Fostering Innovation Act of 2015

Floor Speech

Today I rise in opposition to H.R. 4139, the Fostering Innovation Act. This bill permits certain public companies that would be valued at more than half a billion dollars to avoid an independent audit required by the Sarbanes-Oxley Act of 2002 for up to a decade.

While I support legislation that would enable emerging growth companies to use valuable resources to remain competitive, stable, and, ultimately, successful, I believe that this bill, as currently drafted, is overly broad and would potentially undermine critical investor protections and impede confidence in our capital markets.

Ultimately, these auditor reports on public companies provide substantial benefits to investors and to companies. They promote confidence in the U.S. markets, strengthen internal controls, and, ultimately, prevent fraud.

I urge my colleagues to oppose this legislation.

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Ms. SEWELL of Alabama. Mr. Speaker, I include in the Record letters of opposition from Americans for Financial Reform, Public Citizen, and the SEC Investor Advocate. Americans for Financial Reform, Washington, DC, May 23, 2016.

Dear Representative: On behalf of Americans for Financial Reform, we are writing to reiterate our opposition to H.R. 4139, the ``Fostering Innovation Act''

This legislation would double the length of the existing exemption from compliance with Sarbanes Oxley Section 404(b) for ``emerging growth companies'', from five years to ten years. The exemption granted in H.R. 4139 applies to companies with $50 million or less in annual gross revenues.

Section 404(b) of Sarbanes-Oxley requires the auditor of a public company to attest to the accuracy of the company's financial reporting. This requirement was passed in response to the accounting scandals of the late 1990s, which revealed widespread deception and fraud in financial reporting. More recent research by the GAO has found that companies exempted from auditor attestation requirements have a higher frequency of accounting restatements, indicating that the financial reporting at such companies is deficient. Such accounting restatements are harmful both to investors and to the companies themselves, by virtue of making it harder to raise capital.

We believe that the five year exemption provided for in the JOBS Act is already ample time for a publicly held company with tens of millions of dollars in revenue to develop the capacity to provide fully reliable and accurate financial statements. Ten years is an excessively long exemption. This is especially true given the significance to the public and the financial markets of accurate financial reporting. Congress should reject H.R. 4139.

Thank you for your consideration. Sincerely, Americans for Financial Reform.

Following are the Partners of Americans for Financial Reform--All the organizations support the overall principles of AFR and are working for an accountable, fair and secure financial system. Not all of these organizations work on all of the issues covered by the coalition or have signed on to every statement.

AARP, A New Way Forward, AFL-CIO, AFSCME, Alliance For Justice, American Income Life Insurance, American Sustainable Business Council, Americans for Democratic Action, Inc, Americans United for Change, Campaign for America's Future, Campaign Money, Center for Digital Democracy, Center for Economic and Policy Research, Center for Economic Progress, Center for Media and Democracy, Center for Responsible Lending, Center for Justice and Democracy, Center of Concern, Center for Effective Government, Change to Win, Clean Yield Asset Management, Coastal Enterprises Inc., Color of Change, Common Cause, Communications Workers of America, Community Development Transportation Lending Services, Consumer Action, Consumer Association Council, Consumers for Auto Safety and Reliability, Consumer Federation of America, Consumer Watchdog, Consumers Union, Corporation for Enterprise Development, CREDO Mobile, CTW Investment Group, Demos, Economic Policy Institute, Essential Action.

Green America, Greenlining Institute, Good Business International, Government Accountability Project, HNMA Funding Company, Home Actions, Housing Counseling Services, Home Defenders League, Information Press, Institute for Agriculture and Trade Policy, Institute for Global Communications, Institute for Policy Studies: Global Economy Project, International Brotherhood of Teamsters, Institute of Women's Policy Research, Krull & Company, Laborers' International Union of North America, Lawyers' Committee for Civil Rights Under Law, Main Street Alliance, Move On, NAACP, NASCAT, National Association of Consumer Advocates, National Association of Neighborhoods, National Community Reinvestment Coalition, National Consumer Law Center (on behalf of its low-income clients), National Consumers League, National Council of La Raza, National Council of Women's Organizations, National Fair Housing Alliance, National Federation of Community Development Credit Unions, National Housing Resource Center, National Housing Trust, National Housing Trust Community Development Fund, National NeighborWorks Association, National Nurses United, National People's Action, National Urban League, Next Step, OpenTheGovemment.org, Opportunity Finance Network, Partners for the Common Good, PICO National Network, Progress Now Action, Progressive States Network.

Poverty and Race Research Action Council, Public Citizen, Sargent Shriver Center on Poverty Law, SEIU, State Voices, Taxpayer's for Common Sense, The Association for Housing and Neighborhood Development, The Fuel Savers Club, The Leadership Conference on Civil and Human Rights, The Seminal, TICAS, U.S. Public Interest Research Group, UNITE HERE, United Food and Commercial Workers, United States Student Association, USAction, Veris Wealth Partners, Western States Center, We the People Now, Woodstock Institute, World Privacy Forum, UNET, Union Plus, Unitarian Universalist for a Just Economic Community. List of State and Local Partners

Alaska PIRG, Arizona PIRG, Arizona Advocacy Network, Arizonans For Responsible Lending, Association for Neighborhood and Housing Development, NY, Audubon Partnership for Economic Development LDC, New York, NY, BAC Funding Consortium Inc., Miami, FL, Beech Capital Venture Corporation, Philadelphia, PA, California PIRG, California Reinvestment Coalition, Century Housing Corporation, Culver City, CA, CHANGER, NY, Chautauqua Home Rehabilitation and Improvement Corporation (NY), Chicago Community Loan Fund, Chicago, IL, Chicago Community Ventures, Chicago, IL, Chicago Consumer Coalition, Citizen Potawatomi CDC, Shawnee, OK.

Colorado PIRG, Coalition on Homeless Housing in Ohio, Community Capital Fund, Bridgeport, CT, Community Capital of Maryland, Baltimore, MD, Community Development Financial Institution of the Tohono O'odham Nation, Sells, AZ, Community Redevelopment Loan and Investment Fund, Atlanta, GA, Community Reinvestment Association of North Carolina, Community Resource Group, Fayetteville A, Connecticut PIRG, Consumer Assistance Council, Cooper Square Committee (NYC), Cooperative Fund of New England, Wilmington, NC, Corporacion de Desarrollo Economico de Ceiba, Ceiba, PR, Delta Foundation, Inc., Greenville, MS, Economic Opportunity Fund (EOF), Philadelphia, PA, Empire Justice Center, NY, Empowering and Strengthening Ohio's People (ESOP), Cleveland. OH, Enterprises, Inc., Berea, KY, Fair Housing Contact Service, OH, Federation of Appalachian Housing, Fitness and Praise Youth Development, Inc., Baton Rouge, LA, Florida Consumer Action Network, Florida PIRG, Funding Partners for Housing Solutions, Ft. Collins, CO, Georgia PIRG, Grow Iowa Foundation, Greenfield, IA, Homewise, Inc., Santa Fe, NM, Idaho Nevada CDFI, Pocatello, ID, Idaho Chapter, National Association of Social Workers, Illinois PIRG, Impact Capital, Seattle, WA, Indiana PIRG, Iowa PIRG, Iowa Citizens for Community Improvement, JobStart Chautauqua, Inc., Mayville, NY, La Casa Federal Credit Union, Newark, NJ, Low Income Investment Fund, San Francisco, CA, Long Island Housing Services, NY, MaineStream Finance, Bangor, ME, Maryland PIRG, Massachusetts Consumers' Coalition, MASSPIRG, Massachusetts Fair Housing Center, Michigan PIRG.

Midland Community Development Corporation, Midland, TX, Midwest Minnesota Community Development Corporation, Detroit Lakes, MN, Mile High Community Loan Fund, Denver, CO, Missouri PIRG, Mortgage Recovery Service Center of L.A., Montana Community Development Corporation, Missoula, MT, Montana PIRG, New Economy Project, New Hampshire PIRG, New Jersey Community Capital, Trenton, NJ, New Jersey Citizen Action, New Jersey PIRG New Mexico PIRG, New York PIRG, New York City Aids Housing Network, New Yorkers for Responsible Lending, NOAH Community Development Fund, Inc., Boston, MA, Nonprofit Finance Fund, New York, NY, Nonprofits Assistance Fund, Minneapolis, MN, North Carolina PIRG, Northside Community Development Fund, Pittsburgh, PA, Ohio Capital Corporation for Housing, Columbus, OH, Ohio PIRG, OligarchyUSA Oregon State PIRG, Our Oregon.

PennPIRG, Piedmont Housing Alliance, Charlottesville VA, Michigan PIRG, Rocky Mountain Peace and Justice Center, CO, Rhode Island PIRG, Rural Community Assistance Corporation, West Sacramento, CA, Rural Organizing Project, OR, San Francisco Municipal Transportation Authority, Seattle Economic Development Fund, Community Capital Development, TexPIRG, The Fair Housing Council of Central New York, The Loan Fund, Albuquerque, NM, Third Reconstruction Institute, NC, Vermont PIRG, Village Capital Corporation, Cleveland, OH, Virginia Citizens Consumer Council, Virginia Poverty Law Center, War on Poverty--Florida, WashP1RG, Westchester Residential Opportunities Inc., Wigamig Owners Loan Fund, Inc., Lac du Flambeau, WI, WISPIRG. Small Businesses

Blu, Bowden-Gill Environmental, Community MedPAC, Diversified Environmental Planning, Hayden & Craig, PLLC, Mid City Animal Hospital, Phoenix, AZ, UNET. ____ PUBLICCITIZEN, Washington, DC., May 23, 2016. Re Vote NO on H.R. 4139 Fostering Innovation Act of 2015. House of Representatives, Washington, DC.

Dear Honorable Member: On behalf of more than 400,000 members and supporters of Public Citizen, we ask to you to vote no on H.R. 4139 Fostering Innovation Act of 2015. This bill would allow certain firms with up to $50 million in revenue and $700 million in capital floats to escape critical scrutiny in audits by doubling the length of their exemption from the requirements set forth in 404(b) of the SarbanesOxley law.

A firm where investors have trusted $700 million should be willing to be scrutinized under a Section 404(b) audit. A firm that does not want to withstand such scrutiny is the very firm that likely needs such scrutiny to ensure its financial reporting is not being doctored.

Already the Dodd-Frank Wall Street Reform and Consumer Protection Act provides relief for smaller companies from the audit requirements of Sarbanes-Oxley. Capital markets thrive when companies are held to reasonable standards. That works both for investors as well as entrepreneurs who hope to avail themselves of the capital markets. Extending firms' exemptions from necessary oversight will only lead to less compliance with standards, and more risk.

For questions, please contact Bartlett Naylor, financial policy advocate, at bnaylor@citizen.org. Sincerely, Public Citizen. ____ United States Securities and Exchange Commission, Washington, DC, May 23, 2016. Hon. Paul Ryan, Speaker of the House, House of Representatives, Washington, DC. Hon. Nancy Pelosi, Minority Leader, House of Representatives, Washington, DC.

Dear Speaker Ryan and Minority Leader Pelosi: H.R. 4139, cited as the ``Fostering Innovation Act of 2015,'' is ill- advised, and I urge Members of Congress to vote against it. The bill would allow smaller public companies to avoid the auditor attestation requirement of the Sarbanes-Oxley Act for up to 10 years following an initial public offering.

In a small company, as in a large one, it is management's job to maintain a system of internal controls to help ensure that the financial statements are reliable. A key reform of the Sarbanes-Oxley Act, which followed on the heels of the Enron implosion and other accounting scandals that wreaked havoc on American investors, was to require that a company's auditor attest to management's assessment of the effectiveness of its internal control over financial reporting. This ``second set of eyes'' helps to identify potential risks of material misstatements and is designed to prevent or detect fraud. Unfortunately, H.R. 4139 would chip away further at the requirement for a second set of eyes, even though auditor attestation enhances reliability of financial reporting for investors, which has been shown to reduce the cost of capital for businesses.

Credible empirical research has established that both investors and companies benefit from having auditors attest to the effectiveness of internal controls. For example, institutional investors rely on the auditor's opinion. Auditor testing uncovers more deficiencies than does management's assessment alone. Moreover, there is a positive correlation between a material weakness in internal control and the future revelation of fraud. Indeed, companies with more serious control problems tend to be smaller, less mature, growing, or rapidly changing. All of this academic research is described at length in the testimony of University of Tennessee professor Joseph V. Carcello on this bill before the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services Committee. In addition, a 2011 study published by the staff of the U.S. Securities and Exchange Commission fund that companies that do not have an auditor attestation tend to have significantly more material weaknesses in their internal controls and more financial restatements.

Since the adoption of the Sarbanes-Oxley Act in 2002, several steps have already been taken to significantly reduce the burden on smaller companies from the auditor attestation requirement in Section 404(b). In 2007, for example, the SEC and the Public Company Accounting Oversight Board took steps to reduce the costs of 404(b) compliance. Later, the Dodd- Frank Act exempted approximately 60 percent of companies from this requirement, and the JOBS Act waived the requirement for emerging growth companies for up to five years. HR 4139 would extend this exemption for up to 10 years for certain issuers, and I believe it is a step too far.

Aside from weakening an important investor protection, H.R. 4139 further compounds the complexity of securities law reporting requirements by creating yet another category of issuers. The development of scaled reporting requirements has resulted in multiple overlapping issuer categories, each eligible for different rules, and that complexity itself adds to the cost of raising capital.

In short, the independent audit of internal controls provides important protections to investors and the companies in which they invest. It strengthens internal controls, prevents fraud, and promotes confidence in U.S. capital markets. I oppose H.R. 4139 because it would further deteriorate the benefits of Section 404, and I strongly encourage you to oppose it as well. Please call me at if you have any questions. Sincerely, Rick A Fleming, Investor Advocate.
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