On Friday, a divided appeals court rejected a constitutional challenge to a powerful board set up by the Sarbanes-Oxley Act to regulate the accounting industry. The court’s decision was internally-inconsistent and illogical. It also provoked a strong dissent from Judge Kavanaugh. The challenge argued that the Public Company Accounting Oversight Board (PCAOB) violated the Constitution’s Appointments Clause, as well as separation-of-powers safeguards. Eminent legal scholars have questioned the PCAOB’s constitutionality, such as Law Professor Donna Nagy, an expert on securities regulation, and Professor Stephen Bainbridge, a leading authority on corporate law. The PCAOB has “massive power,” “unchecked power by design,” according to a Senator who voted to create it. But it was nevertheless upheld in a 2-to-1 vote by the D.C. Circuit.
The red tape generated by the PCAOB has been very costly to investors and our economy. $35 billion is the estimated annual cost of complying with just the PCAOB’s rules governing “internal controls.” A University of Rochester study estimated overall costs of the law to shareholders at $1.4 trillion. The 2002 law did nothing to protect shareholders: many of the mismanaged companies now engulfed by the mortgage crisis, like Countrywide Financial, were paragons of Sarbanes-Oxley compliance, using compliance with its red tape to mask underlying problems. The law has driven businesses and jobs overseas, virtually drying up I.P.O.s. And the PCAOB’s unaccountable, unconstitutional structure gives it an incentive both to overregulate small business, and to shy away from taking meaningful steps that would actually protect the investing public.
The constitutional challenge is a case called Free Enterprise Fund v. Public Company Accounting Oversight Board.