Press Releases

Today, the Subcommittee on Capital Markets, led by Subcommittee Chair Ann Wagner (MO-02), held a hearing examining the implementation and effects of the Sarbanes-Oxley Act of 2002 (SOX). Members focused particularly on how certain provisions affect public companies and capital markets activity.

On the cost of SOX compliance:

“Implementation of [Sarbanes-Oxley], particularly under section 404(b), is something that's the most expensive feature in our public securities rulebook. Reports show these companies are spending over a million dollars a year purely on SOX compliance,” said Chairman French Hill (AR-02).

“For many small companies, Section 404(b) has become a major obstacle. It requires companies not only to assess their own internal financial controls, but also to pay for an external auditor to effectively repeat that process. That’s why many refer to it as a 'double audit.' The cost can exceed $1 million per year, even for pre-revenue biotech firms and small-cap innovators,” said Subcommittee Chair Wagner.

On the impacts of SOX compliance costs:

“We benefit from the deepest, most liquid capital markets in the world. And that’s why it’s important for us to always look at how we can improve access for everyone in the economy. So our markets stay strong, resilient, and attractive. One of the challenges we face today is the prohibitive cost of going public, overreaching compliance requirements, and reporting regulations that discourage companies from entering public markets,” said Rep. Frank Lucas (OK-03).

“While we know that Sarbanes-Oxley was intended to prevent fraud over the past 20 years, we’ve seen the negative impacts of these regulations on growing companies and their access to capital. The cost and regulatory burden of these requirements are excessive, as even small companies must pay on average $723,000 a year to comply with this Act,” said Rep. Marlin Stutzman (IN-03).

Witnesses echoed their support for the work of the Committee.

Abigail Allen, Associate Professor of Accounting, Marriott School of Business, Brigham Young University, said: “A key objective of SOX was to improve financial reporting quality. Realized benefits of improved financial reporting quality may outweigh the resource diversion costs to innovation by increasing firms’ access to capital. In the context of young life cycle firms, however, the intended benefits of improved financial reporting quality under SOX 404(b) are less likely to manifest for two reasons. First, young life-cycle stage firms have limited free cash flow and more concentrated ownership structures, reducing the agency conflicts that financial regulation aims to mitigate. Second, because a larger portion of young life-cycle firms’ valuation stems from intangible investments which are not included on their balance sheet, improving the quality of traditional financial reports may not provide significant benefits to these firms. Consistent with these differences, our research suggests that young life-cycle stage firms experience more negative consequences for innovation without receiving corresponding financial reporting benefits from the implementation of SOX 404(b).”

Lawrence Cunningham, Director, Weinberg Center for Corporate Governance, University of Delaware, said: “With the enactment of SOX, director workloads increased, along with director compensation. Audit committees on average meet twice as frequently than pre-SOX. Again, related costs fall disproportionately on smaller companies. The regulations skew incentives. For example, companies may increase dividends or buybacks to avoid becoming accelerated filers subject to 404(b) or may issue more debt than equity to avoid crossing the threshold making them subject to 404(b). There is even evidence that 404(b) compliance impairs innovation, as proxied by the number of patents and patent citations between regulated and unregulated firms and reduced R&D spending by companies before and becoming subject to 404(b)—without any compensating improvement in financial reporting quality.”

Frank Watanabe, President and Chief Executive Officer, Arcutis Biotherapeutics, said: “One of the most burdensome policies for today’s biotech innovators is Section 404(b) of the Sarbanes-Oxley Act. Section 404(b) requires the establishment of extensive internal controls and procedures for financial reporting, as well as an external auditor’s attestation of those internal financial controls. Though the requirement provides little-to-no insight into the health of an emerging biotech company, it is incredibly costly and onerous for small businesses like Arcutis to comply with. Arcutis first experienced the overwhelming burden of Section 404(b) in 2021. Although we had yet to generate a single dollar of revenue and had only gone public the year prior, we suddenly became subject to Section 404(b) when the market value of our publicly held shares exceeded $700 million on the testing date of June 30th. … To date, we have spent around $11 million on our compliance with Section 404(b) - approximately the cost of running a large Phase 2 clinical trial. … These millions of dollars spent on unnecessary compliance was precious capital that could have been spent on developing life-altering drugs.”