INTRODUCTION OF THE DUE PROCESS AND ECONOMIC COMPETITIVENESS RESTORATION ACT -- (Extensions of Remarks - April 15, 2005)
HON. RON PAUL
IN THE HOUSE OF REPRESENTATIVES
THURSDAY, APRIL 14, 2005
Mr. PAUL. Mr. Speaker, I rise to introduce the Due Process and Economic Competitiveness Restoration Act, which repeals Section 404 of the Sarbanes-Oxley Act. Passed in the hysterical atmosphere surrounding the Enron and WorldCom bankruptcies, Sarbanes-Oxley was rushed into law by a Congress more concerned with doing something than with doing the right thing. Today, American businesses, workers, and investors are suffering as a result of Congress's eagerness to appear "tough on corporate crime." Sarbanes-Oxley imposes costly new regulations on the financial services industry. These regulations are damaging America's capital markets by providing an incentive for small U.S. firms and foreign firms to deregister from U.S. stock exchanges. According to a study by the prestigious Wharton Business School, the number of American companies deregistering from public stock exchanges nearly tripled the year after Sarbanes-Oxley became law, while the New York Stock Exchange had only 10 new foreign listings in all of 2004.
The post-Sarbanes-Oxley reluctance of small businesses and foreign firms to register on American stock exchanges is easily understood when one considers the costs this act imposes on businesses. According to a survey by Kron/Ferry International, Sarbanes-Oxley has cost Fortune 500 companies an average of $5.1 million in compliance expenses in 2004, while a study by the law firm of Foley and Lardner found that the act has increased the cost associated with being a publicly held company by 130 percent.
Many of the major problems with Sarbanes-Oxley stem from Section 404 that requires that a Chief Executive Officer certify the accuracy of financial statements and that a company's outside auditors must "attest to" the soundness of the internal controls used in preparing the statements. The Public Company Accounting Oversight Board defines internal controls as "controls over all significant accounts and disclosures in the financial statements." According to John Berlau, Warren Brookes Fellow at the Competitive Enterprise Institute, the definition of internal controls is so broad that a CEO could possibly be found liable for not using the latest version of Windows! Financial analysts have identified Section 404 as the major reason why American corporations are hoarding cash instead of investing it in new ventures.
Journalist Robert Novak, in his column of April 7, said that, "[f]or more than a year, CEOs and CFOs have been telling me that 404 is a costly nightmare" and "ask nearly any business executive to name the biggest menace facing corporate America, and the answer is apt to be number 404 ..... a dagger aimed at the heart of the economy."
Compounding the damage done to the economy by Sarbanes-Oxley is the harm the act does to constitutional liberties and due process. CEOs and CFOs can be held criminally liable, and subjected to up to 25 years in prison, for inadvertent errors. Laws criminalizing honest mistakes done with no intent to defraud are more typical of police states than free societies. I hope those who consider themselves "civil libertarians" will recognize the danger of imprisoning any citizens for inadvertent mistakes, put aside any prejudice against private businesses, and join my efforts to repel Section 404.
Nowhere in the United States Constitution is the federal government given the authority to regulate the accounting standards of private corporations. These questions are to be resolved by private contracts between a company and its shareholders and by state and local regulations. I would remind my colleagues who are skeptical of the ability of markets and local law enforcement to protect against fraud that the market passed judgment on Enron, in the form of declining stock prices, before Congress even held the first hearing on the matter. My colleagues should also keep in mind that certain state attorneys general have been very aggressive in prosecuting financial crimes
Far from fulfilling the promise of the authors of Sarbanes-Oxley that it would protect economic growth by creating a favorable investment climate, Section 404 of the Sarbanes-Oxley Act has raised the costs of doing business, thus causing foreign companies to withdraw from American markets and retarding economic growth. By criminalizing inadvertent mistakes and exceeding Congress's constitutional authority, Section 404 also undermines the rule of law and individual liberty. I, therefore, urge my colleges to cosponsor the Due Process and Economic Competitiveness Restoration Act.