In 2001, the sudden collapse of corporate giants like Enron and WorldCom wiped out the retirement funds of millions of Americans and badly damaged investor confidence in our capital markets. As it became clear that these companies had “cooked the books” – willfully misleading shareholders about their true value – leaders in Congress began crafting what eventually became known as the Sarbanes-Oxley Act.
After months of hearings and bipartisan compromise, Sarbanes-Oxley passed the House of Representatives by a margin of 423 to 3 and the Senate by a unanimous vote of 99 to 0. Signing the bill into law on July 30th 2002, President Bush said “Corporate corruption has struck at investor confidence, offending the conscience of our nation. Yet, in the aftermath of September the 11th, we refused to allow fear to undermine our economy, and we will not allow fraud to undermine it, either.” He called the new law “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.”
Today, some in Congress want to roll back Sarbanes-Oxley. They are seeking to exempt certain firms from the transparency standards created by that law. Apparently, less than ten years later, some have already forgotten what we learned from the Enron and WorldCom debacle.
Although Sarbanes-Oxley fundamentally changed the nature of the relationship between public companies and their investors for the better, what is required under the most often discussed section of law is refreshingly simple. Section 404 says that a public company’s executives must put in place appropriate internal controls and certify that the company’s financial reports to investors are accurate. An independent auditor must then confirm the adequacy of the company’s internal controls. In return for meeting these basic standards of transparency, the company can access the wealth of capital provided by public investors on our nation’s stock exchanges. Alternatively, if a company does not wish to meet these requirements, they are free to raise capital outside of the public markets like thousands of businesses do every day.
Unfortunately, in committee, a controversial amendment was added to the Wall Street Reform and Consumer Protection Act to eliminate the Sarbanes-Oxley external audit requirement for publicly traded companies with a market capitalization up to $75 million. It is sadly ironic that an amendment to dilute one of the most important sources of investor protection was pinned to legislation that is supposed to address the fundamental flaws in the financial services industry that precipitated last year’s catastrophic financial crisis and the collapse of firms like Lehman Brothers and AIG. The Wall Street Reform and Consumer Protection Act would reform executive compensation policies that led to excessive risk-taking, regulate the “anything goes” derivatives market, and put in place protections so that taxpayers will not have to bailout “too big to fail” companies in the future.
Exempting a select group of public companies from the transparency requirements under Sarbanes-Oxley is a bad idea under any circumstance. But it is outrageous that a bill designed to address the latest Wall Street scandal is being used as a vehicle to weaken reforms from the last one. This week, along with several of my colleagues in the House of Representatives, including Chairman Barney Frank and Subcommittee Chairman Paul Kanjorski of the Financial Services Committee, I will be supporting an amendment to strike this provision from the bill.
The fact is that when companies of any size choose to access the capital markets, they hold themselves to a higher standard. Investors deserve the same level of reliable financial reporting from all public companies. As the Consumer Federation of America stated in a November letter to Financial Services Committee members, “For defrauded investors, it doesn’t matter if they lose their money in a big company or a small company. The financial loss is the same.”
Our amendment will preserve the important reforms achieved under Sarbanes-Oxley. Those reforms are supported by Mary Schapiro, the current Chairman of the Securities and Exchange Commission, as well as previous SEC Chairmen, including Arthur Levitt. In a recent interview, Mr. Levitt said it was ”surreal” that Congress was trying to weaken Sarbanes-Oxley. If investors cannot have transparency, Levitt said, ”the whole system is worthless.”
Congressman John Sarbanes represents the 3rd Congressional District of Maryland. His father, former-Senator Paul Sarbanes, was co-author of the Sarbanes-Oxley Act.