Constitutional Challenge to Sarbanes-Oxley Accounting Board Dismissed
District Court order and opinion
Contact: Christine Hall, 202.331.2258<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />
Washington, D.C., March 21, 2007— A federal district judge on Wednesday dismissed a constitutional challenge to the Public Company Accounting Oversight Board (PCAOB) brought by the Competitive Enterprise Institute and the Free Enterprise Fund. The case will be appealed to the circuit court.
The lawsuit, filed on February 7, 2006, alleges that the PCAOB violates the appointments clause (Article II Section 2) of the U.S. Constitution, which grants the power to appoint high level government officials to the President, the courts, or the heads of departments– not a commission such as the Securities and Exchange Commission. The PCAOB was created by Congress as part of the Sarbanes-Oxley Act of 2002.
The board wields great power over the businesses it regulates, and its regulations and mandates have produced costly and unintended consequences for publicly traded U.S. businesses, as well as for entrepreneurs and capital markets. Yet it is entirely unaccountable to any elected official. The board’s five members are appointed for five-year terms, not by the President or the head of an executive branch, but by the SEC acting as a collective body.
Statement by John Berlau, Director of the Center for Entrepreneurship:
The court said that PCAOB members are appointed by a multimember body—the SEC—not by the head of an agency, as required by the Constitution but that, in this particular case, the error was harmless, because the SEC’s Chairman voted for them. But when constitutional safeguards are at stake, there are no harmless errors.
The appointment scheme for members of the Public Company Accounting Oversight Board, created by the law when Congress passed it in 2002, violates what the Framers saw as one of Constitution's core provisions to ensure accountability in government. And the importance of the Appointments Clause has been recognized by Supreme Court justices across the political spectrum. In a sense, Congress’s mistake in vesting appointment of the Board collectively in all the SEC Commissioners, rather than the SEC Chairman, allowed the court to throw this case out on a technicality.
The judge’s opinion today in Free Enterprise Fund v. PCAOB provides yet more evidence of how sloppy Congress was in drafting the Sarbanes-Oxley Act, since it wrote the law in a way that violated the plain text of the Constitution’s Appointments Clause. Even in the course of throwing out the lawsuit on a technicality, the court noted that Congress had goofed in vesting appointment of the Board collectively in all the SEC Commissioners, rather than the SEC Chairman.
In the decision, the court also said the plaintiffs didn’t have standing to challenge that error, since the SEC Chairman had in fact voted with the other Commissioners for the people now sitting on the Board, making the error harmless to the plaintiffs. Congress had no reason to anticipate that the Chairman would do that, and thus it’s only random chance that prevented the relevant part of Sarbanes-Oxley from being struck down.
The case, Free Enterprise Fund v. The Public Company Accounting Oversight Board, was filed in U.S. District Court for the District of Columbia. Plaintiffs include the Free Enterprise Fund and Beckstead and Watts, LLP, a small Nevada accounting firm. CEI is co-counsel in the case.
CEI is a non-profit, non-partisan public policy organization dedicated to the principles of free enterprise and limited government.