Lawmakers, witnesses debate whether Sarbanes‑Oxley Section 404(b) deters IPOs and curbs innovation

At a House Financial Services subcommittee hearing, members and witnesses debated whether Section 404(b) of the Sarbanes‑Oxley Act imposes disproportionate compliance costs on smaller and early‑stage public companies and whether those costs reduce innovation and deter companies from going public. Testimony came from academics and business leaders who described measurable compliance costs and from governance experts who cautioned against weakening investor protections.

The discussion focused on the external auditor attestation required by Section 404(b), which witnesses said often requires duplicative testing of internal controls. "Section 404(b) had negative consequences for innovation for these firms," said Abigail Allen, associate professor of accounting at Brigham Young University's Marriott School of Business, summarizing research showing that firms she classified as "young life cycle stage" reduced R&D spending and produced fewer, lower‑value patents after becoming subject to 404(b). Allen told the subcommittee her study found declines she estimated at roughly 9–12% in R&D intensity and about a 6% decline in patent filings for that firm subset.

Frank Watanabe, president and CEO of Arcutis Biotherapeutics and vice…