEI's mission. Every investor 
depends on accurate and reliable financial reporting. Without 
the trust that comes with market integrity and sound corporate 
governance, investors withdraw, capital markets wither, 
companies cannot grow, and jobs become scarce.
    Ten years ago, Congress passed Sarbanes-Oxley to restore 
integrity to a tarnished market. Now, we have an opportunity to 
examine what has worked and how we might do better.
    During the SOX debate, FEI offered several recommendations 
which were eventually adopted into the legislation, one of 
which resulted in the requirement that a company's CEO and CFO 
certify the firm's financial statement.
    The requirement that CEOs and CFOs must personally certify 
their company's financial statements is the crown jewel of 
Sarbanes-Oxley. This sets the tone from the top, increases the 
accountability and drives better corporate governance.
    After its passage, even SOX supporters acknowledged 
portions were costly, time-consuming, and overly prescriptive. 
FEI's 2005 survey on SOX implementation showed a 66% increase 
in external consulting costs and a 58% increase in auditor 
fees. In 2011, fees continued to rise, but at a slower 5% 
average rate.
    While FEI does not yet have a position on H.R. 6161, 
offered by Congressman Fitzpatrick, a number of our member 
benefit companies would benefit from the increase in reporting 
flexibility it provides.
    As we consider new laws, regulations are not the only path 
to better markets. FEI is stepping up to the plate to research, 
improve, and share best practices in deterring and detecting 
fraud through its work as a bonding member of COSO and the 
Anti-Fraud Collaboration.
    Thank you for the opportunity to address you this morning. 
And I look forward to your questions.
    [The prepared statement of Ms. Hollein can be found on page 
115 of the appendix.]
    Chairman Garrett. Great. Thank you.
    We will now begin the questions. I am going to defer to the 
gentleman with the legislation that so many of you have been 
speaking about this morning.
    Mr. Fitzpatrick is recognized for 5 minutes.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Mr. Berlau, one of the main goals of this Sarbanes-Oxley 
Act, now 10 years old, was to protect investors. In your view, 
has the Act protected investors or protected as it was 
intended?
    Mr. Berlau. No. It has not. Its costs are very high, and 
its benefits are hard to quantify. We have seen companies fully 
subject to SOX audits like Lehman Brothers and MF Global have 
scandals and mismanagement.
    And I think the best quote on the lack of benefits came 
from Hal Scott of Harvard University who said that it remains 
empirically unclear whether adherence to SOX 404 achieves its 
intended benefit. What is often cited are the increasing number 
of restatements--but Professor Scott makes clear that some of 
those may be due to technicalities and the market prices have 
not really reflected these were large misstatements that 
Sarbanes-Oxley detected.
    Mr. Fitzpatrick. So, did Sarbanes-Oxley help to prevent the 
financial crisis in 2008?
    Mr. Berlau. It did not. In fact, it may have hurt.
    The lack of IPOs may have shifted more investment than 
would have otherwise occurred into real estate. It certainly 
kept the focus away of companies expanding and building a 
profitable firm. All of these technicalities, like keeping 
track of office keys and some of the other things accounting 
firms counted as internal controls, may have compromised 
companies' focus on risk management.
    Mr. Fitzpatrick. Professor Bullard, in your statement, I 
think you indicated on the subject of audit firm rotation that 
you are in favor of the mandatory rotation rule that is 
currently being considered or being developed. That would be an 
expansion of Sarbanes-Oxley. Is that accurate?
    Mr. Bullard. I am sorry if my testimony was not clear. It 
is not that I support it. I am somewhat skeptical of whether 
mandatory rotation would be beneficial. But in reviewing the 
PCAOB's review of this issue, and their extensive requests for 
information from the business community, I think they are 
handling it wisely. And I think it would be better to leave 
them the flexibility to find the right approach.
    Mr. Fitzpatrick. Do you think that PCAOB should engage in a 
cost-benefit analysis as a condition to going forward on the 
rule, to see what the actual cost is?
    Mr. Bullard. Yes, it should.
    Mr. Fitzpatrick. Mr. Hatfield, the high costs associated 
with Sarbanes-Oxley Section 404(b) compliance has been listed 
repeatedly by small and emerging companies as one of the 
deterrents from listing in the U.S. public markets. Would you 
agree that it is not only the real dollar cost of compliance, 
but also the opportunity cost that is an issue?
    Mr. Hatfield. Absolutely. The financial costs obviously are 
daunting for a company that is putting every investment dollar 
toward clients. The cost for developing breakthrough medicines 
or cures for people is daunting. Every dollar needs to go to 
that science. Every dollar that does not go there detracts from 
the ability to advance those cures. I would say that it is 
coming short, the opportunity costs, in a couple of ways.
    When the science does not get done, then people living with 
those diseases do not get the cures. And I think that is the 
most significant opportunity costs. If we are taking it away, 
we are taking it away from scientists, and giving it to the 
fulfillment of compliance.
    And people living with chronic kidney disease, with 
diabetes, with Alzheimer's, all the things we work on, how can 
we tell them that we did not get them the cure, but we are 
compliant with regulations? I think that is tough to say.
    The opportunity costs over a billion dollars to be able to 
develop these medicines. Investors want protection, but they 
want protection to make sure the science gets done. That is why 
they put the dollars in.
    They are not investing for dividends. They are not 
investing for revenue growth. They are investing to deliver 
these cures. And I think that is the most important focus. If 
we are not doing that, we are not doing our jobs.
    Mr. Fitzpatrick. So, what are you hearing from investors, 
perhaps your investors, about the cost of your entity to comply 
with Section 404?
    Mr. Hatfield. I just had a board meeting with our investors 
yesterday, talked to them about coming here and talking to the 
subcommittee. And their direction to me--these are the 
investors speaking--was to go get rid of that regulatory burden 
because we want to get to science.
    The fact of the matter is that complying with Section 
404(b) has been for years the number one discussion point in 
boards as we think about going public. That is the number one 
drain, the reason not to do it. Private companies' CEOs feel 
that it is not worth it to go public, often because of the 
burden. And CEOs say we do not want to go--public CEOs say we 
should go private because it detracts from what we intend to 
do.
    Chairman Garrett. Thank you for your time. The gentleman 
yields back. Thank you.
    The gentlelady from California is recognized for 5 minutes.
    Ms. Waters. Mr. Chairman, I have a question for Mr. John 
Berlau.
    The Dodd-Frank Wall Street Reform Act permanently exempted 
companies with the public float of less than $75 million from 
Sarbanes-Oxley Section 404, which effectively exempted 60 
percent of all public companies.
    In addition to that, Congress also passed the JOBS Act, 
which would exempt newly public companies. What additional 
percentage of companies would be exempt if the Fitzpatrick bill 
became law, and if the Congress keeps passing additional 
exemptions? Does Sarbanes-Oxley become meaningless at some 
point?
    Mr. Berlau. Congresswoman Waters, thank you for the 
question. And thank you for your support of the JOBS Act.
    Ms. Waters. You do not have to tell everybody.
    Mr. Berlau. Okay.
    [laughter].
    I do not know what percentage of--I can get back to you on 
that. I think Congressman Fitzpatrick's bill is important 
because say there were a biotech company like Mr. Hatfield's 
and all of a sudden there were an FDA approval or a sign of 
good work or something.
    The company is taking in no new revenues or new profits. 
But its--a stock price could shoot up. And all of a sudden, 
even though the assets, the profits or the revenues have not 
changed, the company could be classified as a large company. 
And then, it could have all these additional costs, and it is 
just trying to develop its product again and create jobs. So, I 
think that is why reclassifying what public float and market 
cap is, and using another measure, is important.
    Ms. Waters. Mr. Coffee, what do you say to that?
    Mr. Coffee. I would tell you we are talking right now about 
basically taking 1,000 companies outside of the range of having 
Section 404(b) compliance. The SEC elaborately studied this a 
year ago, and the SEC reported that companies that are 
compliant with Section 404(b) have a rate of restatements that 
is 46 percent lower than the rate of companies that are not 
compliant.
    If you take 1,000 companies, and say there is a 46 percent 
difference in the rate of restatements, that is an awful lot of 
fraud. And I think it is going to make investors quite nervous 
about that kind of change.
    Moreover, it is not just the 1,000 companies that are in 
this zone between $75 million and $250 million. The way the 
statute has been written, any company that has under $100 
million in revenues, even though it might have a market cap or 
a public float of $690 million, would be exempt.
    So, I think you are giving a very large exemption, 
permanently, not for 5 years the way the JOBS Act does. And I 
think the SEC is right to say the case has not been made for 
that large an exemption.
    Ms. Waters. Mr. Bullard, do you agree with Mr. Coffee's 
analysis of Mr. Fitzpatrick's bill?
    Mr. Bullard. Yes, I do agree. But I would like to sort of 
bifurcate it. There is the point about what should be the 
standards that should apply. And I agree with Professor Coffee 
that the standards should be the existing Section 404(b) 
standard.
    But I would also like to add that the current approach to 
exemptions is essentially not taking issue with the standards 
as applied by regulators; it is essentially saying there should 
not be a requirement for management assessment or evaluation. 
There should not be any audit or attestation.
    The efficient way to approach this, especially for those 
who are interested in cost-benefit concerns, should be for 
regulators to decide what the right level is, not to grant 
wholesale exemptions that essentially make absolutely 
meaningless the idea of a public company for regulatory 
purposes.
    The issue here really should be regulatory oversight. It 
should not be the very fundamental protections that I have not 
heard any particular objection to, that are in Section 404(b) 
itself.
    Ms. Waters. Thank you very much.
    Mr. Berlau, you had the first word on this. I have heard 
from Mr. Bullard and Mr. Coffee. Do you have a rebuttal?
    Mr. Berlau. Yes. I think that this lets investors decide 
how much internal controls are worth to them. And I think you 
are seeing a lot of investor interest in Kayak, the travel 
site, and Five Below, the discount teen retailer--I had to ask 
my intern what that was.
    And really one of the criticisms of the internal control 
requirements is it has been defined as things like office keys, 
in some cases, or the number of letters in employee passwords; 
things that are not exactly relevant to good corporate 
governance and risk management. So, it is letting the public as 
investors decide how much these internal controls are worth, 
while still policing and protecting from fraud. That's what the 
JOBS Act and Mr. Fitzpatrick's bill would do.
    Chairman Garrett. I thank the gentleman. And the gentlelady 
yields back.
    Mr. Schweikert is recognized for 5 minutes.
    Mr. Schweikert. Thank you, Mr. Chairman.
    First off, a fundamental issue, and I would love first an 
explanation from the panelists and tell me if you see something 
other than I do. I look at the aggregate data of the last 
decade. And yes, there has been some--a bit of a financial 
rollercoaster through there.
    But even when you adjust for 2008, what happened to IPOs, 
after the SOX mechanic, what happened to the U.S. IPO market, 
particularly in juxtaposition to what was happening in other 
places around the world?
    When I look at aggregate data today, there is literally one 
third fewer publicly traded companies today than there were a 
decade ago. So, this is one step off saying okay, the 
disclosures, the protections that were designed in SOX may be 
absolutely appropriate and justified.
    Something happened in our U.S. capital markets. And first, 
I would like to start with the professor. What happened, and is 
there a linkage?
    Mr. Bullard. There are academics with more expertise on 
that. My survey at least is there are a lot of explanations. 
Probably the principal one is that other countries just got a 
lot better at attracting that kind of business, as they have 
with respect to a lot of areas of commerce. But I will leave it 
to Professor Coffee, who has a lot more expertise in this area.
    Mr. Schweikert. My friend to the left?
    Mr. Berlau. Yes. There--certainly there has been a long--
the data shows there has been a long-term decline. There is 
disagreement about the causes although I would say the return 
of some after the JOBS Act would argue that Sarbanes-Oxley was 
a big cause of that.
    But there were fewer IPOs, for instance in 2006, a 
relatively good year for economic growth, an expansion year, 
than there were in 1991 when we were coming out of recession, 
fewer absolute numbers. There has been a debate in the economic 
literature that IPOs might actually be countercyclical. And 
that as debt is closed off people will issue more equity, so we 
do not have this tool to help us come out of the recession.
    Mr. Schweikert. Mr. Coffee?
    Mr. Coffee. Basically, and I do study IPOs, what issuers 
are looking for is not an IPO, but to raise capital by the 
least-costly means. And beginning in the period of around 1998, 
private placement became a much cheaper means of raising 
capital.
    Mr. Schweikert. But doesn't that make the point that 
private placement became less expensive than going public? And 
for some reason, going public got much more expensive in 
capital formation?
    Mr. Coffee. The first thing I would tell you is that public 
offerings became much more difficult after the Internet bubble 
burst. A tremendous amount of money was lost and people would 
not go back to the people who sold them Pets.com. Investors 
learned a very harsh lesson--
    Mr. Schweikert. But your comment is that the same investors 
then would go through private equity.
    Mr. Coffee. No. I am saying, first, private placement, 
which is often debt and sometimes equity became much cheaper 
and much easier to raise.
    Second, smaller issuers simply cannot do IPOs under any 
structure because large institutional investors, who are the 
principal purchasers in public offerings, want high liquidity. 
What we are seeing is that to the extent we have public 
offerings today, they are in the $500 million range because 
that is what institutional investors demand.
    I would suggest that things like--
    Mr. Schweikert. We can get back to that point, because in 
my minute-and-a-half, you may have hit on something I am 
heading for.
    Mr. Gallagher?
    Mr. Gallagher. Thank you, Congressman.
    As was said before, there are so many reasons. You cannot 
isolate one specific reason for the change in IPOs during that 
period. It is very dynamic for multiple reasons including the 
availability of capital.
    But I would also say during that period between 2006-2007, 
the requirements and how Section 404(b) in particular was 
implemented after that time period have been much more 
efficient because of some standard setting changes and the way 
the auditing profession and the way the companies are dealing 
with Section 404(b).
    Mr. Schweikert. Ms. Hollein?
    Ms. Hollein. Yes. First of all, our membership is more than 
50 percent private companies. And there are a variety of 
reasons for the increased number of companies that are choosing 
to remain privately owned rather than go public, partly because 
of the regulatory reporting and the internal control 
requirements with which public companies must comply. But an 
additional difference would be in the tax treatment that has 
motivated many of these companies to remain private.
    Mr. Schweikert. Okay. And you do understand--I do not know 
if you all were listening to each other. The cross-messaging we 
get is that Sarbanes-Oxley raised costs. It was the 
availability of capital. But everyone moved over to private 
placements and--so the money was over here, but it was not over 
here so it could not have been choking off of capital because 
they found the money over here. We got a mixing of messages.
    What is the--
    Chairman Garrett. Sorry. The gentleman's time has expired.
    Mr. Schweikert. And we missed the punch line. Thank you, 
Mr. Chairman.
    Chairman Garrett. We will come back to the punch line.
    The gentleman from Massachusetts.
    Mr. Lynch. Thank you, Mr. Chairman.
    First of all, I want to thank all the witnesses. I want to 
especially thank you for your thoughtful testimony. It has been 
varied, but I think in all cases it has been very astute and 
thoughtful.
    I would like to focus, Mr. Bullard, Mr. Coffee and Mr. 
Gallagher, on the proposal to rotate the auditors. Mr. Bullard, 
you have gone agnostic on this, I guess. But there are a couple 
of factors.
    One is it is rather arbitrary to say every 5 years, for 
instance, we are going to require a company to change auditors 
and bring in a new company. There are some cost factors with 
that. Obviously if a company is auditing year-to-year, there is 
a certain efficiency that is gained by the familiarity with the 
way that company works. But there is the integrity factor that 
auditors are not being captured by the client.
    So, if you would, Mr. Bullard, Mr. Coffee, and especially 
Mr. Gallagher because of your position, I would like to have 
your thoughts on that, the cost and the efficacy of actually 
rotating auditors.
    Mr. Bullard. I will be very brief. My main concern was that 
Congress not prevent the PCAOB from finding the right solution. 
And a statutory prohibition would place into doubt whether the 
PCAOB could take an alternative approach such as having a 
presumption that the audit relationship at the end after 10 
years, and that the board had to do something to overcome that. 
Or that there would be some kind of mandatory disclosure or 
findings made by the board.
    If Congress acts in this respect, those alternative 
approaches come into question as to whether the PCAOB would 
have that authority. So, audits themselves, I think even the 
investor community has some ambivalence about whether this is 
the right way to go. But I see a great deal of thought given to 
this by the PCAOB. My main point would be to let the experts 
decide the question.
    Mr. Lynch. Very good. Thank you.
    Mr. Coffee?
    Mr. Coffee. I am going to give you a very equivocal answer 
after all that. I am not able to endorse the idea yet of 
mandatory rotation of the firm. We do rotate the auditing 
partner. And there are other countries that are now requiring 
mandatory firm rotation. I would like to see what their 
experience is.
    I do think this has to be given a thorough cost-benefit 
study. And I believe that the PCAOB--and I serve on one of its 
advisory boards--would not do this without a very thorough 
study because they will be subject to judicial review. So, I do 
not think this is about to happen.
    Mr. Lynch. Okay. Fair enough. Thank you.
    Mr. Gallagher?
    Mr. Gallagher. Congressman, my view is that audit 
committees are in a very good position to make a decision based 
on the specific facts and circumstances that exist at a 
particular company about how to select the auditor and 
mandatory firm rotation would limit the audit committee's 
ability to make that judgment. Who is in the best position, as 
opposed to a one-size-fits-all solution, I think is a better 
way to go in terms of quality.
    There has never been any linkage between tenure and 
negative impacts of audit quality. In fact, if anything, 
history tells us otherwise.
    But that said, I do agree with Mr. Bullard that I think 
this is appropriately dealt with at the PCAOB. I think the 
process has been a good one. And I think you wind up at the 
right answer.
    Mr. Lynch. Thank you. I have a minute-and-a-half left.
    Ms. Hollein, you mentioned in your testimony that you 
considered that the crown jewel of Sarbanes-Oxley was the fact 
that we have the CEOs and CFOs sign off on financials after the 
first district's decision that said that on a whistle-blower 
case, a nonpublic company would not be bound by allegation or 
attestations that they made.
    Do you think that we should also require nonpublic 
contractors to these companies to also be bound by the same 
penalties and prohibitions that we place on the CEOs and CFOs? 
In other words, if I hire a nonpublic accountant, they are not 
bound by the same restrictions that we placed on those subject 
to Section 404, for example on Sarbanes-Oxley. Have you given 
any thought to that? I know that you sort of mention it in your 
remarks.
    Ms. Hollein. Yes. We do feel--just looking at it we 
actually studied more of the public company sectors of our 
membership more than the private companies related to the 
Whistleblower Act. We do feel, however, that the CFOs and CEOs 
having signed off on it has provided a more robust process 
within the terms. And this would also possibly benefit the 
private companies, although we would have to study that further 
to see what the burden would be on those individual companies.
    Mr. Lynch. Okay. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    The gentleman from Texas, Mr. Hensarling, is recognized for 
5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Berlau, in your testimony, you advocate repeal of 
Section 404 of Sarbanes-Oxley. You say essentially it does not 
meet the cost-benefit test.
    And I think, Mr. Coffee, you used the same phrase. I want 
to let you know how welcome the phrase ``cost-benefit'' is in 
this committee room. We rarely hear it uttered.
    On the cost side, Mr. Berlau, I guess you allude to SEC 
data that cites an average cost of compliance with Section 404 
of $2.3 million. I think, Mr. Hatfield, you said the average 
compliance for a biotech company was about $1 million. So, I am 
trying to focus somewhat on the cost side of the equation.
    There has been some discussion. I would like to study it a 
little bit more carefully. We know that there have certainly 
been fewer IPOs and that the IPOs we have had post-SOX have 
been larger. So, we can certainly have a debate about the cause 
and effect of that.
    Mr. Berlau, you also refer to the fact that--I guess you 
quote Bernie Marcus, the co-founder of Home Depot, who 
apparently has been quoted publicly on a number of occasions 
saying that he never could have taken Home Depot public had 
Sarbanes-Oxley been in effect when Home Depot was launched.
    So, again, I am trying to isolate the various costs that we 
have, not just direct cost to the companies. But there is 
obviously an opportunity cost for average retail investors who 
might have missed out on the next Home Depot.
    Can you elaborate on other costs that you see with respect 
to Sarbanes-Oxley? And particularly the cost of perhaps 
channeling some of these start-ups or emerging growth companies 
to private placements and debt as opposed to public equity?
    Mr. Berlau. Yes. I think this is what the Facebook IPO and 
the flaws in that, the after effects demonstrate that maybe it 
was just too big to succeed.
    When Home Depot went public in the pre-SOX era, it had just 
four stores to its name. It used the money from going public to 
build hundreds of stores and employ the 300,000 people it does 
now. Whereas, in contrast, when Facebook went public, it was 
already a household name and some of these other things. And it 
was--and its IPO was $100 billion, and less than that as the 
share price has gone down.
    So I really think this shows how retail investors, ordinary 
investors cannot get in on a Home Depot at its growth stages or 
a Starbucks or a Cisco Systems. It all went public when they 
were relatively small.
    And the good news is that already with the JOBS Act, with 
just the 5-year exemption, we are seeing companies like 
ClearSign Combustion, a green technology company out of Seattle 
that has a $20 million market cap IPO. I do not think we have 
seen one this small since before Sarbanes-Oxley.
    So, the SEC still says--although some costs have come down 
slightly--Section 404 is 7 times as costly for a smaller 
company as in a larger company, and for its investors as well.
    Mr. Hensarling. Mr. Bullard, in listening to your 
testimony, if I heard you properly, you did not find fault with 
Section 404. You found fault with the implementation of Section 
404. And I thought I heard you say that you essentially believe 
that the regulators have it wrong and the cost could be much 
lower. Did I hear you properly? And if so, can you elaborate?
    Mr. Bullard. I did say the first part, but not necessarily 
the second. I think that the history shows that regulators have 
conceded they probably got it wrong with respect to the first 
implementation of Section 404(b), and that is essentially the 
audit standards issued by the PCAOB.
    Today, what we have seen is the SEC economists have found 
that there have been declining costs. The PCAOB has 
substantially revised the requirements under Audit Standard 5. 
And I think that is the appropriate way for this to proceed. I 
do not think anyone--
    Mr. Hensarling. If I could, I see my time is running out. I 
want to try to slip in one more question.
    Mr. Berlau quoted Professor Scott of Harvard Law School who 
says that it remains empirically unclear whether adherence to 
SOX 404 achieves its intended benefit. Mr. Gallagher, you spoke 
of some of the benefits that you perceive. But just how 
empirical are these benefits versus anecdotal?
    Mr. Gallagher. Congressman, I think if you look at the 
intended purpose of SOX in terms of financial reporting, and 
the fact that restatements went down after it worked itself 
through the system and the internal controls got significantly 
better, identified the issues that were there prior to the 
implementation. Restatements have gone down significantly, and 
I think that is a tribute to the benefits of SOX.
    Chairman Garrett. Thank you.
    Mrs. Maloney is recognized for 5 minutes.
    Mrs. Maloney. Thank you for calling this hearing. It is an 
important one. And I thank all of the panelists here today.
    I truly do believe that markets run more on trust than on 
capital. You see it all the time. And I believe we have to 
remember why Sarbanes-Oxley was created in the first place. It 
was to restore trust. Some of our most respected companies that 
were rated AAA plus, crashed in 24 hours, wiping out jobs, 
wiping out pensions, 401(k)'s, devastating communities in which 
they were located. And it was a horror.
    And I got phone calls. I believe probably everybody on this 
panel did, calling upon us to restore confidence. And it was 
legal, a lot of things. It was legal to hide tremendous losses 
and lack of capital. So, in a bipartisan way, Sarbanes-Oxley 
was passed and put into law.
    I would like to ask Mr. Bullard and Mr. Coffee--and I have 
to mention that Mr. Coffee is from the great State of New York 
and teaches at one of our very important institutions. We 
welcome you today. Thank you for your service and for being 
here.
    But were we successful on our primary goal of restoring 
confidence? We would have done nothing if there had not been a 
crash. We would not have done it. We would not have moved. But 
there was a problem, an accounting scandal. So, we worked to 
address it.
    So, Mr. Coffee, since you are from my home State, if you 
would respond first, and then Mr. Bullard, from the great State 
of Mississippi. I am so glad you are here. Thank you.
    Mr. Coffee. I agree with what you were saying. Investors 
pay a price based on how they perceive the risk and return. If 
they think the risk of fraud is high, they will pay a lower 
price. And thus, companies will find capital much more 
expensive.
    The number of IPOs has never recovered from the Internet 
bubble in 2000-2001. And there is also this large impact of 
Enron, WorldCom, and the series of accounting scandals.
    Did SOX thoroughly cure the problem? Probably not, but 
thoroughly curing the problem would be extraordinarily 
expensive. So, SOX was a partial step in the right direction.
    The SEC studied this in response to Dodd-Frank, which they 
asked them to study what further exemptions should be done from 
Section 404. And they felt that Section 404(b) was working, and 
that giving a broader exemption would produce a lot more fraud. 
The case has not been made.
    I am not in a better position than the SEC to disagree with 
them. There will be debates, continuing debates about the costs 
and benefits of Section 404. But you are quite right. It is 
intangible. Do investors trust companies? And I would say the 
series of scandals that we have seen recently, including the 
ongoing Libor scandal, makes them distrust not only companies, 
but the adequacy of regulatory oversight.
    Mrs. Maloney. Mr. Bullard?
    Mr. Bullard. I agree very much with Professor Coffee's 
statements. And I would add that one of the issues, as 
Sarbanes-Oxley has matured over time, has not necessarily been 
problems with the statute in and of itself.
    We very rarely hear somebody criticizing SOX and then 
actually referring to the terms of the statute. What you see is 
criticism with respect to implementation. And as Chairman 
Garrett has been particularly sensitive to, part of this is an 
issue of the SEC's historic problems with doing cost-benefit 
analysis.
    But I think we need to recognize it is in a revolutionary 
period, hiring many more economists as we speak. And that what 
we need to keep sight of is the appropriate structure of 
administrative law as something can actually operate 
efficiently. And it cannot operate efficiently with 
micromanagement at the congressional level. We need the SEC to 
evolve as it has--as it currently is in the cost-benefit 
frontier.
    Mrs. Maloney. Very briefly, I would like to follow up on 
Professor Coffee's statement on the SEC study, and I invite 
anyone to respond to it, that the amount now at $75 million 
exemption. And many of us in fact even had a bill at one point 
from $50 million exemption.
    Dodd-Frank had the $75 million at 60 percent--covered 60 
percent of the companies in America. But the SEC study said 
that there was no reason to exempt anymore. If you could 
elaborate on that, or if anyone else would like to mention it.
    And as I understand it, the real cost is when you set up 
the infrastructure and the reporting system. And once you have 
set that up, then the cost to the companies is not--
    Chairman Garrett. The gentlelady has 30 seconds left for an 
answer.
    Mrs. Maloney. Mr. Coffee? Do you want to respond?
    Mr. Coffee. I did not want to take all the time. I agree 
with what you are saying. The cost is front-loaded. The 
companies who would now be exempted have been complying with 
Section 404(b) for 5 years or more. And therefore, while they 
would like to have their costs reduced, they really are--these 
really are some costs. We are not talking about subjecting new 
companies to them.
    Chairman Garrett. Thank you.
    Mrs. Maloney. Thank you.
    Chairman Garrett. Mr. Royce is recognized for 5 minutes.
    Mr. Royce. I think Mr. Coffee has had some insights, some 
key insights, and I think over the years, some of these 
insights have been included in legislation.
    Your overarching idea of applying the penalty not to the 
shareholder, but to those officers, those directors who are 
culpable--you have written about this in the past. You have 
witnessed in the past years over the subject. That is a key 
component of Sarbanes-Oxley. And that is one that I think is 
very effective in terms of those disincentives.
    The premise, however, and here is where we get into a 
question of cause and effect. We can readily agree that the 
dot-com bubbles and the malfeasance that has occurred in the 
market have had an impact against IPOs. But when we look at 
market share, and originally the United States was the majority 
of IPOs, then we watch it go to 11.5 percent. Then we watch it 
go to 8.6 percent.
    And in the context of IPOs worldwide being rolled out in 
Europe and Asia, and our market share continues to fail to 
address amendments to the cost of Section 404(b), especially to 
those new companies like Mr. Hatfield's. And I want to ask him 
about this because if you look at the biotech industry, and I 
read his testimony and--their efforts, expertise, kidney 
disease, Alzheimer's, how you get a cure for dementia.
    What is not seen in all of this is his thesis that money 
taken away during this on-ramp out there from that type of work 
and applied to these kinds of costs, which is not a good fit, 
especially for a biotech company going public. Why can't we 
look at amending the Act so that we still achieve your 
overarching goal, Professor Coffee, which is a very good one?
    But at least we begin to recognize that besides what you 
see in front of you there are these unseen costs in terms of 
his diabetes trials, which you know if there is a cure here we 
want this to come to market soon. That has to be weighed in the 
balance. And I think I would ask you about that.
    Mr. Coffee. I agree with what you are saying. But it leads 
me to believe that you do not want an all-or-nothing approach 
that says all companies of less than $250 million public float 
are excluded.
    What I think you need, and the person missing from this 
table is the chairman of the PCAOB, in terms of are there more 
focused, more surgical ways of reducing these costs with 
smaller companies?
    Mr. Royce. Okay--
    Mr. Coffee. And that kind of focuses--
    Mr. Royce. But I have to let Mr. Hatfield talk for a 
minute, too.
    Mr. Hatfield, could you explain the conundrum here, 
succinctly?
    Mr. Hatfield. I will try that. But I support many of the 
provisions of SOX. I think investor protection is really 
important. The key issue is balance and cost-benefit for that. 
IPOs are down. And I can cite specific conversations amongst my 
colleagues in our boardroom that one of the primary reasons for 
that is bureaucratic burden that takes away from our mission.
    Mr. Royce. Talk about the IPOs in the biotech sector, 
because those numbers are impactful.
    Mr. Hatfield. It is terrible. That is one of the most 
important discussions that are going on in boardrooms, whether 
or not to take on that burden, whether to divert funds from 
investors into compliance.
    I think the great example of whether or not this really is 
an issue is what the JOBS Act has done. If I look now at the 
filings that have occurred since the JOBS Act was enacted--and 
thank you for that--Biotech ought to be 3 percent. It is 25 
percent in the filings now. So obviously, something was 
relieved, pressure on the system that now allows biotech 
companies that are trying to create these cures to actually 
access--
    Mr. Royce. And other CEOs in your field, what is their 
reaction to this legislation that we are discussing today in 
terms of further amending Sarbanes-Oxley?
    Mr. Hatfield. One of the comments that I got--I was talking 
to somebody who runs a public company. And he said, ``Hey Jeff, 
what I regret about going public is I switched from leading the 
company to being chief compliance officer. And that really 
changed my life.'' So, that is what I would like--balance is 
important, but right now, Section 404(b) for companies in the 
biotech industry is a large burden.
    Mr. Royce. Thank you.
    Mr. Chairman, thank you.
    Chairman Garrett. Right. Mr. Himes will have the last 5 
minutes. And then, in order to get more people in, we are going 
to go down to 3-minute questioning.
    Mr. Himes?
    Mr. Himes. Thank you, Mr. Chairman.
    And thank you to the panel. I have actually found this 
discussion incredibly interesting. And I think anyone listening 
to the panel would arrive at the conclusion that yes, 
regulation does impose costs on companies like Mr. Hatfield's, 
costs that may or may not be wise, depending on whether they 
reduce the risk premium that investors would subtract from Mr. 
Hatfield's business to invest in it.
    It is that simple. And I have not heard a single thing from 
this panel saying that SOX has not actually improved investor 
protection. And yes, there are costs.
    My colleague Jeb Hensarling said that we do not engage in 
cost-benefit analysis as much as we should, and I could not 
agree more. And part of the problem is that we can quantify the 
costs that someone like Mr. Hatfield bears.
    We are in disagreement here. Mr. Berlau has $2.3 million. 
The SEC study says $600,000. We can quantify that. There are 
3,500 filers who have to pay Section 404 costs. But the benefit 
is a little harder to get at. And I want to explore that a 
little bit.
    Mr. Berlau, in your testimony, which I found colorful, and 
I appreciate that, by the way--
    Mr. Berlau. Thank you.
    Mr. Himes. Your opening metaphor here that we need to 
liberate to stimulate, that we should think of this as grass 
that is growing; one does not need to teach or subsidize grass 
to grow, rather remove the rocks obstructing its growth and it 
will grow wide and tall. It makes me want to break out in song.
    [laughter].
    Mr. Berlau, is this the metaphor we should think about that 
you should frame this debate in? And let me ask you a specific 
question: Have you ever come across a blade of grass that 
borrowed money that had shareholders, or that could make a 
decision to commit fraud?
    Mr. Berlau. I cannot take credit for that metaphor. That 
was my vice president, Wayne Crews, my boss. That is the way we 
look at all public policy.
    But yes, I think investors and entrepreneurs--it is sort of 
like a garden. And the question is, people come together and 
make different arrangements.
    But it is the government's role to prevent--to make sure 
that there is transparency, and there is not fraud. And it is 
up to the gardeners and all of the different people who take 
care of the--to come up with--
    Mr. Himes. My question was partly rhetorical. So, let me 
explore this question of cost-benefit. Thank you for the 
answer, though. It is hard to get your arms around what the 
benefits are because we are talking about crises averted. But I 
am struck by the fact that the numbers and the costs, and I do 
not in any way not take seriously how expensive a dollar is to 
a company like Mr. Hatfield's. VCs, angel investors extract a 
very substantial price for that dollar.
    So, do not get me wrong on this. But the costs that we are 
talking about in this cost-benefit analysis are always in the 
hundreds of thousands and millions of dollars. Mr. Berlau, you 
say $2.3 million. The SEC study says $600,000. What about the 
costs?
    Mr. Berlau, what was the peak market capitalization of 
WorldCom and Enron, those two companies? What was the peak 
market cap of those two companies?
    Mr. Berlau. Let me say first--
    Mr. Himes. No, a simple question. Please answer it.
    Mr. Berlau. I--
    Mr. Himes. The peak market cap of Enron and WorldCom was 
$250 billion combined, a quarter of a trillion dollars in value 
obliterated by fraud.
    Now, I am not going to make the argument--I will let the 
panel make the argument if they want--that SOX is perfect. But 
I do not need to. Because if I take the 3,500 filers of Section 
404 and I use your number of $2 million, I get about $7 
billion, a very--
    Mr. Berlau. That is the SEC's number. I can send you the--
    Mr. Himes. Okay. Whatever. I will give you the $2 million. 
Let us just say $7 billion, because we have 3,500 filers. That 
is $7 billion, expensive dollars--$250 billion in market cap 
obliterated in the meltdown which David Schweikert called a 
little financial rollercoaster, with $17 trillion in U.S. 
household wealth obliterated. So, can I take some fraction of 
those numbers and hold those against your $7 billion?
    Mr. Berlau. Sarbanes-Oxley was in effect before the 
meltdown and it did not seem to do much. The question is, will 
this achieve its intended benefit? And as Professor Scott of 
Harvard said, it is unclear that it does.
    Mr. Schweikert. And will the gentleman yield for a second?
    Mr. Himes. No. I am actually--I have 33 seconds, so I am 
not going to yield.
    Do you agree that I can take some fraction of the $250 
billion of obliterated market cap of Enron and WorldCom and 
hold that on the opposite side of the scales of the $7 billion 
that SOX apparently costs us on Section 404? Is that a fair way 
to think about it?
    Mr. Berlau. Only if you can show the provision actually 
affects that and prevents that type of--
    Mr. Himes. Do you believe that Section 404--there are 
studies that show that it reduces the rate of restatement. Do 
you believe--
    Chairman Garrett. The gentleman's time has expired.
    Mr. Himes. --that has no effect?
    Chairman Garrett. So, that will be a rhetorical question as 
well.
    [laughter].
    The gentleman from New Mexico is recognized for 3 minutes.
    Mr. Schweikert. Mr. Chairman, quick parliamentary inquiry.
    Chairman Garrett. Yes?
    Mr. Schweikert. Sarcasm is banned from the committee.
    Chairman Garrett. From this point on.
    Mr. Schweikert. Thank you, sir.
    Chairman Garrett. The gentleman from New Mexico is 
recognized for 3 minutes.
    Mr. Pearce. I thank the gentleman for lowering the time to 
3 minutes just as I start.
    Mr. Coffee, you refer to an SEC study in justifying some of 
your positions about this. And so I guess my question is that 
this is the same SEC that was sitting in the room when MF 
Global was transferring money out of segregated accounts, and 
you want us to sit up here as policymakers and just blithely 
take that.
    And with just 3 minutes, we will probably move on, but--if 
we will go ahead and look at MF Global, Sarbanes-Oxley was in 
effect. And wasn't MF Global making trades just a day before 
the report period came out so that they would understate the 
amount of actual debt they had in the actual--
    Mr. Coffee. You seem to be describing the Lehman Brothers 
scam, the repo--
    Mr. Pearce. No. I am talking about MF Global. I am talking 
about Jon Corzine. I am talking about Jon Corzine who came in 
here and testified. And yes, they were taking stuff off the 
balance sheets. And it is in place. And you are quoting the 
SEC--
    Mr. Coffee. I am certainly not defending MF Global.
    Mr. Pearce. I will tell you when it is your time to speak. 
You are trying to get--you are trying to say that the SEC is 
going to be the great protector. And I am telling you they sat 
in the room and watched MF Global take that money out of 
segregated accounts. They were watching them as they moved 
stuff on and off.
    Now, Mr. Berlau will tell you that I am not necessarily a 
great critic of Sarbanes-Oxley. But we are trying to find a 
balance point here. And when you come in and say, ``the SEC, 
the SEC, the SEC,'' and we watch from up here what the SEC has 
done under this law, and we watch what they did in the complete 
meltdown, the illegal transferring of assets out of segregated 
accounts. Then, I say that I am not sure the answer is 
regulation.
    Mr. Berlau, they have really brought up good points that 
the market is about trust. So, you cannot just walk away from 
that. You cannot walk away from the fact that trust is needed, 
and things do happen on balance sheets that cause a lack of 
trust. How do you, in your mind, rectify those two?
    Mr. Berlau. I would certainly agree with that. And before 
this--MF Global was such a basic failure of rules in place even 
before Sarbanes-Oxley. For decades, it was the first rule of 
thumb that you--
    Mr. Pearce. I just need an answer. Just skip to it. We are 
really short of time. We have 15 seconds. So--
    Mr. Berlau. I am sorry. Can you repeat the question?
    Mr. Pearce. Yes, trust. How do you find it if you say we 
should repeal it? How do you find the trust in the market? How 
do you find the confidence because people have some more--Mr. 
Himes was asking a very good question.
    Mr. Berlau. Well--
    Chairman Garrett. Okay. I--
    Mr. Berlau. --they are to police fraud and reputation. 
Reputation is a commodity. Like Warren Buffet, other CEOs have 
developed.
    Mr. Pearce. Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. I thank the gentleman from New Mexico.
    The gentlelady from New York, Ms. Hayworth, is recognized 
for 3 minutes.
    Dr. Hayworth. And I thank the chairman.
    I am going to follow Mr. Himes' query regarding the--and I 
realize it becomes--
    Chairman Garrett. The gentlelady will suspend.
    Can we set the clock for her 3 minutes?
    Dr. Hayworth. Oh. Thank you.
    Following on regarding--and acknowledging that it can be 
exceedingly difficult, especially from the macro level, to 
calculate the relative costs and benefits, counterfactuals; 
obviously, we are all arguing different sides of this.
    But when we talk about the relative cost to the economy, 
Mr. Berlau, would you venture a guess as to the opportunity 
cost that has been lost as a result of certain more onerous 
aspects, shall we say, of Sarbanes-Oxley in having a chilling 
effect on the public offering marketplace? There must be a 
certain number of trillions involved in that as well or a 
certain fraction of trillions at least.
    Mr. Berlau. Two numbers are important. Ivy Zhang of the 
University of Rochester published a paper in which she 
estimated, as you said, Congresswoman Hayworth, the opportunity 
costs of companies not listing other things of Sarbanes-Oxley 
as being as high as $1.4 trillion.
    I would also note in the IPO Taskforce organized by the 
Obama Treasury Department that they said that the cost of the 
long-term decline in IPOs in terms of jobs lost associated with 
that would be about--could be as high as 22 million jobs not 
created in the past--it the past decade or so. And it is--so a 
lot of the--yes, there are a lot of opportunity costs. And it 
is hard to measure. But what some of the--even some of the 
things that have been measured and shown is just quite 
chilling.
    Dr. Hayworth. So, it is fair to say that there is probably 
room for improvement. And I take Mr. Gallagher's comments very 
seriously, and those of others on the panel, regarding the 
importance of having accuracy in the representation of 
financial statements. Obviously, that is a very important 
aspect.
    But, Mr. Hatfield, would you say as an entrepreneur that 
there is a balance that we can reach and that we can provide a 
certain amount of liberations like Mr. Berlau says, but also 
allow for that investor assurance that Mr. Gallagher and 
Professor Coffee have advocated for?
    Mr. Hatfield. Absolutely. And as previously mentioned, I 
think there are very strong components of Sarbanes-Oxley that 
are important. The overall transparency that it creates 
important Section 404(a) with management responsibility 
increased impact if they are not. I think those are all very 
important. And I think where the balance comes in on the other 
side is Section 404(b) and the costs associated with that.
    Importantly, I would just say our investors, and that is 
what we are talking about here is protecting the investors. And 
I have heard from them directly and I know what this 
marketplace is, the biotech companies. The investors want to 
know about the science. Again, for 8 years now, we have not 
spent material time in the boardroom on historical financial 
reports. We are focused on driving science and finding cures 
for people.
    Dr. Hayworth. As you should be.
    And Mr. Chairman, thank you all. I yield back.
    Chairman Garrett. The gentleman from California is given 10 
seconds for coming in so late. No, 3 minutes.
    Mr. Sherman. Okay. Or when we have to leave for votes, we 
have to leave for votes.
    I think there has been some confusion this morning about 
the distinction between Sarbanes-Oxley Sections 404(a) and 
404(b). Why is the audit required under Section 404(b) 
important? I do not know which member of the panel? Mr. Coffee?
    Mr. Coffee. Yes. Did you address me? Okay. I think that 
Section 404(b) requires the auditor to attest to the adequacy 
of management's internal compliance efforts. Section 404(b) 
does seem to relate to the percentage of restatements that 
subject companies experience. The SEC study did find that if 
you are compliant under Section 404(b), the rate of 
restatements goes down by something like 46 percent. That is 
not a small number.
    I agree we can debate costs and benefits for a long time. 
But what I would point out is that in the wake of Sarbanes-
Oxley, a number of companies went private. More recent studies 
have found that even those companies who went private continued 
to remain reporting companies and to comply with Section 404(b) 
because debt investors insisted upon it. That suggests that 
debt investors saw some value in reporting and in Section 
404(b).
    So, I do think that there is some value to this. And the 
SEC made many mistakes. But it was not MF Global because the 
principal regulator of MF Global was the CFTC. So, I want to 
give credit where credit is due. And that probably belongs to a 
different agency's failure.
    Mr. Sherman. I will ask Mr. Gallagher to quickly respond, 
and then we have to go vote.
    Mr. Gallagher. Congressman, I think Professor Coffee is 
dead on. If you look at the numbers and the rigor of the 
internal control analysis by management, knowing that somebody 
is going to come in and provide that audit, and provides the 
assurance to the capital markets. And to Mr. Himes's point, you 
know the benefit of the cost of capital because of that 
assurance, because of that confidence in the higher level of 
rigor of that internal control analysis.
    Mr. Sherman. So, you would pay more to the accountants and 
you pay less to your bank.
    I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Dold is recognized for 3 minutes.
    Mr. Dold. Thank you, Mr. Chairman, for the 3 minutes that 
we have. And I certainly want to thank all the panelists for 
coming.
    My colleague from Connecticut was talking about cost-
benefit analysis, certainly something that I also agree with. I 
also want to talk--I do think this is largely about trust.
    But I do think that if we--in talking to a number of 
companies and talking to some public officials, some of the 
concerns that I have are not just about the lack of IPOs that 
have been coming, or lack thereof, into the marketplace. But we 
have actually seen companies de-list from U.S. exchanges to go 
to other exchanges, whether it be to Ireland or someplace else, 
because of this overregulatory burden that is being placed upon 
these companies. And certainly, that is an enormous concern 
that I have.
    Now, we talked a little bit about the cost-benefit 
analysis, and certainly when we look at the cost of Enron. But 
I am not so sure. If we had had Sarbanes-Oxley, if SOX had been 
in place, Mr. Coffee, would Enron not have happened?
    Mr. Coffee. I cannot tell you that it would not have 
happened. And I think it is more likely than not that it would 
have happened.
    Mr. Dold. Okay. And I think that is the point. Good 
companies are going to do good things. Bad companies certainly 
are one of those things that we have to be looking out for. 
Trust is going to be one of those critical things.
    So, in terms of that cost-benefit analysis, I am not so 
sure that my colleague is 100 percent correct in saying all of 
that would have been saved; there would not have been fraud 
going on out there because we have things like MF Global that 
happen. And certainly people are doing bad things and things 
which are against the law.
    And from my opinion, and I think hopefully somebody will be 
brought to justice. We are also seeing that again the cost of 
compliance is significantly more expensive as a percentage as 
Mr. Berlau had talked about for smaller companies and larger 
companies.
    In the last little bit of time that I have, one of the 
things that I do want to talk about is the mandatory rotation 
for audit terms. Does anybody really think that if somebody is 
intending on committing fraud or hiding it, they are not going 
to hide it from the auditors as well?
    And if a Big Four accounting firm, let us just say, were to 
be caught up in an accounting fraud scandal, does anybody think 
that would not be devastating to that company? Would any other 
major Fortune 1000 company use that auditing firm again? Does 
anybody think that would not be a self-regulated type entity?
    Or do we think that the government needs to come in and 
mandate that no, you have to rotate? Is it 5 years? Is it 7 
years? Is it 10 years? Why not 15 years? What is the actual 
number?
    And what my real point is, is the government not weighing 
in a little bit too deeply here? Because certainly the auditing 
firms, they absolutely want to make sure that they are 
following the letter of the law because that is going to be 
critical for their business model. Because if they are caught 
up in some sort of a scandal, if they do things wrong and the 
light is shone upon them, trust me, that is going to be 
devastating to that firm.
    Mr. Coffee, do you want to comment? And then, Mr. Bullard?
    Mr. Coffee. As I said earlier today, I was not endorsing 
mandatory rotation of firms--
    Mr. Dold. I did not say--
    Mr. Coffee. --and I would point out--
    Mr. Dold. I am asking if you would comment on that 
quickly--
    Mr. Coffee. I would point out that if you rotate the 
auditor, that is an opportunity to capture the new auditor. I 
do not know that you will get a better, stronger auditor when 
you rotate, because if you are a corrupt CEO, you may go out 
and solicit the auditor who will be most acquiescent. So, I am 
not testifying that will be the perfect answer.
    Chairman Garrett. Mrs. Biggert, for 3 minutes or one 
question.
    Mrs. Biggert. Thank you. I will try one question, Mr. 
Chairman.
    Ms. Hollein, SOX attempted to improve companies' internal 
controls and deter fraud. That said, are there comments since 
private sector initiatives, education efforts or better 
communication between the PCAOB and audit committees that could 
be done instead of adding costly regulations?
    Ms. Hollein. Yes. I think as the private sector, we have 
actually stepped up. And we have been in collaboration with the 
Center for Audit Quality helping to educate. We have done a 
roadshow with all of our members throughout the Nation just 
helping to educate them on the deterrence and detection of 
fraud. And we will continue to provide those types of 
opportunities and thought leadership to them. In addition, we 
are part of the COSO framework addressing internal controls and 
actually refreshing that to detect fraud.
    Mrs. Biggert. Thank you very much, and I yield back.
    Chairman Garrett. Thanks. Since the gentlelady yields back, 
I will yield myself 3 minutes for the final word of the day.
    So, there are some things that are good with SOX and there 
are certainly some things that are terrible about it. And there 
are certainly some things that were good about Dodd-Frank, and 
certainly some things that were terrible about it. I guess the 
ironic part of all this is that one of the best parts of Dodd-
Frank was the repeal or the lowering of the limits--raising the 
limits for SOX. So, that is the irony there.
    Let us begin with Mr. Hatfield. When these crises occurred 
back like when Enron and WorldCom and all those things, 
Congress rushes in, tries to pass legislation to do it right 
away. One of those people--one of the Senators who helped pass 
SOX was Jon Corzine, who then went on to become CEO of MF 
Global. And so the question there is did having him in--having 
Sarbanes-Oxley in place, did that solve or prevent the losses 
over there?
    Mr. Hatfield. It would seem to be that they did not. I 
think regulation has its purpose. But if we are to protect 
against every outcome and the bad actors that inevitably are 
going to be out there in some measure, we can increase 
regulation to the point where no one will ever go public. And 
public companies, particularly those in the less than $250 
million float range that Congressman Fitzpatrick has sponsored 
legislation on, those companies will go back to being private. 
And I think we need to establish the balance.
    Chairman Garrett. Right. And so just in line with that, and 
I know the other side of the aisle believes that Section 
404(b), we have talked about that, is the answer to all these 
things. Without objection--I guess I will not get any 
objection--I will put into the record the attestation provision 
from the compliance with that for Lehman Brothers right before 
their bankruptcy, and also put into the attestation provision 
from JPMorgan right before their recent London Whale trade.
    I will also put into the record the attestation provision 
for Bear Stearns & Company right before their bailout. Also 
again, the attestation provision with regard to MF Global right 
before Jon Corzine as CEO apparently transferred millions of 
dollars from investors' accounts, customers' accounts. And 
also, the two attestation provisions, one from Fannie Mae and 
one from Freddie Mac, right before each one of their bailouts 
in the past.
    Without objection, obviously it is clear that those 
attestations in compliance with SOX did nothing in all of those 
circumstances.
    Mr. Coffee, in your written testimony, and you just touched 
on it very briefly; you used the words ``mature mediocrities.'' 
There we go mediocrities. These are companies that have been in 
place for about 5 years or more and just sort of stayed about 
the same.
    And whereas we are saying that maybe the small companies, 
and I think you even said maybe need that growth pattern and 
the exemption to get up there that these do not. Is there 
something about companies that want to stay at that level that 
they do not deserve the same sort of exemption and abilities to 
continue to grow that the small companies do?
    Mr. Coffee. I think the differences between a brand new 
startup company that might use a 5-year transitional experience 
in order to comply with Federal securities laws. That is what 
the JOBS Act said. And I think that is a stronger rationale 
than saying a company that has already been subject to Section 
404(b) for at least 5 years should get a complete immunity.
    And do they want to stay at that level? I assume that all 
companies would like to get their market capitalization up and 
their stock price up. But we will see a certain amount of 
gaming if we use this rigid test of $250 million.
    The SEC has made that finding in its report that any time 
we use a rigid market cap test, we are likely to see a lot of 
gaming around that key line. And because there are more 
companies, there will be more gaming.
    Chairman Garrett. Right. And I guess we could see if you go 
back to what was the impetus behind Sarbanes-Oxley in the first 
place was not the small companies, was not the mid-size 
companies; it was not even these mature mediocrity type 
companies.
    It was the huge companies. It was the Enron's. It was the 
WorldCom's. It was some of the other companies that were 
literally huge companies that initially was the trigger for 
Congress to do their typical knee-jerk reaction in these things 
and pass SOX. And it was not these mid-size companies and was 
not the small companies.
    And the last point, and Mr. Himes is not here, is the costs 
and the cost-benefit analysis, which is one of my driving home 
points. And there is really--this is a rhetorical point. While 
if we can pass legislation and try to do a cost-benefit 
analysis and say on the one hand is the expense, millions or 
billions of dollars.
    And on the other hand is the entire collapse of the world 
marketplace. What you are never going to have a reason not to 
pass legislation to do so because you can never outweigh that. 
But what is intangible is--and a couple of you talked about 
this--the opportunity costs.
    And the fact that we are seeing so many IPOs going overseas 
and not going over here--what is that expression: It is 
priceless.
    The businesses that are not in this country, the jobs that 
are not in this country, the families who have been dislocated 
because they cannot get a job anymore, the communities that 
have been decimated because they do not have jobs whether it is 
in manufacturing, construction, biotech or the like. How do you 
put a price on that?
    That is called opportunity costs. I do not know. The 
economists probably cannot do it. But that would be the 
rhetorical question back to Mr. Himes. And that is the question 
that we have to grapple with in any legislation when we do a 
price-benefit analysis.
    But with that, I have to go vote, hopefully before the 
board closes.
    I ask unanimous consent to make a statement from the 
Institute of Internal Auditors a part of the record.
    Without objection, it is so ordered.
    Again, thanks so much to the panel for putting up with the 
abbreviated portion here. But all your testimony has already 
been considered and will continue to be considered. I thank the 
panel.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    The hearing is now adjourned.
    [Whereupon, at 11:00 a.m., the hearing was adjourned.]


                            A P P E N D I X


                             July 26, 2012

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