Accountability, Power, and Our CAP Project

Accountability, Power, and Our CAP Project

May 08, 2006

Violations of the Constitution come in all shapes and sizes.  Many of you may be familiar with the Tobacco Master Settlement Agreement (MSA), which CEI is now challenging in federal court. The MSA was the culmination of a scheme by 46 state attorneys general and the tobacco industry to circumvent the Constitution’s Compact Clause—a little-known provision aimed at limiting the ability of the states to gang up on the federal government or on each other. The MSA resulted in a de facto national sales tax on tobacco imposed without the vote of any elected official whatsoever.

The Constitution’s Appointments Clause, which governs the naming of federal officials, may be as little known as the Compact Clause. Nonetheless, it is the focus of CEI’s second pending constitutional case, our challenge to the Public Company Accounting Oversight Board (PCAOB). The PCAOB was established by the Sarbanes-Oxley Act of 2002, which Congress hastily enacted in the wake of the Enron collapse, and it has rapidly become one of the most far-reaching and costly federal regimes in existence. 

Despite their relative anonymity, both of these clauses are central to the Constitution’s chief purpose of restraining government. The Compact Clause restricts the ability of groups of states to form powerful factions—a threat that the Framers had painfully experienced under the Articles of Confederation. Similarly, British rule over the colonies had demonstrated the dangers of unfettered bureaucracy; in the words of the Declaration of Independence, King George had sent “Swarms of Officers to harass our People, and eat out their Substance.”

The swarms sent out by the PCAOB involve the modern American equivalent of Crown officers—regulations. The Board has issued a series of incredibly far-reaching rules governing the internal controls of publicly held companies. These controls now need to be documented by comprehensive accounting audits. At the same time, the PCAOB’s regulation of the accounting profession has drastically reduced competition in that field; many smaller accounting firms have simply stopped auditing even the smallest public companies due to the complexity involved. The annual costs of the Board’s rules have been estimated at over $35 billion.

The Board’s members are appointed by the members of the Securities and Exchange Commission (SEC). This violates the Appointments Clause, which requires that major government officers be nominated by the President or a court, while minor officers can be named by individual department heads. In contrast, the PCAOB’s members are not named by any one person, but instead by a collective body—the SEC. (Moreover, the SEC itself is not a government “department” under the Constitution). As a result, neither the President nor any other individual in government is responsible for the PCAOB’s actions. As John Berlau and Hans Bader point out in a CEI Issue Analysis, the Appointments Clause was intended to “promote effective management in government by preventing lack of accounting in a multi-member body.”  The lack of that accountability quickly turned the selection of PCAOB members into a Keystone Cops routine.

To top this off, Congress declared that the PCAOB is not a government agency.

In February, CEI and the Free Enterprise Fund filed a court challenge to the PCAOB on behalf of Beckstead and Watts, a small Nevada accounting firm. The firm specializes in serving micro-cap companies, but the PCAOB is attempting to force it to comply with auditing standards more suited to the Fortune 500. Standing up to a government force like the PCAOB takes guts, especially when Congress pretends it’s a non-government force, and we applaud Beckstead and Watts for its courage.

Developments such as the tobacco deal and the PCAOB illustrate the amazing extent to which the Framers got it right over 200 years ago. They got it right, moreover, not just on such “big-picture” issues as free speech and property rights, but on the details in which the devil resides.

Both of these cases involve issues of accountability and power. The cases are part of CEI’s “CAP Project.” CAP stands for Control Abuse of Power, but it could just as well stand for Control the Accountability of Politicians.