Read our letter to Congress opposing the Small Company Regulatory Relief Act of 2011 here.
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October 25, 2011
Chairman Scott Garrett Ranking Member Maxine Waters
Capital Markets and Government Capital Markets and Government
Sponsored Enterprises Subcommittee Sponsored Enterprises Subcommittee
Financial Services Committee Financial Services Committee
U.S. House of Representatives U.S. House of Representatives
Washington, D.C. 20515 Washington, D.C. 20515
Dear Chairman Garrett, Ranking Member Waters, and Members of the Subcommittee:
We are writing on behalf of Consumer Federation of America and Americans for Financial Reform to express our strong opposition to the “Small Company Job Growth and Regulatory Relief Act of 2011,” which we understand is scheduled to be marked up today in this subcommittee. This legislation would deprive investors in the vast majority of public companies of reliable financial information on which to base their investment decisions and make it easier for all but the very largest public companies to commit financial fraud, all while doing nothing to promote job growth.
Since the Sarbanes-Oxley Act was adopted in response to an unprecedented wave of accounting fraud at companies large and small, regulators have worked closely with industry to develop an approach to internal control audits that is affordable, effective, scalable based on the size and complexity of the audited company, and well integrated into the financial audit. The result has been a notable increase in the quality of financial reporting and a drop in the cost of capital for compliant firms.
The bill would immediately dismantle those benefits for companies with market caps up to $500 million – over 70 percent of all public companies. It would allow newly registered public companies with market caps between $500 million and $1 billion five years to raise money from the public without effective protections against fraud in place. After that, any company in this size range would be free to opt out of the requirement for an independent audit of financial controls, subject to approval of its shareholders. It seems obvious that companies with the worst controls will be most likely to try to evade the requirement.
That this bill is being offered as a way to promote “job growth” is particularly ironic. As events of the past decade should have taught us, sustainable job growth cannot be produced by relaxing protections against financial fraud or making it too easy for companies to go public.
- Jobs created during the tech stock bubble of the 1990s disappeared overnight when investors suddenly realized most of these companies would never turn a profit.
- Economists studying the 2000-2001 earnings restatements that resulted from the accounting frauds preceding passage of the Sarbanes-Oxley Act found that those restatements cost the economy hundreds of thousands of jobs and may have been directly responsible for the 2001 recession.
- The fraud discovered during the financial crisis of 2008 has of course had even greater consequences – unemployment stuck at nearly 10 percent three years later and millions of American homes foreclosed on.
In each case, investors lost billions, and money that could have gone to support economically sound businesses and sustainable job growth was squandered.
Eliminating protections against financial fraud is bad for investors and bad for the U.S. economy. We urge you to oppose this legislation.
Respectfully submitted,
Barbara Roper
Director of Investor Protection
Consumer Federation of America
Marcus Stanley
Policy Director
Americans for Financial Reform