[House Hearing, 109 Congress] [From the U.S. Government Publishing Office] THE SARBANES-OXLEY ACT 4 YEARS LATER: WHAT HAVE WE LEARNED? ======================================================================= HEARING before the SUBCOMMITTEE ON REGULATORY AFFAIRS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED NINTH CONGRESS SECOND SESSION __________ APRIL 5, 2006 __________ Serial No. 109-199 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html http://www.house.gov/reform ______ U.S. GOVERNMENT PRINTING OFFICE 30-899 WASHINGTON : 2006 _____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON GOVERNMENT REFORM TOM DAVIS, Virginia, Chairman CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California DAN BURTON, Indiana TOM LANTOS, California ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois CHRIS CANNON, Utah WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland DARRELL E. ISSA, California LINDA T. SANCHEZ, California JON C. PORTER, Nevada C.A. DUTCH RUPPERSBERGER, Maryland KENNY MARCHANT, Texas BRIAN HIGGINS, New York LYNN A. WESTMORELAND, Georgia ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina Columbia CHARLES W. DENT, Pennsylvania ------ VIRGINIA FOXX, North Carolina BERNARD SANDERS, Vermont JEAN SCMIDT, Ohio (Independent) ------ ------ David Marin, Staff Director Lawrence Halloran, Deputy Staff Director Teresa Austin, Chief Clerk Phil Barnett, Minority Chief of Staff/Chief Counsel Subcommittee on Regulatory Affairs CANDICE S. MILLER, Michigan, Chairman CHRIS CANNON, Utah STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio WM. LACY CLAY, Missouri LYNN A. WESTMORELAND, Georgia CHRIS VAN HOLLEN, Maryland JEAN SCHMIDT, Ohio Ex Officio TOM DAVIS, Virginia HENRY A. WAXMAN, California Ed Schrock, Staff Director Kristine Husar, Professional Staff Member Benjamin Chance, Clerk Krista Boyd, Minority Counsel C O N T E N T S ---------- Page Hearing held on April 5, 2006.................................... 1 Statement of: Feeney, Hon. Tom, a Representative in Congress from the State of Florida; Hon. Mark S. Kirk, a Representative in Congress from the State of Illinois; and Hon. Gregory W. Meeks, a Representative in Congress from the State of New York...... 9 Feeney, Hon. Tom......................................... 9 Kirk, Hon. Mark S........................................ 17 Meeks, Hon. Gregory W.................................... 29 Hinchman, Grace L., senior vice president, Financial Executives International; Richard A. Hubbell, chief executive officer, RPC & Marine Products Corp.; Robert P. Dowski, chief financial officer, Allied Defense Group [ADG]; Alex J. Pollock, resident fellow, American Enterprise Institute; and Damon A. Silvers, associate general counsel, American Federation of Labor and Congress of Industrial Organizations................................ 48 Dowski, Robert P......................................... 65 Hinchman, Grace L........................................ 48 Hubbell, Richard A....................................... 61 Pollock, Alex J.......................................... 72 Silvers, Damon A......................................... 80 Letters, statements, etc., submitted for the record by: Dowski, Robert P., chief financial officer, Allied Defense Group [ADG], prepared statement of......................... 68 Feeney, Hon. Tom, a Representative in Congress from the State of Florida, prepared statement of.......................... 12 Hinchman, Grace L., senior vice president, Financial Executives International, prepared statement of............ 51 Hubbell, Richard A., chief executive officer, RPC & Marine Products Corp., prepared statement of...................... 63 Kirk, Hon. Mark S., a Representative in Congress from the State of Illinois, prepared statement of................... 20 Meeks, Hon. Gregory W., a Representative in Congress from the State of New York, prepared statement of................... 33 Miller, Hon. Candice S., a Representative in Congress from the State of Michigan, prepared statement of............... 4 Pollock, Alex J., resident fellow, American Enterprise Institute, prepared statement of........................... 75 Silvers, Damon A., associate general counsel, American Federation of Labor and Congress of Industrial Organizations, prepared statement of....................... 83 THE SARBANES-OXLEY ACT 4 YEARS LATER: WHAT HAVE WE LEARNED? ---------- WEDNESDAY, APRIL 5, 2006 House of Representatives, Subcommittee on Regulatory Affairs, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10:08 a.m., in room 2154, Rayburn House Office Building, Hon. Candice S. Miller (chairman of the subcommittee) presiding. Present: Representatives Miller, Westmoreland, Lynch, and Clay. Staff present: Ed Schrock, staff director; Rosario Palmieri, deputy staff director; Kristina Husar and Joe Santiago, professional staff director; Benjamin Chance, clerk; Krista Boyd, minority counsel; and Jean Gosa, minority assistant clerk. Mrs. Miller. Good morning. Our third panelist is on his way, and I know our first panelist has another meeting to go to, and the ranking member said that was the sound of the ``Big Dig'' from Boston, so with that we will start. I want to welcome everyone this morning, and the Subcommittee on Regulatory Affairs will come to order. No one here can forget the turmoil caused by the corporate and accounting scandals involving Enron, Arthur Andersen, and certainly WorldCom as well. And as a reaction to the shocking behavior of all of these things, Congress acted very swiftly to pass legislation aimed at restoring order and trust in our Nation's financial markets, and with very good reason. After all, financial investment in our public markets and public companies is good not only for the companies, but for the financial security of average Americans. The more liquid our financial markets, the less expensive it is for American companies to raise capital, to grow their business, and to provide investors with a healthy return on their investment. This system encourages small companies to expand and it is also a recipe for dynamic growth in the job market. The Sarbanes-Oxley Act tried to restore investor confidence in the stock market by restricting accounting firms from performing a number of services for the companies that they audit. The act also required new disclosures for public companies and for the officers and directors of those companies. Among the other issues affected by the legislation are securities fraud, criminal and civil penalties for violating the security laws, blackouts for inside traders of pension fund shares, and protections for corporate whistleblowers. However, Congress might have acted just a bit too quickly as many unintended consequences have made the law more costly to business and to small businesses, in particular, than originally thought. We are holding this hearing today to examine some of these consequences and to look at possible solutions. Oftentimes it is very hard for policymakers to evaluate the cost and benefits of a regulation or a piece of legislation. In the case of Sarbanes-Oxley, we now have data which suggests that the cost of complying with specific provisions of the act is much greater than the actual benefits. For example, while the SEC initially estimated the cost to comply with Section 404 to be about $91,000 per company or $1.24 billion in the aggregate, multiple studies pegged the actual compliance cost at $35 billion, which is, of course, nearly 30 times the original estimate. But let's put this in perspective: Section 404 is only 168 words long, and if you use the $35 billion figure, that is almost $21 million per word, and that is just the initial startup cost. As well, Section 404 has hit small and mid-size firms the hardest: as a percentage of revenue, smaller issuers in 2004 spent 11 times more on the Sarbanes-Oxley implementation than did larger companies. Micro-cap companies, with revenues under $100 million, saw an 84 percent increase in outside audit fees as a result of the law. Small cap companies with revenues between $100 million and $700 million saw a 92 percent increase in audit fees. And S&P 500 companies saw an increase of 55 percent in their audit fees. Smaller companies have limited resources which are now being allocated to Section 404 compliance, and there is great concern that the regulatory burden of Section 404 is currently diminishing their competitiveness through higher operating costs and management distraction from business opportunities and other risks. In addition to these high out-of-pocket costs, there may also be an opportunity cost that accompanies Section 404. When a company spends over $4 million a year to comply with a single regulation, they are unable to direct those substantial resources into capital formation, employee benefits and salaries, or even stock dividends. Moreover, the largest potential cost of Section 404 has yet to be quantified; the loss of opportunities for the American public to invest in small and innovative firms that have either delisted, gone dark, or declined to go public. These corporate managers have determined that the cost of being a public company is no longer outweighed by the benefits the firm gained through access to the deep liquid markets of the American Stock Exchanges. Removing a company from the public exchanges is costly to a firm in terms of lost prestige, decreased liquidity, higher cost of capital. And it is conceivable that the decision to delist results in slower growth, poor returns on investment and a weaker position in the global market; and of course it also results in less job creation. This is a tremendous hurdle that the American companies must overcome that most global competitors do not. Foreign companies that do not list their shares on American exchanges, do not face the same fixed cost imposed by Section 404. Accordingly, they are able to invest their resources into research and development, customer discounts and other forms of value creation. It is no wonder that at every hearing on regulation, witnesses always bring up Section 404 as a key regulation that is hurting Americans' ability to compete. It is certainly clear that the time has come for this Congress to begin a dialog on this important subject, sort of put our ear to the ground and hear directly from those who are affected by Section 404. So we certainly look forward to all the testimony of the witnesses today, and with that, I would recognize our ranking member, Representative Lynch, for his opening statement. [The prepared statement of Hon. Candice S. Miller follows:] [GRAPHIC] [TIFF OMITTED] T0899.001 [GRAPHIC] [TIFF OMITTED] T0899.002 [GRAPHIC] [TIFF OMITTED] T0899.003 Mr. Lynch. Thank you Chairman Miller, and I appreciate the fact the we are holding this hearing. This is one of the most important securities related acts in the history of this country, and I think it is appropriate at this point to be reviewing its impact on medium and small-sized businesses. I am pleased to join, as well, my colleagues, Mr. Feeney and Mr. Kirk, and I know Mr. Meeks is on his way, to look at this. I hear a lot about this in my district. I want to associate myself with the remarks of the Chair. I understand the impetus of this act, the WorldCom and Enron scandals, and the lack of accountability that we had in our accounting practices, how investor reliability and accuracy had to be improved. But also, I am concerned with the unanticipated cost of compliance with especially Section 404 of the act, and I think we have to look very closely at that. There are definitely ways that we can improve the cost side of this equation, and not relinquish the accountability and the exactitude with which investors are helped in making their decisions. I know for a fact that some of my own constituent businesses in my district have suggested that such a thorough process is done during those examination years, that it would be possible, perhaps, to look at biannual, every 2 years, to have the audits conducted and have a statement of compliance on those alternate years that would basically reduce the cost by 50 percent, even maintaining the existing language in place. So there are ways that I think we can help small and medium-sized businesses in compliance with the act without sacrificing one bit of the accountability that is provided by the act. There have been some successes with Sarbanes-Oxley, and we don't wan to jettison that in our pursuit of reducing costs of simplifying the act. I look forward to the comments of both our panels, and again, I appreciate Chairman Miller for convening this hearing. Thank you. Mrs. Miller. Thank you. Opening statement for Representative Clay? Mr. Clay. Thank you, Madam Chairman, for holding today's hearing on Sarbanes-Oxley and its impact on our smaller publicly traded companies. I welcome our witnesses, especially my colleagues and friends, Mr. Meeks, Mr. Feeney and Mr. Kirk. When Sarbanes-Oxley was enacted in 2002, our capital markets were suffering from investor anxiety directly relating to major accounting scandals that rivaled the S&L failures of the 1980's. While Enron and WorldCom became the public poster children of corporate fraud, the fact is there were numerous companies who were forced to restate earnings and future estimates due to fraud and faulty accounting practices. A complicit public accounting industry made these activities not exceptions, but standard practices in order to appease their short-term profit-driven clients. In response, Sarbanes-Oxley strengthened regulations over auditing practices, mandated executives to certify their annual financial statements, and increase penalties for accounting related fraud. A cornerstone of this legislation was Section 404, which required publicly traded companies to attest to their internal control for financial reporting and related activities. while Section 404 is a reasonable mandate to ask of companies, some smaller companies find compliance to be both cost prohibitive and time consuming. Although I am sympathetic to this claim, I am also wary, wary of returning to a period of lax internal practices and functions that will enable inadequate stewardship of investor resources. It is my hope that new SEC regulations, along with recommendations from our witnesses today, can help us achieve a balance that provides both adequate investor protections and relief for well-managed small businesses. This concludes my statement, Madam Chairman, and I yield back. Mrs. Miller. Other opening statements? Representative Westmoreland. Mr. Westmoreland. Thank you, Madam Chairman. I appreciate you having this hearing. We have an advisory committee at home in the district, and on our banking and finance advisory committee, the one thing that I have heard is this Section 404 of the SOX. I have often been told that Congress had two speeds, dead still and knee-jerk reaction, and I think this comes under the--this particular section of this bill came under the knee- jerk reaction. I don't know, out of the response to what happened maybe to Tyco and Enron and others, but they weren't prosecuted under this bill, they were prosecuted under laws that we already had on the books. And I think that you can see that there were laws there to protect and to punish those that caused the problem. So I hope, Mrs. Chairman, that when we look at this, that we can come up with some type of legislation or suggestion that would take some of the burden off of the small and middle-size companies as far as these audit fees. I had one small banker tell me that it was 10 percent of his bottom line to adhere to Sarbanes-Oxley. That is ridiculous. Audit fees, since 2003, have gone up anywhere from 75 to 90 percent. This should have been called the auditors employment act of 2003. I look forward to hearing from both panels, and I hope, Mrs. Chairman, that we can come up with some type of idea to really reform this to where not only does it protect the investors in the company, but brings about some rational thinking. Thank you. Mrs. Miller. Thank you very much. Our first witness this morning is our distinguished colleague, Representative Tom Feeney from the 24th Congressional District of the great State of Florida. Congressman Feeney is in his second term and serves currently as a Deputy Whip. He has quickly become a leading advocate for exposing and fighting waste, fraud and abuse in the Federal Government. He serves as well on the House Financial Services, sits on the House Judiciary and Science Committee, and was a member of the Sarbanes-Oxley ``listening tour.'' So Representative Feeney, the floor is yours. We look forward to your testimony, sir. STATEMENTS OF HON. TOM FEENEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA; HON. MARK S. KIRK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS; AND HON. GREGORY W. MEEKS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK STATEMENT OF HON. TOM FEENEY Mr. Feeney. Thank you, Madam Chairman, Ranking Member Lynch, and members of the subcommittee. I don't think I could say it any better than the four of you have just said it. Mrs. Miller, I thought your introduction was very well done. I think Mr. Lynch put it best, time is at a minimum for Congress to look at where we are because we have some data in. I am very grateful to be joined by two colleagues, who, the three of us, with a couple of other colleagues, have engaged in a national listening tour to hear about some of the consequences of Sarbanes-Oxley. Some have called it the most comprehensive and important corporate governance reform since FDR was President. And I was kind of surprised when I got here--because I was not here when Sarbanes-Oxley was passed--that businessmen, both small and big, chief financial officers, CEOs, beat a path to my door to beg for some relief from current impacts of Sarbanes-Oxley and for small and mid cap companies that are not yet directly impacted, beg for prospective relief. I like to say, as my colleague did, that Congress has two speeds, zero and over-react, and it may be that in some ways we have overreacted with respect to Sarbanes-Oxley. So I am glad, that on a bipartisan basis, we can look at the advantages and keep them, look at the disadvantages and reform or eliminate them. We have heard some important positive things and effects from Sarbanes-Oxley. I want to make that clear from the beginning. So far from my portion of the listening tour I have concluded that there is general agreement that after SOX was passed we have tighter financial reporting, which is a good thing. Internal controls have improved across the board, and there is also more transparency in the overall auditing process. All of those things are cited approximately by Sarbanes-Oxley supporters as a reason that not all of this bill should be thrown out in its entirety. And as one suggestion, Section 404 is the target of virtually all of the major complaints. There have been some serious negatives in the way we have imposed and implemented Sarbanes-Oxley. On January 6th the Wall Street Journal pointed out, for example, that New York loses its edge in snagging foreign listings. In the year 2000, $9 of every $10 raised by a foreign company in a public market was raised primarily in New York, and in the United States of America. By the year 2005, the reverse was true, $9 of every $10 raised by a foreign company in a public exchange is now raised in places like Luxembourg and London exchanges, the biggest spread favoring London. This is a startling number to me, and candidly, I believe that we are slowly and steadily outsourcing America's world lead in the capital markets. After a recent trip to Hong Kong, which Mr. Kirk was part of as well, I received very similar feedback regarding Sarbanes-Oxley from their Chief Financial Officer, Mr. Tung. He practically thanked me and Mr. Kirk for Sarbanes-Oxley and the competitive advantage it gave to the Hong Kong markets. The Financial Times stated in November 2005, ``Over the past few years, as more global investors have begun to invest in Asia, the New York Stock Exchange appears to have lost its lore for the region's leading companies. The roots of New York's recent difficulties in winning Asian companies' listing lies in the high burden of regulations and compliance.'' Many of the participants in the listening tour also noted that 404 compliance ignores the indirect costs, and I think the chairman pointed to the opportunity costs of Sarbanes-Oxley compliance. Some of America's best and brightest leaders on corporate governance boards are spending more time complying with bureaucratic and accounting regulations than they are building a better mousetrap, a cheaper mousetrap, and then marketing the mousetrap; and that is really what we want to do in order to get American advantage. The opportunity cost is huge. A paper by Mr. Butler of Chapman University and AEI-Brookings Joint Center for Regulatory Studies, and Larry Ribstein of the University of Illinois School of Law cites the ``direct compliance costs of SOX are about $6 billion per year, but this expense--which basically represents payments to accountants--is a small fraction of the total compliance costs for firms. The indirect costs from having to divert company resources are much greater and based on a back-of-the-envelope calculation of how SOX impacted American markets, they can be estimated at about $1.1 trillion.'' That is with a ``T'', and by the way, we have only impacted 5 percent of America's companies on the public markets so far. Now, as the CEO of Sun Microsystems put it, Scott McNealy, ``What Sarbanes-Oxley has done in some ways is like throwing buckets of sand into the gears of the market economy.'' Madam Chairman, you have more of my testimony, but I see I have run out of time. I would just suggest that it is time that we take a serious look at the current impacts of Sarbanes- Oxley, the prospective impacts as mid-size and small companies are thrown into this briar patch, which is going to be very difficult for them to comply with, much more difficult than the large companies that are having such problems. Finally, I will quote from the regulator. Mr. McDonough, the former regulator, who just recently retired as chairman of the Public Company Accounting Oversight Board. I quote him in part in a recent Wall Street Journal interview, because even he acknowledged that in some ways Sarbanes-Oxley implementation has gone way overboard. On October 12, 2005 he told the Journal, ``In many cases it's clear that they [auditors] overdid it. There's no question that some auditors got it right on; there are other cases, in fact probably more, in which the auditors overdid it, and decided we better check everything under the sun. Why? Because [they're] also concerned about being sued--that it is appropriate for the well-being of the American people if companies have costs which simply don't have any appropriate offsetting benefit.'' The bottom line is we have to do what benefits investors. If we are taking half of the bottom line out of the pockets of companies and giving it to auditors and to regulators, then financial investors around America are being hugely disadvantaged, and again, I want to thank the committee for paying attention to this very important issue to the American economy. [The prepared statement of Hon. Tom Feeney follows:] [GRAPHIC] [TIFF OMITTED] T0899.004 [GRAPHIC] [TIFF OMITTED] T0899.005 [GRAPHIC] [TIFF OMITTED] T0899.006 [GRAPHIC] [TIFF OMITTED] T0899.007 [GRAPHIC] [TIFF OMITTED] T0899.008 Mrs. Miller. Thank you very much, Representative Feeney. And our next witness is another one of our distinguished colleagues. This is Representative Mark Kirk from the 10th Congressional District of Illinois. He is currently in his third term. He is a member of the House Appropriations Committee and also serves on three of its subcommittees, Foreign Ops, Military Quality of Life and Veterans Affairs, and Science, State, Justice and Commerce. He is certainly a strong supporter of legislation that eases Government regulations, and also another member of the Sarbanes-Oxley listening tour. The floor is yours Representative Kirk. We look forward to your testimony, sir. STATEMENT OF HON. MARK S. KIRK Mr. Kirk. Thank you, Chairman Miller. I have some testimony that I would like to with unanimous consent insert for the record. Mrs. Miller. Without objection. Mr. Kirk. And a letter from a wide industry of leading new industries for comments on this subject. Sarbanes-Oxley addressed some critical weaknesses in public markets, but to put it simply, I think we all support Section 1 through 403 of Sarbanes-Oxley. It is just Section 404 I think that we have a bipartisan consensus on the need for reform. You see here wide agreement between conservatives, moderates and liberals that we need action. American Enterprise Institute, Nancy Pelosi, Eliot Spitzer, all agreeing that we need reform of Section 404. I have a presentation here that answers a basic question, which is: Does 404 add investor value, and would a retiree making decisions about their IRA, ever use 404 data in making a buy or sell decision on their retirement savings for the cost and benefit of Sarbanes-Oxley? We see that we fit a need, especially in the mismanagement of America's largest companies. But we have to balance the compliance of the act with the cost of doing that. We see with small companies that there is a great imbalance. My colleague from Florida quoted Bill McDonough that said that it would be inappropriate to spend too much on the compliance with this if we simply do not have an offsetting benefit, and what Chairman McDonough was driving toward, was, are we driving investor value? And I think, clearly, with the application of 404 to small companies, we are not. We see that SOX compliance already is costing about 50 times more than was estimated in 2002, exceeding about $6 billion so far. And the global position of the United States has been dramatically weakened in this area. We have a bipartisan Republican and Democratic consensus that whatever else we do, American financial markets should lead, and we clearly see that because of Section 404 compliance costs, American financial markets are rapidly falling behind. In our look at SOX and its application, we are also seeing a decline in R&D expenditures, and I think that is troubling for the long-term future. If you look here at the next chart, you will see that we have a greatly disproportionate cost of compliance leveled on small businesses in America of publicly traded companies. And I will just note, the category that I want to pay most attention to are companies less than $100 million, the great employers of the United States. The average $100 million employer, by the way, in America, makes a 6 percent profit, and so Sarbanes- Oxley, by taking away almost 3 percent of that profit, means that we have reduced the profitability of the most dynamic small business sector in America by half with this one section of one law. We also see a trend of going private. You can see in the next slide, a well-known company, Vermont Teddy Bear, will not be in the public markets and will not offer their securities for sale to the public, citing this as a critical example of why they have turned to the private market. Brookstone, SunGard Data Systems, Toys R Us, AMC Entertainment, Loehmann's, all going private. And remember, one of the basic points of Sarbanes-Oxley was transparency and accountability. All of that is lost when a public company becomes private, accomplishing just the exact opposite of the core function of the act. In fact, Foley & Lardner reports, of 147 companies surveyed, 20 percent would like to go private. That is an almost doubling of the companies wanting to go in that direction. By the way, that reverses a 400-year trend in capitalism of companies going from private markets, where capital is relatively expensive, to public markets where it is a bit less expensive. That should be a great concern. When we look at other companies seeking a public alternative, we see that there is a great reluctance to go public, and we have a number of magazine articles and the Wall Street Journal reporting on that. My colleague from Florida though listed probably the most dramatic effect of Sarbanes-Oxley, and that is almost the disappearance of foreign listings on U.S. markets. Whether you represent Boston, New York, Chicago, or one of our other financial centers, you do agree that all of this work should come to the United States. It doesn't mean just jobs in the financial sector and for stockbrokers, it also means jobs for American accountants and American lawyers. Every single dollar is lost when we don't have those foreign listings. And you can see a 90 percent drop in foreign work coming to the United States. To conclude, we have been talking about three common sense reforms for Section 404. First of all, for small business relief, to look at the smallest companies in America. They represent only about 6 percent of the portfolio on the New York Stock Exchange, and to give them relief from 404, as the Commission and their Small Business Committee has been looking at. Another common sense reform: to permit auditors and consultants to actually talk to each other to decide what compliance is. Right now, we have pushed many small publicly traded companies into a Bermuda Triangle of having their consultants on Sarbanes-Oxley not being able to discuss any major compliance issues with their auditors, and so you cannot get an answer of what is compliance. And finally, to return to the traditional, Generally Accepted Accounting Principle of what a major problem is. We used to think of a material weakness as something that affected 5 percent of the bottom line. We have lost that, and so right now we have a ridiculous situation where almost a box of lost pencils could be regarded as a material weakness. If every issue in the company is a material problem, then we have dramatically worsened the ability of anyone to manage their company, and I think that Sarbanes-Oxley was sold to the Congress as a way to help people run their companies, but if every issue is a material weakness, allowing trial lawyers to jeopardize the entire company, and therefore, the investor value, and where our retirees have put their funds, then we have actually worsened the problem, rather than improved it. So I thank the committee and look forward to your questions. [The prepared statement of Hon. Mark S. Kirk follows:] [GRAPHIC] [TIFF OMITTED] T0899.009 [GRAPHIC] [TIFF OMITTED] T0899.010 [GRAPHIC] [TIFF OMITTED] T0899.011 [GRAPHIC] [TIFF OMITTED] T0899.012 [GRAPHIC] [TIFF OMITTED] T0899.013 [GRAPHIC] [TIFF OMITTED] T0899.014 [GRAPHIC] [TIFF OMITTED] T0899.015 [GRAPHIC] [TIFF OMITTED] T0899.016 [GRAPHIC] [TIFF OMITTED] T0899.017 Mrs. Miller. Thank you very much. Next the subcommittee will hear from another one of our distinguished colleagues, Representative Greg Meeks from the 6th District of New York. He is currently serving his fifth term in Congress, and he serves on the House Financial Services Committee, and also on the House International Relations Committee. He is a very strong advocate for consumers, and along with the other representatives who testified today, is also a member of the Sarbanes-Oxley listening tour. So the floor is yours, Representative, and again, we certainly appreciate you joining us today and look forward to your testimony. STATEMENT OF HON. GREGORY W. MEEKS Mr. Meeks. Thank you, Chairwoman Miller and Ranking Member Lynch. I remember back in 2002 when the Enron scandal began to unfold. Week by week we learned more about the machinations of the senior executives of Enron that would ultimately lay low the seventh largest company in America, as well as one of the Big Six audit firms. Immediately after that, the WorldCom scandal took front and center. Following the aftermath of numerous hearings, including us witnessing one senior executive after another plead guilty-- or plead the Fifth--should have plead guilty--it was clear to members of the Financial Services Committee, as well as the majority of the rest of the House of Representatives, that Congress needed to act to maintain investor confidence in America's capital markets. The resulting Sarbanes-Oxley legislation was designed to improve corporate governance by holding board of directors more responsible for their oversight of the corporation, hold the CEOs and CFOs to task if they knowingly signed off on inaccurate statements, strengthening auditor standards, and forcing publicly traded companies to review, and if need be, improve their internal controls that ultimately led to the production of their financial statements. Let me say, Madam Chairman, that in the 8 years that I have sat on the Financial Services Committee, Sarbanes-Oxley is one of the two most significant pieces of legislation we have passed, along with Gramm-Leach-Bliley, which repealed the Depression Era Glass-Steagall Act. In some ways SOX is more significant because it affects all publicly traded companies and not just the financial sector. After Sarbanes-Oxley was passed and the Public Company Accounting Oversight Board was created, the PCAOB opened for public comment on their proposed rulemaking for Section 404. Even then, comments that were received by the PCAOB from companies such as Microsoft, addressed concerns that the audit of internal controls where a public auditor must attend to the soundness of a company's internal controls system would significantly increase the cost of public audit. During this time period, my office began conducting meetings with small groups of Tier 2 and Tier 3 accounting firms. The purpose of the meetings was to determine if the potential increase in the audit costs could be minimized by having the 404 work subcontracted to small accounting firms. Under SOX, there is some leeway for the public auditor to ``rely on the work of others'' in providing their attestation on the soundness of the 404 audit. Not only did I suggest this to the PCAOB in writing during their comment period, but my office also arranged a meeting with members of the National Association of Black Accountants and the PCAOB to discuss these issues. Unfortunately, this option was not deemed viable by the PCAOB due to potential supervisory constraints between the major auditor and the subcontracted company. We are now some 4 years from the passing of Sarbanes-Oxley, and the jury appears to be deadlocked. Without question, Sarbanes-Oxley has achieved its goals in relation to improved corporate governance. As you know, I have joined with my colleagues, Congressman Kirk and Feeney, in a listening tour of companies that have to deal with Sarbanes-Oxley compliance. Companies listed on Nasdaq and the New York Stock Exchange, and members of the Chamber of Commerce, seem to concur on the corporate governance issues. There is a consensus that the board of directors have taken their fiduciary responsibilities more seriously, including meeting more, acting more independently of management, particularly in relation to the audit, and improving communication with shareholders. Many companies have expressed how Section 404 has forced them to review and tighten their internal controls, making them a more efficient and secure company. This is clearly a part of what SOX was meant to do. However, some of our intentions have backfired, and we are forced to recognize that phrase that we hate to hear as legislators, ``unintended consequences.'' Although there are several issues related to 404 compliance costs that I could mention, for the sake of time, I will limit my concerns to two issues. The first is the effect that the significant cost in financial and human resources of SOX implementation is having on small cap companies, particularly biotech. The second is the overall cost to our capital markets from companies that have either delisted, not listed, or have listed overseas. According to a survey conducted by Financial Executives International, member companies spent an average of $4.3 billion for costs associated with internal control compliance. I have heard of companies going from approximately $400,000 for audit costs to over $1 million. According to that same FEI study, companies with revenues over $25 billion, spent an average of more than $14 million. The reality is that large cap companies can absorb these costs, but small cap companies simply cannot. In New York City we have an enclave of biotech firms. They are small firms whose primary business is research and development in health care, agriculture, industrial and environmental biotechnology products. In other words, their research leads to quality of life improvements that include cancer-related and other types of life-saving products. For many of these companies, documentation and testing of internal controls is the responsibility of their internal audit departments. Since in most cases there are only a few staffers, many of whom are part time, these companies now have to hire additional personnel or engage outside consultants to perform the required internal control testing. Many of the smaller biotech companies have had to redirect 10 percent of their full-time employee resources to comply with SOX. The cost has ranged from $300,000 to $500,000 for increase in internal staff, and $800,000 to $1 million for external consultants. I will give you one example. A New York biotech company that works on spinal cord injuries has a market capitalization of $99 million. It has 65 employees and survives on capital raised every round. It has a spending rate of $4 million for clinical trial and research and development for a possible product to cure spinal cord injuries. If it spends one million on SOX compliance, that equals 25 percent of its budget. That is an opportunity cost of $1 million that is not being spent on research to benefit humanity. I know that it was not the intention of the Financial Services Committee or this Congress as a whole to divert funds from life-altering research. My second concern, particularly as a Member from New York, is the issue of public listings of companies; 68.7 percent of companies are listed in the New York Stock Exchange, Nasdaq or the American Stock Exchange. This is a major artery in the lifeblood of the New York economy. According to Citigroup, as of the year 2000, $9 out of every $10 raised by foreign firms through new stock offerings was done in New York. In 2005, the $9 out of every $10 has moved to London or Luxembourg. In addition, hundreds of small corporations have already delisted. Let me just give you this quote as I wrap up. This is from the March 17, 2006 article in the Houston Business Journal: ``Today, hundreds of U.S. companies are considering tapping the London Exchange's AIM as a promising source of quick capital. Faced with costly compliance requirements under Sarbanes-Oxley regulations passed 4 years ago in the United States, a growing number of small domestic companies suddenly are more open to the idea of crossing the ocean to use the more lightly regulated AIM. The overseas option is being weighed against U.S. exchanges such as Nasdaq.'' Now, as a member of the International Relations Committee, I am in favor of development of other countries, but not by creating an unfair advantage against American companies and American markets. Let me close again by saying that I am not offering--I am not going to offer right this second a particular solution to the day, although, I do have remedies in mind. At this point I am still in a mode of listening to companies, American and foreign, so that I can offer a solution or support the solutions of my colleagues. I feel comfortable that we have heard and considered the best options before choosing any to avoid creating a bigger problem. It is also important for me to hear particularly from more minority firms, who are too often left out and not heard. And I ask all to join with me so that we can make sure that all their voices are here, because they are very definitely being affected by the SOX regulations. I end by just saying that this is not a Democrat or Republican issue. This is an American issue, and we have to work with this in a bipartisan manner to make sure that we don't continue with unintended consequences, and that we resolve this issue fairly for our businesses. Thank you, Madam Chair. [The prepared statement of Hon. Gregory W. Meeks follows:] [GRAPHIC] [TIFF OMITTED] T0899.046 [GRAPHIC] [TIFF OMITTED] T0899.047 [GRAPHIC] [TIFF OMITTED] T0899.048 [GRAPHIC] [TIFF OMITTED] T0899.049 [GRAPHIC] [TIFF OMITTED] T0899.050 [GRAPHIC] [TIFF OMITTED] T0899.051 [GRAPHIC] [TIFF OMITTED] T0899.052 Mrs. Miller. Thank you so much. I think that was particularly well-said. Let me thank all of our witnesses for being here and tell you how absolutely delighted I was to listen to all of your testimony and the opening statements of my colleagues here as well. And being still a relatively new Member of Congress, one of the most distressing things for me has been the partisan atmosphere around this place. I think we can look at this in a very bipartisan way. As you say, before we are Republicans or Democrats, we are all Americans first, and this is an American problem and something that we need to address in a bipartisan way. And I think we can do so. I was a little bit concerned, even initially, calling this hearing. I wasn't here when Sarbanes-Oxley originally passed; I don't sit on the Financial Services Committee, either and have not been an official member of your listening tour. But I would think that you could probably go to all 435 Members and enlist any one of them, because we must all hear the same things in our district. As I mentioned to our ranking member before we started here, I am just outside of Detroit, so you can imagine all the auto suppliers and the small and mid-size businesses that I come in contact with every time I am out in my district, and they know that I am the chairman of this Subcommittee on Regulatory Affairs. So I will ask them, what is the biggest problem that you have with onerous governmental burdens? And they--I mean, if you took Sarbanes-Oxley out of the vocabulary, they would almost have nothing left to say, because that is the first thing they want to talk about. And this is every type of business. So it is something that we need to look at. This is a committee that has tried to look at various types of onerous governmental burdens. It was interesting, we were talking about manufacturing regulations, and here you have the National Manufacturers Association estimating that the structural costs of American-made goods are 23 to 24 points higher than any of our foreign competitors, and much of it is due to these kinds of things; particularly Section 404 in Sarbanes-Oxley. And when we do see jobs leaving our shores for other countries, like China or Mexico or India or what have you, guess what, those countries did not put this regulatory burden on us. We have done it to ourselves. So it is a very appropriate thing, I think, for us to take a good look in the mirror and see where we can go with this. I guess I would just throw this out to all of you as we--I think we are all concerned, of course, that we are not viewed as going soft on corporate governance after the rather horrific experiences that we went through with the Enrons and Tyco, etc. But if we were to revisit some of these corporate governance standards, do you think that some of the companies or even the American public might think that we are opening up a Pandora's Box? In other words, as bad as 404 is, that they are getting used to it? And the cost of compliance does seem to be coming down a bit as we are going through the second and third year of this. At least it is a known quantity. Mr. Kirk. Let me just briefly answer that, if we look at the markets the way the SEC does and look at companies at $750 million in capitalization and below, and give some sort of 404 relief to $750 and below, you still have 94 percent of public markets under full Sarbanes-Oxley compliance controls. And so I think that we have protected the main part of investors, especially retirement investors that are largely, 94 percent, invested in the very large companies, but we have also lifted a tremendous burden off the small employers, which employ over half of all Americans. And so I think the way that the Small Business Advisor Committee of the SEC and the way the Commission has looked at this dividing line is a very helpful one for the Congress. Mr. Feeney. Well, I think it is a very real concern that investors are--you know, there is an Enron trial going on as we speak. I won't prejudge the outcome of that, but as the chairwoman said, there are lots of protections for investors out there. No protection is going to work against bad apples that really want to commit outright fraud. And the bottom line is nothing in 404 is going to protect investors from people that are really evil. And we need to explain to Americans that regulations are appropriate and necessary; redundancy and red tape that does not add to investor confidence is disadvantaging Americans. I think, you know, Madam Chairman, you put it best, is foreign companies--to take Gregory's biotech example--is foreign companies are not spending 25 percent or 50 percent of their bottom line on compliance with redundant regulations and auditing, but instead putting money into finding the next cure for cancer or the next cure for AIDS. Good for humanity, but bad for the potential for American employers and American employees, and it puts us at a huge disadvantage. So let's keep what is good. Explain to Americans. I think we are trying to build the case to keep what is good, review what is bad, and either reform it or get rid of it. Mr. Meeks. Let me just concur. I think that Representative Westmoreland said, you know, basically what we do sometimes, we have knee-jerk reactions. And I think that we have to understand that it sometimes happens. We react to a situation and we act fast. But we can't throw the baby out with the bath water. I think that from the testimony that I have heard from a lot of individuals around the country, they all agree that a lot of Sarbanes-Oxley is good. But we are focusing on, and what Representative Kirk just talked about, I believe that we can have a cap so that we can make sure that the intention of the Members of Congress is had. And we can do that without people coming back and talking about the fact that we are opening up Pandora's Box. We can do that by saying that we still have the investors' confidence that Congressman Feeney just mentioned, but that we are also making sure that we are keeping companies public or having the desire to come public and not go overseas. Mr. Kirk. Madam Chairman, can I add one more thing? Mrs. Miller. Certainly. Mr. Kirk. Because this really is about investor confidence at its bottom. If I want to get a credit card tonight, go online at 3 o'clock in the morning and invest in the futures in pork bellies on the Shanghai Market, I bet there is a way to do it. And ultimately, investors will find a way around the protections that we think we have built up around them. If we have added value, they will invest their money in American markets. If we have added costs, they will find their way around it. That is happening with the major investors as we speak. Mrs. Miller. Yes. And I think Representative Kirk made a very good point when you were saying whether or not individual investors are actually looking at some of this data when they are deciding to invest in an IRA or what have you. So it is an interesting thing. My other question would be---- Mr. Kirk. Can I just add---- Mrs. Miller. Yes. Mr. Kirk. My staff talked to the Commission yesterday and asked if they had any report of any investor using a 404 disclosure to buy or sell securities. And to date, the Commission has not one. Mr. Feeney. And neither do the rating services use 404. Moody's, Standard & Poors, they could care less about these things. And yet they are costing Americans--one estimate--$1.1 trillion to our economy and nobody is using the stuff. Mrs. Miller. Well, you know, we are from the Government. We are here to help them. [Laughter.] What is your opinion on the lack of direct control, sort of the wiring diagram for this PCAOB, sort of the lack of direct control that the Congress has on that? Do you think their independence from congressional oversight is having any impact on their opinions, their guidance? Mr. Kirk. The Board, obviously, had some difficulties in starting up. We went from eight employees to now over 400. So we are finally getting an ability to issue an opinion and to have some common sense in the application of the act. But we have not yet had the tsunami of full 404 compliance hit the small business sector yet. And that is the critical issue for the Congress. If we have 100 percent compliance requirements on the small business sector, we should understand that we are only affecting 6 percent of public markets but we are dramatically weakening the employers of half of all Americans. And so that is the concern I have for the PCAOB and their compliance burden. Just imagine how many employers and how many public companies will be calling them, flooding their phone lines if a full requirement is imposed on them. Mr. Feeney. Madam Chairman, the problem is that everybody in the system is covering their rear ends. From the chief financial officer to the chief executive officer, they now have to certify total compliance with all of these things even if they had no knowledge. It is no longer a willful standard or a negligent standard, it is a zero-mistake standard. Everybody on the board of directors has to do that. The inside auditors that are advising the board of directors has to do that. The outside auditors, who are not allowed to talk to the inside auditors, they have no incentive whatsoever to use a reasonableness standard because they are going to be held personally, civilly, and perhaps criminally responsible for any mistake. Thus the hyperbole about, you know, finding every box of paper clips for a global company like IBM, or every box of pencils, it really has almost gotten to that point. And also, as you point out, the Accounting Oversight Board, there is no incentive for them to be reasonable. The incentive is to make sure that every single box that can be checked is checked. Nobody wants to be the guy that lost that box of paper clips. Mr. Meeks. I think that what Representative Feeney just said is right, because what he is talking about is basically reasonableness. And there is no incentive to be reasonable as of right now. It is protect yourself at all costs. And so therefore, you know, there is no room for you to do anything that may be a common-sense approach. It is if I don't make sure that I am absolutely 1,000--you know, even in criminal jurisprudence, you have beyond a reasonable doubt. This is not--this is zero doubt. So it is a standard that is so high that I don't know that it can be met. Mrs. Miller. Thank you. Representative Lynch. Mr. Lynch. Thank you. And again, I thank the panel. Let me ask you--and I understand the standard is a very high one and may in fact be unrealistic and it may have, as you have pointed out, negative consequences. Let's just take from the existing Section 404. I do want to point out, though, that Section 404, when people are assessing, you know, whether to buy a certain stock, whether to invest publicly, they wouldn't look at 404. They would look at the numbers, the financial numbers, for the performance of the company itself, the profit and loss, their value. And what 404 does is it speaks to the accuracy or reliability of those numbers. You wouldn't look to Section 404. It is just a given that the companies to which it applies must comply. What about the idea, however, that right now Section 404 requires an annual manager's statement, an annual assessment by the company supported by an outside auditor, you know, an independent auditor to come in here and say that the internal controls are in place and that they are reliable. That is a very extensive process. That is what is driving the costs of this rule. It would seem to me that thorough of a process does not need to be repeated every single year, and that if in, you know, 2006 a company goes through this--and it is a painstaking process and extremely thorough--it would seem that in 2007 it should be sufficient to have those managers and the folks in control at the company certify that last year's controls and procedures are in effect. And that should be enough for reliability and what we are talking about. And then in the next year, 2008, if 2 years have gone by, obviously, there may be the need to go back to the full-blown, full-tilt assessment again. But even if we adopted that system, where it is not annual, that we will trust for 1 year. If a company certifies that their internal controls and their internal procedures are still in place to the same degree or substantially to the same degree as they were in the previous year, that should be enough. In my mind, that would cut everything in half without changing, you know, a period or a comma in any of this, and it still would provide that reliability and that accountability that we are looking for under the bill. Because there has been some improvement on transparency and other things that have been very good here. And we are stuck on 404. But it just seems to me that enormous amounts of money and labor could be saved, without any measurable drop in quality of the reports and reliability for the investor, by going to a biannual reporting or biannual manager's statement on the reliability of internal controls and procedures. What are your thoughts? Mr. Kirk. Congressman, that is a very common-sense reform that would cut the work level in half. Also, remember what we are talking about. With a small publicly traded company, the entrepreneur largely sees the entire operation. We are talking about 10 and 20 employees. And so the issue of internal controls is entirely different than for an extremely large company where you really have some serious management issues. But one of the things that we learned on this listening tour is when you talk to rating agencies, like Moody's or Standard & Poors, which for most investors issue the critical buy and sell signal or the data package they use to asses a security, the 404 disclosures are in the 10-Ks that are submitted by the publicly traded companies. And even the rating agencies say they are not using this data. It is so turgid, it is so user-unfriendly that it is not driving investor value for a buy or sell signal. And then we have the issue of the London AIM Market, which is now marketed directly as a Sarbanes-Oxley-free environment. And I am worried because, you know, there is an unwritten story in the 1880's of how New York gained financial dominance over London and became the best and least expensive way to access capital markets and the financial center of the world market was transferred from London to the United States. They are beginning to gain back that financial leadership. But that is a critical issue in the rise of China. Congressman Feeney and I, when we were talking to Chinese entrepreneurs in the emergence of this $1 trillion economy, said now, because of Sarbanes-Oxley, they would not think ever of listing in the United States because of these compliance costs. And they are talking about bringing small, $50, $100, $200 million companies to market and they do not want to bring this work to the United States, where 5 years ago all of the work came to the United States. Mr. Feeney. Congressman Lynch, you made a very common-sense recommendation. We have actually heard a couple of recommendations and we want to hear more before we make a recommendation of which one I would think would be preferable. One would be semiannual or every third or every fourth year have the outside audit; your internal procedures would have to remain the same. Another way to do it is to allow the exchanges to, for example, have everybody pay in based on a pro rata share of their market capitalization. If they have 1,000 companies and everybody is the same size, pay in to a little system and then have random testing like we do drug testing in some places. So that everybody has to stay on their toes, but they do not have to be duplicating and have this superfluous process where you have redundant mechanisms. But I would say that doesn't resolve the whole problem. You still have the issue of if you place this burden on small and mid-cap size companies as it remains today, I am afraid you would never get the next Dell or Microsoft to go public. And American--not only would they not grow to the size that they grew, but American investors would never have the opportunity to invest. I also believe the materiality standard is very important to address. But if you did those three things, boy, I think you would get to 90 percent of the problem. Mr. Meeks. I think your approach is a common-sense approach and I think that is what the listening tour has helped me with. I have found that the companies that we have listened to, nobody is really trying to avoid the scrutiny or anything of that nature. Nobody even--because they all have basically been straightforward and honest in saying we want to make sure there is transparency, we want to make sure that our internal controls are in place. It is just a cost. And we have to figure out and come out with different ideas of how we reduce the cost. And they came up themselves, voluntarily, with various ideas, you know, what Representative Feeney just talked about as far as--we can even act like a system like the IRS, where there are random audits. That would help us reduce our costs. We don't want to just say that we want to go back to the old way. We accept that things have changed. But we have to bring down the costs. And I think that is what the listening tour does. That is what has benefited me, is to hear good commonplace ideas on how we can make it better so that we don't have the unintended consequences ruling. And I think that we can do that. Mr. Lynch. OK, thank you. I yield back. Mrs. Miller. Mr. Westmoreland. Mr. Westmoreland. Thank you. Mr. Kirk, you know, if you look at the total cost of WorldCom, Enron, and Global Crossing, it is about $155 billion. And I believe the Rochester School of Business just got through putting out the fact that this is costing $1.4 trillion. Is that a good common-sense approach to fighting the problem? What is the source, do you think, of the disparity in the cost that was expected or that the SEC expected this to cost, as compared to what it is costing? And what do you think made that difference? Mr. Kirk. A couple of things. First of all, a lack of rationality in what is material. That is why it is so important to go back to the old traditional definition of materiality, because if every single lost pencil box is a material weakness, we are going to continue to have stories, as we do now, of CEOs spending a vast amount of their time trying to account for every single asset or liability, you know, almost on a real- time basis, rather than thinking about new markets and innovation and research and development that we traditionally associate with growing a company. Another problem is we have four and a half major accounting firms. And generally, for a small employer, they will, when they seek to have a public accounting, will find that two or three of the large accounting firms are conflicted out because they are already working with competitors. And so the final accounting firm knows that they have this company in a box and will charge a very high price for their services. And remember, in the world of Sarbanes-Oxley, you can't have one accounting firm. You have to have two. You have one accounting firm to actually certify your books and another one to advise you as to how to implement 404. And those two firms cannot coordinate their activities to issue you a compliance signal or a noncompliance signal. So for all those reasons, we have costs that are very high. Last, let me just say this. And this is what Congressman Lynch pointed out, that we have--404 is a very short section of law. Enormous discretion is given to the Commission and to the PCAOB. This hearing is going to help in the process, because if we send a signal from the Congress that we have broad-based bipartisan support for rationalizing the implementation of these regulations, the PCAOB and the Commission can take action on their own to dramatically lessen this process. I think we are in the period here where, this year, this committee and our bipartisan group of members can send that signal. And my hope is the Board and the Commission will then take action to relieve this burden. And then, if not, I think the time comes next year for a listening tour to turn into a legislative tour. But I hope that the Board and the Commission will see this action by the Congress and take their own authority. Mrs. Miller. Yes, Representative Lynch? Mr. Lynch. I just want to clarify. I believe I misspoke. I was talking about biennial, which is every 2 years, not biannual, twice a year. Biennial, OK? [Laughter.] I don't want a riot going on out there. Mrs. Miller. We appreciate that clarification. Representative Clay. Mr. Clay. Thank you, Madam Chair, and thank you both for your testimony. In terms of the cost and compliance requirements under Section 404, how well is the accounting industry responding to the needs of industry? Are auditing firms recognizing the limits facing smaller capitalized firms in their evaluations and recommendations for corporate compliance? Both of you all can tackle it, please. Mr. Meeks. Well, that was just one of my points, where I said we had to open it up to tier 2 and tier 3 firms, because we were trying to make sure that there could be more competitiveness and more firms involved. When you have just the top firms, as Representative Kirk just talked about, they know, you know, two of the firms are already engaged, they know that they have the companies, and they can charge whatever they want to charge. They virtually have what is called a monopoly. That is driving costs up significantly. So I, again, suggest that we need to look again at the opportunity of tier 2 and tier 3 firms being able to be involved as a subcontractor getting involved and I think that would help drive some of the costs down. Mr. Clay. And you also mentioned some significant barriers that prevent small-cap companies from becoming compliant. Give me an example. Mr. Meeks. What I was talking about, I mean, when you talk about they can't compete because they don't have the wherewithal to deal with the Big Four firms. And as a result, you know, you find that many minority firms are directly affected, cannot compete, and thereby are out of business, and cannot have the opportunity to be the next Dell. We want to make sure that they are not left out of the game. And you have a significant number of minority accountants who are left out of the game. And this is a way that, I think, by adding them into the game, by adding tier 2 and tier 3 firms, then you are eliminating even some of the diversity issues that you may have in the industry by opening it up and giving everyone an opportunity. Mr. Clay. Mr. Kirk. Mr. Kirk. I would certainly agree that Representative Meeks has pointed out a critical need for either the Commission or the Congress to act that would help out small minority accounting firms get into this. They don't have that opportunity now because they don't have the brand name and ability to access and advise a client in this way. But even more importantly, in the wider market for small- cap companies to be able to expand and grow their business, you have to really, really think about becoming a public company now in America, given the liabilities and uncertainties that you face because of full 404 compliance. I would like it for minority companies to be able to go public in an easier way, not a more difficult way. And that is the problem. Mr. Clay. Let me shift and share with you both, one of the reasons I believe in Section 404, is that it forces companies to pay attention to their information technology systems that are often susceptible to hacking, information breaches, and other activities that have dire economic consequences. If Section 404 requirements are not met, how can a company be certain its information system's proprietary data are secure? Have any of you given thought to---- Mr. Kirk. I would just say remember what we are talking about, the information data system of a small company is probably two or three PCs in an office. We are talking about a common-sense approach of not going overboard. These are the most dynamic and largest employers in America, but they come in groups of 12 or 20 employees. So we are not talking about a very difficult control issue here. You are probably talking about one office suite and a set of computers that is similar to the set of computers in your own office. You know, remember the irony here--404 does not imply to congressional offices. Imagine the challenges you would have as a small employer employing 18 people if you had two large accounting firms unleashed on your operation, and were told that one gasoline receipt that may have been misplaced is now a material weakness and you could be brought--brought suit against you on behalf of some trial lawyers. That is the kind of issues that we are talking about, because I think every Member of Congress does understand that we employ 18 people, so we are exactly in the same position, management and control, as many of the companies that we are talking about. Mr. Meeks. Just look at my example of the biotech firm. I mean, this is a real example. This is what I had going--this is a biotech firm, mostly--a lot of part-time workers, very limited staff. And now they have to shift resources and shift people to comply, taking them away from the research and development that their existence is there for. So we have to make more of a common-sense approach to this, because otherwise the burden of a company being able to survive as a public company will not continue to exist, and they will stay private. Mr. Clay. I thank you both for the response, and I agree, we need to find a balance. Thank you, Madam Chairman. Mrs. Miller. Thank you all so very, very much. We certainly appreciate your time. And, you know, this is an oversight committee so it is appropriate, I think, that we begin a debate and have some oversight on various issues, certainly this Section 404. And I certainly agree with you all that--I am hoping that the Commission and the Board are listening to what is happening, as you are doing your listening tour on this. Hopefully, this can't be any secret to them, the problems that are out there and that in a bipartisan way the Congress does intend to take some action if they don't become a little more proactive themselves and look at some common-sense solutions as well. So again, we appreciate your time sincerely. We adjourn for the next panel to be seated. [Recess.] Mrs. Miller. OK. We will call the committee back to order. Since this is an oversight committee with subpoena authority, although we did not swear in the last panel, I do hope that you will bear with us and please rise and raise your right hands. I would like to swear you in. [Witnesses sworn.] Mrs. Miller. Thank you very much. Our first witness on the second panel is Grace Hinchman, who joined the Financial Executives International in 1999 as vice president for government relations. In 2000, she was promoted to senior vice president of public affairs. FEI is a professional association for senior-level corporate financial executives and is dedicated to advancing ethical and responsible financial management. The floor is yours, Ms. Hinchman. We certainly appreciate you joining with us today. STATEMENTS OF GRACE L. HINCHMAN, SENIOR VICE PRESIDENT, FINANCIAL EXECUTIVES INTERNATIONAL; RICHARD A. HUBBELL, CHIEF EXECUTIVE OFFICER, RPC & MARINE PRODUCTS CORP.; ROBERT P. DOWSKI, CHIEF FINANCIAL OFFICER, ALLIED DEFENSE GROUP [ADG]; ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE; AND DAMON A. SILVERS, ASSOCIATE GENERAL COUNSEL, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS STATEMENT OF GRACE L. HINCHMAN Ms. Hinchman. Thank you, Madam Chairman Miller, Ranking Member Lynch, and members of the subcommittee, for this opportunity to appear before you today. My name is Grace Hinchman, and I am senior vice president of FEI. It is the leading organization of 15,000 members, including CFOs, treasurers, controllers, and other financial executives. FEI members represent the preparer community; that is, the financial executives responsible for the preparation of financial statements. Importantly, we are also users of financial statements, relying on financial reports of other companies in our investment and credit decisions. In both roles as a preparer and as a user, we welcome today's hearing. FEI strongly supports the goals of Sarbanes-Oxley. Overall, the SEC and the PCAOB have done an impressive job in striking a balance between efficiency and cost-effectiveness, while maintaining the intent of the statute. However, the rules and standards related to the implementation of Section 404 require significant attention. Although the SEC maintains final authority over the rules and standards to implement the requirements of 404, much of the rulemaking and standard setting has come from the PCAOB's Auditing Standard No. 2 [AS2]. Since the SEC's approval of AS2 in June 2004, the PCAOB and the SEC have released additional guidance to supplement AS2 through policy statements, detailed staff Q&As and roundtable discussions. FEI recognizes that this additional guidance has been helpful to both preparers and auditors alike, but they have fallen short in providing a completely effective and efficient implementation process. FEI firmly believes that Section 404 is workable and does not require congressional action. Both the SEC and the PCAOB have the authority today to right-size AS2 and Section 404 so they meet the capabilities of all public companies, large and small. I would be remiss if I did not mention the overall cost/ benefit of Sarbanes-Oxley. As recently as last month, FEI surveyed 274 public company members with average revenues of nearly $6 billion to gauge Section 404 compliance costs, and this survey is the fourth survey that we have done over the last several years, and Congressman Meeks had made reference to one in his testimony. The survey that we just did in March, last month, showed that in total companies audit attestation fees represent 44 percent of their total annual audit costs. The average company, which is a company of $6 billion in annual revenues, expended approximately $1 million in internal costs, or approximately 21,000 internal people hours. For year two filers, this average was only a 12-percent decrease from their first year of implementation. External costs for non-auditor-related consultants and vendors were $2.3 million. This was a decrease of approximately 22 percent for year two filers. Finally, audit fees were approximately $1.4 million, or a decrease of 13 percent for year two filers. What this survey shows is that while companies have experienced some reduction in their cost of compliance, primarily their external costs, they are less than we had anticipated. As a result, the costs of Section 404 remain high and continue to be disproportionate to the requirements of annual compliance. In conclusion, FEI is confident that the SEC and the PCAOB are up to the task of right-sizing compliance requirements of Section 404 of Sarbanes-Oxley and they possess the authority to meet this challenge. We believe that a more balanced approach will be achieved and that this right-sizing will further reduce the costs of Sarbanes-Oxley. That concludes my remarks, and I would like to thank Madam Chairwoman and the members of the subcommittee for inviting FEI to participate in today's hearing. [The prepared statement of Ms. Hinchman follows:] [GRAPHIC] [TIFF OMITTED] T0899.018 [GRAPHIC] [TIFF OMITTED] T0899.019 [GRAPHIC] [TIFF OMITTED] T0899.020 [GRAPHIC] [TIFF OMITTED] T0899.021 [GRAPHIC] [TIFF OMITTED] T0899.022 [GRAPHIC] [TIFF OMITTED] T0899.023 [GRAPHIC] [TIFF OMITTED] T0899.024 [GRAPHIC] [TIFF OMITTED] T0899.025 [GRAPHIC] [TIFF OMITTED] T0899.026 [GRAPHIC] [TIFF OMITTED] T0899.027 Mrs. Miller. Thank you so much. Our next witness is Richard Hubbell. He is the president and chief executive officer of RPC, Inc., which is a position he has held since 2003. He is also the president and chief operating officer of Marine Products Corp., a position that he has held since February 2001. Prior to this, he was president and chief operating officer of RPC, Inc., and also was an executive vice president of Rollins Communications, which he joined in February 1970. Mr. Hubbell, we appreciate you joining with us today, and we look forward to your testimony, sir. STATEMENT OF RICHARD A. HUBBELL Mr. Hubbell. Well, thank you very much. As mentioned, I am the chief executive officer of RPC, which is a small oilfield service company providing services and equipment to producers of oil and gas in the petroleum-producing regions of the United States and a few international markets. RPC has approximately 1,600 employees, the majority of which are in the domestic United States. In order to deal with the cyclical nature of our business and provide the best possible return to our shareholders, we acquired a pleasure boat manufacturer in 1986. A few years ago, we decided that it was in the best interests of our shareholders to form a separate company and spin that pleasure boat manufacturer off. So that is why I am president and CEO of two New York Stock Exchange companies. Marine Products Corp. is the third largest manufacturer of sterndriven pleasure boats in the United States. We have two domestic manufacturing facilities and approximately 1,100 domestic employees. Our strategies have provided good long-term returns to our shareholders. Today, the combined market capitalization of the two companies is approximately $1.7 billion. As a result of the spin-off transaction I just outlined, I manage a small corporate headquarters staff that handles the common corporate functions of these two public companies. We believe that it is in the best interests of our shareholders to have this common headquarters structure, because it allows us to spread the costs and leverage the knowledge of our staff over such functions as accounting, public company reporting and compliance, and financial management. It also allows us to work more effectively with outside constituents such as our public accounting firm and our shareholders. We managed the implementation of the Sarbanes-Oxley Act of 2002 in the same manner. For these companies, which are relatively small, this implementation created a large and ongoing structure which is expensive for our shareholders and time-consuming for our corporate and field employees. For example, during the last year prior to the implementation of Sarbanes-Oxley, our public company compliance costs for each company were approximately $70,000. After the implementation of Sarbanes-Oxley, our ongoing annual costs increased to $1 million per company. So I have heard quotes of costs increasing 100 percent. Ours is way, way more than that. I acknowledge the loss of confidence in the integrity of the business community that shook our society a few years ago, and I agree that decisive measures had to be taken in order to restore public confidence. I believe that my companies have benefited in certain ways from the documentation of internal controls, tightening of policies and procedures, and enhanced transparency in our operations and financial reporting that have resulted from our compliance with Sarbanes-Oxley. However, I also believe that my companies and our shareholders have not benefited in proportion to the expenses we have incurred. In addition, I believe that we have suffered certain opportunity costs since we are now spending more time to comply with and document policies and procedures than we had in the past. This means that we can devote less time to the analysis of our financial and operational results, management of the operations of our businesses, and the intangible aspects of company management that relate to experience and judgment. Sarbanes-Oxley has made many companies consider going private and has, I believe, prevented others from becoming public. This limits access to the capital markets for U.S. companies and, in the long run, damages American competitiveness in the global marketplace. In addition, I have serious concerns about the approach to the implementation of Section 404. The text of the provision itself is brief and ambiguous, and it provides a great deal of leeway to a company's public accounting firm as to what the accounting firm believes to be effective internal controls. In the case of my companies, we are a ``controlled corporation,'' both of them ``controlled corporations,'' with high insider ownership, and common sense dictates that a different level of testing and documentation than for public companies with a larger shareholder base. I believe that in the current environment, public accounting firms have been overzealous in their interpretation of 404, and in many cases have abandoned basic concepts of materiality and common sense. To allow public accounting firms to have this level of control ignores several conflicts of interest, because there is an inherent economic incentive to spend more time and conduct more testing on internal controls. As a result of the implementation of Section 404, the work required by public companies to comply with 404 has been overly burdensome and without a proportionate benefit to the financial community or investing public. Thank you very much. [The prepared statement of Mr. Hubbell follows:] [GRAPHIC] [TIFF OMITTED] T0899.028 [GRAPHIC] [TIFF OMITTED] T0899.029 Mrs. Miller. Thank you. Our next witness is Mr. Robert Dowski. He has over 20 years of domestic and international experience in strategic planning, corporate financial reporting, and financial accounting systems. Prior to joining Allied Defense Group, he was a senior vice president and CFO of New Star, Inc. His financial management background includes positions with Gillette, GE, Space Net, Telecorp, PCS, and Hughes Network Systems. Mr. Dowski, you have the floor. We look forward to your testimony, sir. STATEMENT OF ROBERT P. DOWSKI Mr. Dowski. Thank you very much. I think ADG should be a poster child for SOX. For those of you who have had a chance to look us up on the Internet, you know that the company has suffered through a restatement related to FAS 133. That is an ongoing process. We have been delayed in filing our 10-K and, in fact, have been working 80 hours a week with offsetting and corresponding amount of hours from our auditors trying to get through our second-year SOX issues. So this is a topic that is near and dear to my heart. So, with that, let me go through the testimony. ADG is a small public company. We are headquartered in Vienna, VA, and have seven operating units located overseas in Belgium and here in Texas and California. We design and manufacture medium caliber ammunition and products for the security, surveillance, and video transmission markets. We have approximately 700 employees and in 2005 produced approximately $110 million in revenues. Our largest operating unit produces $60 million of revenue and our smallest produces $6 million. We uncharacteristically lost over $20 million on the bottom line in 2005. 2005 was also the second year of our SOX implementation. I must be honest, Chairwoman Miller, and tell you that not all of that loss was attributable to our SOX compliance efforts. But like many other companies in the United States, we spent a great deal of time and effort trying to meet a set of one-size-fits-all regulations that did not, as enacted and thereafter interpreted, adequately differentiate between a company the size of ADG versus IBM. I come before the committee as a believer in the primary goals of the Sarbanes-Oxley legislation: providing more timely, accurate, and transparent information for investors. ADG believes that a well-run company should have and maintain good internal controls. As a company working hand in hand with our public auditors, we have made significant progress in improving our internal controls, and we will continue on that journey in 2006 and beyond. But it has come at a cost. In 2005, we spent over $108 million on external fees for SOX compliance and auditing. We spent that much and probably more on internal resources on documentation, testing, and related activities. That $3.6 million in 2005 equates to over 62 cents of negative earnings for our shareholders, not to mention the unmeasured opportunity costs of efforts not spent on improving revenue, profit, and productivity within the company. Robert Greifeld, president and CEO of Nasdaq, in a recent Wall Street Journal editorial summarized the situation very well. He said, ``The burden of compliance is onerous, the cost is significant, and it falls disproportionately on smaller companies that are least able to pay.'' Their research has shown that the burden on small companies, as a percentage of revenue basis, is 11 times that of large companies. He went on to say, and we agree, that ``SOX is important, by and large it works. We have spent 3 years to assess its strengths and problems. Perhaps 90 percent of all complaints have their genesis in 20 lines of text in Section 404. The time has come to address those 404 concerns without diluting the essential investor protections that are the true legacy of SOX. Specifically, we should adopt the recommendations of the SEC's Advisory Committee on Smaller Public Companies, which has proposed an exemption from 404 for companies with less than $128 million in market cap and revenues under $125 million. Companies with up to $787 million in market cap, as long as they had revenues of less than $250 million, would receive a partial exemption. The companies exempted account for only 6 percent of the U.S. market cap--which means 404 would still apply fully to 94 percent of equity market capitalization.'' ADG agrees with these observations and supports his call for reforms and exemptions. In their discussion on cost/benefit, the Committee on Sponsoring Organizations [COSO], states that, ``The challenge under 404 is to find the right balance. Excessive control is costly and counterproductive.'' ADG believes that auditors should not have a one-size-fits-all checklist when auditing companies of different sizes, and regulators should amend the current rules to accommodate the special needs and circumstances faced by smaller companies. In smaller companies, such as ADG, the simple lack of people can be a liability. For example, it can be more difficult to achieve separation of duties that 404 calls for in many areas because of flatter organizations and smaller staffs. We have some operating units that have less than 40 people. Workers and managers in those typically have multiple roles and responsibilities, so you have a higher dependence on people doing the right thing. You also typically have a higher degree of direct and explicit knowledge of day-to-day activities since managers are much closer to the daily transactions than their peers at bigger companies. And yet there is no recognition of that in the standards of the transparency. Managers and executives should be allowed to place more reliance on monitoring than on control activities under those circumstances. The existing paradigm of documentation and testing creates huge burdens in small companies. Controls that exist but are not properly documented and tested internally are not considered by auditors in their assessments under SOX. Offsetting informal controls that are ingrained into the culture of small companies do not receive any credit in the existing evaluation process. We agree with COSO that internal control should be a process designed to provide reasonable assurance regarding the reliability of financial reporting. But we also agree with the rule of thumb for internal controls that benefits should outweigh the costs. The current construct of 404 does not meet that criteria. If employees are spending excessive hours on fine-tuning internal controls, updating documentation, testing controls, evaluating and re-evaluating financial reports, and compiling more extensive information for their board of directors and audit committee, then other more important activities are not getting done. ADG agrees that it is time to address the 404 concerns without diluting the essential investor protections that are the true legacy of SOX. Proposals for exemptions for smaller companies should be considered. We should re-examine the standards for defining and measuring internal controls at large, medium, and small companies. It makes no sense to have one set of standards that apply equally to IBM and ADG. I realize I am out of time. Can I continue? Mrs. Miller. A few moments. Mr. Dowski. Let me make one final statement. Personally, I believe that auditors do not commit fraud. Dishonest people inside of companies do, and I think we have seen that in the press. Congress should increase the civil and criminal penalties on those people who violate the trust of shareholders. Violators should be forced to forfeit their assets and spend years in jail. When people who have defrauded investors and fellow employees out of billions of dollars are allowed to keep their fancy homes and other offshore assets, then how on Earth does punishment fit the crime? People with high ethical standards are the best defense of the public interest. Thank you for this opportunity to testify. [The prepared statement of Mr. Dowski follows:] [GRAPHIC] [TIFF OMITTED] T0899.030 [GRAPHIC] [TIFF OMITTED] T0899.031 [GRAPHIC] [TIFF OMITTED] T0899.032 [GRAPHIC] [TIFF OMITTED] T0899.033 Mrs. Miller. Thank you very much. Our next witness is Mr. Alex Pollock. He has been a resident fellow at American Enterprise Institute since 2004, focusing on financial policy issues, including government- sponsored enterprises, Social Security reform, accounting standards, and the issues that have been raised by the Sarbanes-Oxley Act. Previously he spent 35 years in banking, including 12 years as a president and chief executive officer of the Federal Home Loan Bank of Chicago. We appreciate your testimony here today, Mr. Pollock. The floor is yours, sir. STATEMENT OF ALEX J. POLLOCK Mr. Pollock. Thank you very much, Madam Chairman, Ranking Member Lynch. I very much thank you for the opportunity to testify today, and these are my personal views on the issues. This hearing is very important and most timely. Everybody on the panels and on the subcommittee has repeated the amazing evidence from the market, from businesses all over the country, about the problems with Sarbanes-Oxley implementation. It is a great right in America of the people to petition their representatives for redress. I do not think there is any doubt that the people are petitioning the representatives for redress of the consequences of Sarbanes-Oxley, which was an act done with great good intentions, and as you pointed out, Madam Chairman, in your opening comments, we have had unintended, very adverse consequences. It is obvious this has been a tremendously expensive exercise in the creation of paperwork and bureaucracy, and the total costs of this exercise far outweigh the benefits which are likely to arise from it. And the burden of all this is, as many people have said, disproportionately high for smaller companies. It is important to remember that when excess costs are imposed on companies, they are actually imposed on shareholders, and it does not protect the shareholders to impose excess costs on them. Moreover, in my opinion, the historical record is very clear that the mechanical requirements which characterize the implementation of Sarbanes- Oxley will not prevent, when the next bubble and boom time comes, the next set of frauds and scandals, which always appear during these times, and we will have our future Enrons and WorldComs, notwithstanding this mass of expensive paperwork. I want to quote from a typical experience with Sarbanes- Oxley implementation. This is a letter to the SEC from one company. They note the ``concentration on minutia . . . redundant and inefficient operations, creation of an adversarial relationship with the audit firm . . . form over function . . . and unrealistic requirements . . .'' The British Confederation of Industry, looking from abroad, points out, quite correctly, that ``Dealing with risks on the basis of a remote likelihood,'' which is the Sarbanes-Oxley implementation standard, not in the act itself but as implemented, ``other than a remote likelihood,'' that this not only imposes huge costs but makes the whole thing a nitpicking process, as we have heard from many people. And as has been noted, the SEC's Advisory Committee on Smaller Public Companies says that for the smaller public companies, relief from 404 is urgently needed. As has been noted, a highly interesting commentator, Eliot Spitzer, has described Sarbanes-Oxley implementation as an ``unbelievable burden on small companies.'' And what is apparent is that Congress did not intend all of this. The SEC did not intend it. Even the PCAOB did not intend it. This is all a runaway effect basically of fear, the fear on a lot of people's parts, and especially the fear on the part of accounting firms that they will be criticized for doing something wrong. They saw Arthur Andersen be destroyed. But, on the other hand, for these accounting firms, the implementation of Sarbanes-Oxley has been a revenue and a profit bonanza, quite the opposite of what the Senate committee report on Section 404 stated, namely, ``The Committee does not intend that the auditor's evaluation be the . . . basis for increased charges or fees.'' There is a line with great irony read in retrospect. I would like to suggest that Congress should act. I don't think it is wise to wait for the regulatory bureaucracies to do this. And I would like to highlight three steps I believe Congress should take. I think you should also do some things to restructure the PCAOB which are in my written testimony, but I will not mention them this morning. First, the best case would be to enact the provisions of H.R. 1641, a bill introduced last year by Congressman Flake of Arizona, which would, very simply, and in my view elegantly, make Section 404 of Sarbanes-Oxley voluntary as opposed to mandatory. This is an approach well suited to a market economy and a free society, and I simply point out that if investors really want the kind of heavy-handed documentation of internal controls called for by 404, an article of religious faith on the part of its proponents, then the companies will do it because the investors will demand it. I think we need to find out what investors really value, and this voluntary approach would do it. At the very minimum, as many other people have said, Congress should address Section 404 for smaller public companies, and the best way to do that is make it voluntary for smaller public companies. I do not actually think that exemption, which is talked about by the Advisory Committee, is the best approach. I would like to say voluntary with explanation and disclosure. So you as management, you decide how you are going to address internal controls. You disclose and explain it to the shareholders. They can make up their minds. We ought to, at a minimum, do that for smaller companies, best case for everybody. The second point, Congress should instruct the PCAOB to change the internal control review standard from this ``other than a remote likelihood'' to ``a material risk of loss or fraud.'' This was brought up on the first panel. I think it is exactly right, and it is the only way to get the accountants acting right. Third, Congress should state clearly that it understands the true nature of accounting, which is that accounting is not something objective but something full of subjective judgments, estimates of the future, which is unknowable, debatable competing accounting theories and complex compromises, art not science, and, therefore, it is essential to have the accountants closely advising and counseling their clients on the application of the ever more complex accounting standards which the Financial Accounting Standards Board is producing. And we have lost that, as has also been discussed. In conclusion, I think it is critical to take a number of steps, and I think Congress should take them, to bring under control the unintended effects, intended by nobody, which have proved so remarkably costly, bureaucratic, and inefficient, and they have been caused by the way that Sarbanes-Oxley has been implemented. I hope Congress will take these steps. Thanks again for the chance to be here. [The prepared statement of Mr. Pollock follows:] [GRAPHIC] [TIFF OMITTED] T0899.034 [GRAPHIC] [TIFF OMITTED] T0899.053 [GRAPHIC] [TIFF OMITTED] T0899.035 [GRAPHIC] [TIFF OMITTED] T0899.054 [GRAPHIC] [TIFF OMITTED] T0899.036 Mrs. Miller. Thank you so much. And our final panelist today is Damon Silvers. He is an associate general counsel for the AFL-CIO. His responsibilities include corporate governance, pension, and general business law issues. He is a member of the Public Company Accounting Oversight Board Standing Advisory Group. He is also a member of the Financial Accounting Standards Board User Advisory Council and a member of the American Bar Association's Subcommittee on International Corporate Governance. We welcome you to the committee today, Mr. Silvers, and the floor is yours, sir. STATEMENT OF DAMON A. SILVERS Mr. Silvers. Thank you very much, Chairwoman Miller, Congressman Lynch. On behalf of the AFL-CIO, I express our appreciation for being able to be here today and to discuss this obviously very important issue. I will say that before I begin my formal remarks, in very large part, we very much agree with what Ms. Hinchman said. Not all my remarks go straight to those points, and I don't want to associate myself with hers. Ms. Hinchman. And we do not often agree with the AFL-CIO. Thank you. [Laughter.] Mr. Silvers. Right. And as I said to Mr. Parks at the last hearing he and I testified at, it is an unusual experience. But, nonetheless, we do. Union members participate in benefit plans with over $5 trillion in assets, and our actual union-sponsored plans have approximately $400 billion in assets. Those workers' pension funds are broadly invested in a variety of small-cap and total market index funds and are sizable shareholders in many small public companies. I have attached to my testimony a letter from one such fund that provides benefits to our members, the Florida State Board of Investment, that describes the ways in which that large fund is deeply invested in small companies. Union members participate in the capital markets also as individual shareholders and, like other investors, are frequently asked by brokers to consider investing in small and micro-cap companies. And I am particularly honored to be, I think, the only investor representative here speaking today. The integrity of public company financial statements is a prerequisite to the functioning of our capital markets. When investors lose confidence in financial statement integrity, stock and bond prices fall, interest rates for businesses rise, and investors seek out markets in which they have more confidence. With the current account deficit running at a rate in excess of $2 billion a day, the United States simply cannot afford to undermine the integrity of its capital markets in whole or in part, and that was the circumstance in which we found ourselves in the summer of 2002, at the time in which the Sarbanes-Oxley Act was enacted. However, the Sarbanes-Oxley Act did not create the requirement that companies maintain adequate internal controls. That requirement has been a matter of law for public companies since 1977. It has simply been a law that companies have ignored. Internal controls are among the most important mechanisms that ensure that company financial statements are honest and accurate. They range from passwords on key spread sheets to systems for counting inventory. If internal controls are weak, that weakness casts doubt on the accuracy of company financial statements. In the absence of effective internal controls, company financial statements simply cannot be relied upon. Weak internal controls are strongly correlated with problems in company financial statements. Since larger companies--accelerated filers--began to comply with SOX 404 more than a year ago, according to the corporate governance firm Glass Lewis, most public company financial restatements have been at companies that have also had weaknesses in their internal controls. Small public companies disproportionately are involved in these restatements and in SEC enforcement actions. According, again, to Glass Lewis, in 2005 the smallest companies were more than twice as likely to have to restate their financials as large companies. Dana Hermanson, a professor of accounting at Kennesaw State University, has found that smaller public companies ``have accounted for the vast majority of accounting fraud causes brought by the Securities and Exchange Commission.'' Consequently, the AFL-CIO opposes any effort to exempt any public company from its clear obligations under the Sarbanes- Oxley Act with respect to internal controls. In addition, we strongly oppose any stealth effort to turn the audit of internal controls into anything other than what the statute requires--an audit sufficiently substantive to support an attestation by the audit firm that management's own assessment of its internal controls is correct. And we are not alone. Contrary to some of what has been said this morning, there is virtual unanimity in both the institutional and individual investor community about the importance of protecting the current scope of 404, a consensus which includes institutionally oriented organizations like the Council of Institutional Investors, and organizations oriented toward individual investors like the American Association of Retired Persons and the Consumer Federation of America. In addition, distinguished financial leaders like the former chairman of the Federal Reserve, Paul Volcker, and former SEC Chairman, Arthur Levitt, have opposed weakening 404 and specifically warn Congress that the effort to do so could rank with other disastrous efforts by Congress to deregulated industries such as the savings and loan industry if it were to move forward. There are two ways of thinking about the costs versus the benefits of internal control audits. The first way is to try and compare the costs of complying with SOX 404 with the costs involved, for example, in the collapse of a large-cap public company. According to the folks who oppose the application of 404, total costs were approximately $35 billion in 2004. This is approximately a third of a percent of the market cap of the companies involved, a ratio, for example, that is comparable to what I pay for fire insurance for my home. And it is less than half of the cost of any one of the major corporate collapses that occurred in just one company in 2001 and 2002. By the way, other people have very different numbers for what the costs are here. Audit Analytics, for example, cites the total audit costs, not 404 but total audit costs, for the Russell 3000 in 2004 as $2.7 billion. The second way to think about it is to compare the costs with the benefits that accrue at the individual company level from company management getting a tighter grip on their business and being able to manage more precisely. There has been some discussion of those benefits here on this panel, and they were described by Jeffrey Immelt, the CEO of General Electric, when he said, ``I think SOX 404 is helpful. It takes the control discipline we use in our factories and applies it to our financial statements.'' Since 1933, the Federal Government has required companies that wish to sell their securities to the public to bear a number of costs related to investor protection. Each of these costs is higher as a percentage of either assets, revenues, or profits for small companies than for larger companies, and particularly is higher than revenue numbers for small startup- stage companies. Each of these costs has an effective minimum, regardless of the size of the public company. Therefore, it is easy to draw charts that look dramatic but are, in fact, misleading about the impact on small companies of any kind of investor protection. The real question is: What are the minimum requirements to access the public markets, to call our members on the phone and try to sell them your stock? Now, of course, investors do not have an interest--and this comes to Ms. Hinchman's testimony. We do not have an interest in needlessly expensive internal control audits or audits driven by conflicts of interest and accounting firms' desire to recapture consulting revenue they had before, and a variety of other things that we suspect may be going on. And we do believe that in 2004 the audit firms did overcharge the public companies and investors were harmed by that. However, the appropriate response to that is the regulatory response from the SEC and the PCAOB, and not wholesale exemptions from vital investor protections, and sensible changes in the guidelines and rules, such as Arthur Levitt's proposal for reducing duplicate internal control documentation that is simply inappropriate and a waste of everyone's time and money. Ultimately, those who want to weaken Sarbanes-Oxley and exempt wholesale the majority of public companies who seek to sell their shares and bonds to individual investors, they must answer the question: Why should Congress allow a company that cannot attest or receive outside attestation that it has effective internal controls, why should such a company be allowed to sell shares or bonds to the investing public? And Congress, furthermore, if it wishes to go in that direction, will have to explain to the victims of future accounting fraud why it was that when we had a tough law that restored investor confidence we weakened it. Thank you. [The prepared statement of Mr. Silvers follows:] [GRAPHIC] [TIFF OMITTED] T0899.037 [GRAPHIC] [TIFF OMITTED] T0899.038 [GRAPHIC] [TIFF OMITTED] T0899.039 [GRAPHIC] [TIFF OMITTED] T0899.040 [GRAPHIC] [TIFF OMITTED] T0899.041 [GRAPHIC] [TIFF OMITTED] T0899.042 [GRAPHIC] [TIFF OMITTED] T0899.043 [GRAPHIC] [TIFF OMITTED] T0899.044 [GRAPHIC] [TIFF OMITTED] T0899.045 Mrs. Miller. Thank you all so very much. Mr. Hubbell, I was interested to hear of your background in the marina business. My family was from the marina business, and I remember during the 1980's when Congress had some unintended consequences in the marina industry, the boating industry, when they passed the luxury tax and they wanted to make sure that they were taxing the rich. And, of course, what they did instead was drive most of the boat manufacturer companies that employed just average workers all over our Nation out of business, and the wealthy ended up buying boats from foreign nations and just documenting those boats offshore and bringing them in. So people do find a way all around that, and Sarbanes-Oxley, in some ways is, again, the unintended consequences, I think, of an action by Congress, unfortunately. Let me just ask generally one question. You know, we have said that the goal with Sarbanes-Oxley, of course, is full transparency and internal controls and tightening of financial reporting. How can we actually bring down the cost? I thought it was interesting to hear Mr. Dowski talk about the president of Nasdaq, some of the various recommendations that he had made. And Mr. Pollock mentioned about Representative Flake's piece of legislation about voluntary compliance. I am not quite sure about all of that, but I would just pick up a little bit on what Representative Lynch brought up earlier, which I thought was, again, as was mentioned, a common-sense approach. What is your thought about actually, rather than just changing 404, making it--that you would do reporting every other year or, even as Representative Feeney had mentioned, that you do something similar to what the IRS currently does with all of our tax returns, just a random sampling, which seems to be able to keep the entire Nation on its toes. Why not utilize that type of an approach here? I just throw that out to the panel. Mr. Hubbell. If I could comment on that, I think all those are good ideas. I think more importantly there have to be definitions applied, and somebody mentioned earlier this morning about materiality. Our net profit in both of our companies, after tax, for this prior year was about $80 million net after tax. And our auditing firm was using materiality of $100,000. Now, whenever you get to that small number, if that is their threshold, it took them a lot of time to try to look for $100,000 things. So I think if we could apply some definitions--in the case of our company, we are controlled corporation; insiders own 60 percent, so it would be hard to argue that anything we do is in violation of the stockholders' interest. So it is things like that, I think just some definitions. Mrs. Miller. Yes? Mr. Pollock. Madam Chairman, I think that once every 2 years would be a distinct improvement on every year. Once every 3 years would be better. A voluntary standard would be even better. As I said in my testimony, you do not help shareholders by imposing excessive costs done to standards which are unreasonable, which the ``other than a remote likelihood'' standard is, in my judgment, entirely unreasonable. And that is what generates a lot of the excess paperwork, that plus the fear on the part of the accounting firms that any mistake is life-threatening in terms of professional life. When you are operating under fear like that you get unreasonable sorts of responses. So I think we ought to move in a positive direction, and I would support anything in a positive direction, but I would take several other steps besides the ones suggested. Ms. Hinchman. Madam Chairman. Mrs. Miller. Mr. Silvers first. Mr. Silvers. I think that the question is very well posed. I think that it is clear that we are in current--while as you can tell from my testimony we feel very strongly that public companies ought to have audited assessments of their internal controls and that individual investors particularly will be put at risk by, say, a voluntary system or an exemption, big institutions will have various ways of protecting themselves, and individuals I think will not. Given that those things are--that is our position, we do feel that it is important to explore the very question you are asking, which is: How can this be made more cost-effective? How can it be right-sized? And I like Ms. Hinchman's phrase there very much. I do not believe that running out--extending the time periods--I mean, A, I think as Congressman Lynch indicated, doing this every 2 years would require a change in the statute. I do not believe that is the right approach. I believe it is well intentioned, and I believe there are more dangerous things than doing that. But I do not believe it is the right approach, and here is why: because investors want to have annual financial statements they can rely upon, and having adequate internal controls at all times is a vital component of having a financial statement annually that you can rely upon. Now, that being said, I think that there is a reasonable basis--and I am affected by the testimony I have heard about this--that to look at the issue of whether the standard for materiality is the right--has been rightly phrased here. Now, frankly, I don't think that is Congress' job to do that. I think that we in general have an accounting system at every level where we rely upon independent bodies--FASB, COSO, PCAOB--to set these standards and to deal with the technical issues. But I think that this is one area that might be worth looking at. I also think that there are a variety of ways in which the practice in this area has become duplicative, and I think the best statement, as I indicated in my testimony, around this issue was the one by Arthur Levitt, just pointing out places where it appears that audit firm practice has essentially documented things twice. Finally, something that a number of commentators have noted about this situation is that while the PCAOB has given extensive guidance to audit firms as to what to do, almost no guidance has been given to issuers, to the folks at this table, as to how they ought to prepare their assessment. This is a responsibility that lies with the SEC. I do not want to be critical of the SEC. I think both under Chairman Cox and Chairman Donaldson that the Commission has been very ably led today and in recent years. But this has slipped through and needs to be addressed. The focus here throughout ought to be, again, this concept of right-sizing. We do need to see to it that audit firms know the difference between a 60-person company and a 600,000-person company, and that ought not to be too hard and should not require weakening fundamental investor protections. Mrs. Miller. Ms. Hinchman. Ms. Hinchman. Yes, thank you, chairman. I think that one of the things that was talked about in the earlier panel--and Mr. Hubbell had made reference to it as well--is this whole concern about materiality and about how the internal control audits are conducted. And I think that this is the big challenge, and FEI does believe that the PCAOB and the SEC has a very important role to help guide companies through that process. And I had mentioned in my verbal testimony that there were often Q&As from staff to try and give further guidance, and there were some tenets and principles that were articulated by the PCAOB and the SEC over the last 2 years to try and articulate and direct companies and auditors in particular to take a risk- based approach to their audit, and to effectively not be concerned about, as I like to say, count the pencils in the supply room, but really look at the challenges that are going to be a high risk to the entire enterprise or company. And I think what Mr. Silvers says is absolutely true, that I think that the PCAOB and the SEC are up to the task to give the guidance to companies versus a company that has 60 employees versus 2,000 employees. And there is an opportunity to scale the requirements and compliance for these provisions to those different size companies without an outright exemption. Mr. Pollock. My colleagues have a lot more faith in regulatory agencies than I do, Madam Chairman. Mrs. Miller. Mr. Dowski. Mr. Dowski. Yes, I listen with fascination to people that are not involved on a day-to-day basis with running companies. I will give you an example of the current standards of reasonableness in terms of the implementation of SOX 404. We have a company in California called MS Microwave. It has 40 employees, does about $10 million of revenue, surveillance equipment. Under the current SOX regulations, they have an IT department that is actually one individual who runs their servers and keeps all their PCs up. We failed our SOX audit out there for many reasons, but one of which was we did not have adequate controls under IT. According to the SOX regulations that are enforced today by the auditing firms and by the PCAOB, that one individual had to hold a meeting, had to write out minutes, had to actually invite somebody else to the meeting so that there would be a witness to the meeting, and had to do that on a quarterly basis and review the statuses of his IT environment with at least two outside experts. That was deemed to be efficient and effective IT controls. It is insane. The way it is being enforced is insane. And I am not--I think there are a lot of arguments to be said against making exemptions. The problem is that 404 is all of 20 pages. Simply, somebody has to sit down and say, look, we cannot apply the same standard uniformly to a very large company and a very small company. There has to be an interpretation of the definition of reasonableness and materiality that many of the people have talked about, anecdotally or directly. And that is the thing, when you get right down to it, that drives small companies, like ADG, which is really a collection of seven even smaller companies, it drives you to drink because the standards are just unreasonable. You have separation of control duties. Three different people have to handle the checks. Somebody has to request the check. Somebody else has to print the check. And the third person has to sign it. In some organizations, we have one person doing the same thing, and yet it is a material weakness because we do not have those controls in place. It is just insane. So there has to be a standard of reasonableness applied. Mrs. Miller. Thank you. Representative Lynch. Mr. Lynch. Thank you, Madam Chairman. First of all, I just want to say, just as a matter of disclosure, I actually am a member of the AFL-CIO. I am an active member. I pay my dues every month, so I am probably an investor as well. I do want to say that--you know, and I have concerns from that end. I participate in a pension fund and a lot of my constituents do as well. And so I am very interested in the transparency and the accountability and the security that is provided by certain aspects of Sarbanes-Oxley. But I also know that these smaller businesses are really an incubator of great innovation in this country and that the burdens here are disproportionate to the protections they are providing. I heard Ms. Hinchman and also Mr. Pollock, they both sort of hit on the material risk standard, if you will, and whether or not moving to that standard would satisfy the concerns that you have raised. And I just--we have to have some balance here. We have to have some balance, because right now I think just the costs that we are talking about. And so I want anyone who feels equipped to address that issue--and I also want to talk about the biennial issue here about having these full, independent audits done every other year, because I have to say that having sat on a union pension fund, you know, as a trustee, the fact that a company has to go through this process in, say, the odd-number year and then they realize that the next year they are attesting to the internal controls and procedures that they have in place, it seems very odd that they would leap off that standard in the even-number years knowing that they are going to be inspected again on the odd-number year. I just do not see that divergence occurring under realistic circumstances. So I am less concerned with the every-other-year situation. But you may be right. It may not be the ideal solution here. Maybe it is something along Mr. Pollock's line of thought where it is voluntary in a sense, but with, you know, encouragement with the SEC and PCAOB, I don't know. The last--and I know I have given too many questions already, but Mr. Pollock and Ms. Hinchman also suggested that the SEC and the PCAOB already have the ability to do this internally, and you are right, I think they are well equipped to do that. But are they willing to? That seems to be my question. And do they not need under the circumstances some--do we need to act here? I get the sense that we do because nothing is happening. I would love to see this thing handled by the SEC or PCAOB, but I just do not know, with everything else they have going there--my goodness, we do not even have folks at the SEC to train and to coach the issuers in these cases how to go about compliance with Sarbanes-Oxley. So I am a little bit skeptical that they would be able to leap into the fray here and come up with a regulatory solution. Ms. Hinchman. Mr. Lynch, I think part of the challenge is, particularly with the PCAOB, when AS2 was issued, that they really did rely very heavily on what is called principle-based accounting. And they did that intentionally because there was a drive in the accounting, financial reporting world to go in that direction. Mr. Lynch. Principle as opposed to rule-based? Ms. Hinchman. Correct. Mr. Lynch. OK. Ms. Hinchman. But our auditing profession is very much reliant on rules-based accounting, and so it has been a very difficult transaction for the auditors to rely on AS2 and to make the determinations for how to interpret those principles, predominantly because of liability concerns. And we are sympathetic to that issue. I think that is a big part of what is driving the procedures and the way that people are performing these audits these days. But from year one to year two, I think that you have been able to see a growing sense of confidence, both on the auditor's part and also on management's part, on how to conduct these internal audits. And I think that would go a long way, if the PCAOB could give a little more rules-based direction on how to interpret and use AS2 and get out of some of the examples that Mr. Dowski had made mention to earlier, and allow them to really focus with confidence on a risk-based assessment on how to conduct the internal audit. I also think that the SEC does need to step up to the plate more, in terms of giving guidance to the issuers, as you said. Mr. Pollock. Congressman, I very much share your skepticism on whether the SEC and PCAOB would step up to this issue. It is quite clear that the SEC did not know what its regulation would entail. These are unintended consequences from their point of view as well, also for the PCAOB. They did not understand, when they were regulating, what was going to happen. Both the SEC and the PCAOB have subsequently quite severely criticized the accounting firms for what they have done, and as our colleague suggested here, the accountants, of course, have a rather serious conflict of interest in that the more burden there is, the more profitable they become. But neither the SEC nor the PCAOB accepted any responsibility for the morass of bureaucracy they caused, and if you think about the incentives, unlike Congress, which is a balancing body, to balance interests and balance costs and benefits, the incentive structure of any regulatory body is to avoid embarrassment at all costs and to be quite insensitive to the costs imposed on other people in order to make sure that you do not get in trouble. And I think we have that problem with both of these agencies. If I may just add one other comment, I do think that the status of the PCAOB needs to be reformed as well. It is clearly functionally a regulatory body. It needs to be brought under congressional oversight, appropriation, and control, just like every other regulator, and I do think that was a mistake in Sarbanes-Oxley which should be rectified. Mr. Silvers. Congressman, let me answer the two questions that you sort of posed conceptually, and then I want to make a remark about the regulatory agencies as well. The question of doing an internal control audit every 2 years as opposed to every year really raises the question of: Is the internal control audit an integrated whole with the audit of financial statements? In our view it is. If you are not--and, you know, one could take the view that we only need an audit of the financial statements every 2 years. But if you are going to represent to investors on an annual basis that on X date you can rely on these numbers, you also need to, I think, provide investors an assurance that the process that produced those numbers has some integrity to it. I think that we are now sitting at a moment where we have just been through the startup period against a background in which public companies had essentially been lax in relation to internal controls because no one was watching. As I said in my testimony, there has been a requirement to have adequate internal controls for public companies for close to 30 years. But when people actually started, you know, opening up the hood and looking to see what was there, it turned out that really that was not what was going on at all. Now, so I think that is the conceptual issue your proposal raises, and candidly, I have heard it for the first time today, and my reaction I think would be the reaction of many people in the investor community, that we want an annual audited financial statement that we can count on and that integration matters. I mean, I understand what you are trying to achieve and am sympathetic with your ends, but I am not sure that is the right way to do it. Now, in relationship to the materiality standard, I do think that is an area that ought to be looked at, but I want to give you this warning. A, as I said earlier, I think this is an area--these kinds of standards are traditionally an area in the accounting area where Congress has deferred to these independent agencies on the details. It is very much the kind of oversight process the chairwoman alluded to before. The warning around materiality is this: If you have too high a number threshold around internal controls materiality, you run the risk that auditors will not be looking--that neither the internal financial controls people nor the auditors will be paying much attention to symptoms of larger problems, that very big problems tend to start small. I do not pretend to know what the right answer is here, but when you think about getting to the right answer, it is not just a question of is that particular control of that particular account likely to blow the company up. It is, are you learning something by looking at that, the weakness of that control that tells you that there are larger systemic risks. And we have to build that in somehow into the process. Now, finally, with respect to the regulatory agencies, the Nation owes a deep debt of gratitude to the Public Company Accounting Oversight Board. When it was established in the fall of 2002, we were in a crisis period. Thanks to Bill McDonough and to his successor, Bill Gradison, who is the Acting Chair, and the very good people who worked there, the fundamental integrity of the financial reporting system in the United States is not really in doubt today in the way it was in September 2002. I do not believe it is fair to characterize them the way that my friend Mr. Pollock has. Those people are dedicated servants to the Nation and we owe them a debt. Can they--and their colleagues at the SEC, whom I have equal and profound respect for, can they do the right-sizing that is really needed here? And I think the answer is unquestionably yes. Not only can they, but really no one else can. This involves a level of detail, expertise, and interaction with the various components here and attention over time that only those agencies really have, in conjunction with COSO, I believe. I do not think there is really an alternative, and I think that they are eminently able to do it. Mr. Dowski. I think that the key issue is whether or not they are willing to, in the environment that we are in today, take a risk and step out and interpret those rules in a less than uniform way. I think that is--you know, I think that is really at the heart of the debate on 404 if you really sort of break it down and look at why a lot of companies like ADG are saying that this is just not a workable implementation plan. You know, I think Ms. Hinchman hit on a good point in that there has to be a shift from historical rules-based to principle-based interpretation in a lot of the implementation areas, and that PCAOB has started down that path, but the auditors in the environment are in with the increased liability and what they saw happen to Arthur Andersen are simply sitting there wants to check the box. And if they have a schedule that they have to fill out and they cannot check every box, then they are going to keep working it until you can get closer to checking those boxes. They will make that one guy hold a meeting and write up some minutes and document it so they can check that box. And that is the thing that really has to be changed and adjusted. Whether the PCAOB can do it or the SEC can do it or whether Congress should do it, I mean, I think we ought to use the organizations we have and put the onus back on auditors. The other issue is that auditors have gone from being an advisor to companies to being an antagonist with companies, and that is really something that has happened. I have been doing this for 20 years, and since 2002, the biggest thing that has changed is the rules have gotten more complicated, and you cannot call up your audit partner and ask, ``Here is what I think about the interpretation of this opinion and here is what we are doing. Do you think this is the right thing?'' They will not give you an answer. They will say, ``Write it up. Send it to us, and we may or may not tell you that it is an issue.'' They may or may not tell you that during the quarter, and then at the end of the year, they will come back with a whole list of other questions that you did not answer correctly. And that is part of this, I think, environment that has to change and improve as we move through, you know, the reactions that we all had to what happened in 2002, and to an environment where this thing becomes a lot more rational. I mean, nobody is going to argue that the shareholders do not--are not entitled to good internal controls. I think people in the financial profession have been stressing good financial controls because they are the basis on which you make reliable financial statements. You know, long before this came up, people were focused on controls. The breakage now is because we have now taken one standard for what is an acceptable internal control and we are applying it uniformly against the landscape of the American economy, and it just does not make any sense at the practical level. Mr. Lynch. Thank you. Mrs. Miller. Thank you all so very, very much, sincerely, for your attendance today. I think this has been really a fascinating hearing, and again, I think the impetus for the hearing was everybody seeing that something is wrong with the 404 and the way that it is being implemented, and as many of you mentioned, the Commission and the Board certainly have the ability to be proactive and to do something short of Congress taking legislative action and whether or not they have the will. A way that they may have the will is to see that Congress--there is sort of a growing momentum here congressionally for some action, and we would like to preclude that kind of a thing if they would move on something more reasonable. The standard always has to be reasonable. So we appreciate you all coming and appreciate the ranking member, and with that the meeting will be adjourned. [Whereupon, at 12:19 p.m., the subcommittee was adjourned.]