Supreme Court To Hear Sarbanes-Oxley Challenge

Supreme Court To Hear Sarbanes-Oxley Challenge

Op-ed in The Washington Examiner
May 21, 2009
Originally published in The Washington Examiner

A major government abuse of power is about to get much-needed
scrutiny, thanks to the Supreme Court, which this week decided to hear
a constitutional challenge to a powerful, unaccountable agency that is
a drag on the economy.

In the aftermath of the Enron
scandal, Congress passed the 2002 Sarbanes-Oxley Act. It created the
Public Company Accounting Oversight Board (PCAOB), and gave it, in the
words of a senator who voted for it, “massive power,” “unchecked power
by design.”

Using that power, the agency created a mountain
of red tape that cost the economy over a trillion dollars, according to
a joint study by the Brookings Institution and the American Enterprise
Institute.

And yet, none of the new regulations prevented
the subsequent accounting scandals that rocked Wall Street or prevented
the problems that brought on the current financial crisis, like faulty
reporting of sub-prime mortgage-backed securities.

In fact,
the agency’s red tape enriched the big accounting firms that failed to
warn the public about Enron and similar scandals, enabling them to
charge record fees to help businesses comply with regulations.

The
American Electronics Association estimated yearly compliance costs of
$35 billion just for the agency’s “internal controls” rules, which
reach trivia like which employee has access to which computer password
or office key.

The constitutional challenge brought by the Competitive Enterprise Institute and the Free Enterprise Fund argues that the PCAOB
is unaccountable and unconstitutional because its members are picked by
a group of officials – the members of the Securities and Exchange
Commission (SEC) – rather than by the President, with the consent of
the Senate.

The Appointments Clause of the U.S. Constitution
requires that agency officers be picked by the President or (for lesser
officers) by the “Head of a Department” – not a group, such as the SEC Commissioners. The Founding Fathers wanted important government officers, like PCAOB members, to be carefully vetted by the President and Senate.

The PCAOB
can impose $2 million penalties for even unintentional violations. Its
importance is reflected in the princely sum its members are paid. In
2008, PCAOB Chairman Mark Olson received $654,406, and its other members got $531,995, more than the President.

If the Court rules that the PCAOB
must adhere to Appointments-Clause checks on government power, it will
restore accountability. If the President can pick and remove the
agency’s leaders, he will be on the hook for their failures and thus
have an interest in making them develop policies that don’t stifle
economic growth. He won’t be able to blame red tape on an unaccountable
agency over which he has no control, the way the President and
Congressmen have in the past.

The PCAOB’s
defenders cite a 2-to-1 ruling in its favor by the D.C. Circuit Court
of Appeals. But that ruling was based on confused and inconsistent
claims about whether the SEC Chairman is or isn’t the SEC’s “Head.”

The appeals court first claimed the SEC’s chairman, despite his title, is “simply one” of “several commissioners” who collectively “head” the SEC, in order to claim that the SEC Commissioners as a group can pick PCAOB members without violating the Appointments Clause.

But
then it claimed that the Chairman in fact “dominates commission
policymaking” in order to reject a separation-of-powers challenge based
on the PCAOB’s unaccountability to the President. (It claimed the President indirectly influences the PCAOB, because he can pick and remove the SEC’s chairman).

Such
inconsistent reasoning is hard to fathom, in what Judge Kavanaugh’s
dissent aptly described as “the most important separation-of-powers
case regarding the President’s appointment and removal powers to reach
the courts in the last 20 years.”