CEI Takes on Unconstitutional Agency in Court

Washington, D.C., April 15, 2008—Today, as Americans scurried to get their tax forms into the IRS, the D.C. Circuit Court of Appeals heard arguments about another agency that can impose big fines and reams of paperwork on small businesses. The very structure of this agency makes the IRS look like a model of accountability, the Competitive Enterprise Institute and others argued in court.

The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board, giving it authority to set accounting standards, impose its own set of taxes, and open investigations of accounting firms big and small. Yet unlike counterparts wielding similar authority, such as the IRS commissioner and Federal Reserve governors, PCAOB members are never vetted by the President or by the Senate, as neither of these bodies have a say in who will be appointed.

In today’s oral argument in Free Enterprise Fund v. PCAOB, attorneys for the Jones Day law firm and for the Competitive Enterprise Institute asked a three-judge panel—consisting of the Hon. Brett Kavanaugh, Judith Rogers, and Janice Rogers Brown—to declare the PCAOB unconstitutional under the Appointments Clause of the U.S. Constitution. This clause requires that officers of the United States, wielding the authority the PCAOB does, be appointed by the president and  confirmed by the Senate. This process helps ensure agencies remain accountable to elected officials and ultimately the American people.

The PCAOB’s interpretation of Sarbanes-Oxley’s section 404 has cost public companies more than $35 billion a year and has proved especially burdensome to smaller public companies. Bipartisan critics have observed that the PCAOB standards have burdened firms with minutiae while overlooking many of the practices that led to the subprime shenanigans.

As accounting issues become of increasing importance to the electorate, it’s imperative that the PCAOB be accountable to elected officials. “Next year—whether it’s President McCain, President Clinton, or President Obama—America’s new president should not be faced with a powerful government body that lacks accountability to them and members of Congress,” says John Berlau, director of CEI’s Center for Entrepreneurship. “Unaccountable government makes the American people the ultimate losers.”

For more background on the legal issues underlying today’s arguments, see CEI’s study: “The Public Company Accounting Oversight Board: An Unconstitutional Assault on Government Accountability” by John Berlau and Hans Bader.