Free Enterprise Fund and Competitive Enterprise Institute Launch Constitutional Legal Challenge to Sarbanes-Oxley Act

CONTACT: Christine Hall, 202-331-2258, [email protected]

Washington, DC (February 8, 2006)—The Free Enterprise Fund and the Competitive Enterprise Institute (CEI) on Tuesday launched a Constitutional legal challenge to the Public Company Accounting Oversight Board (PCAOB) created by Congress as part of the Sarbanes-Oxley Act.  Enacted in 2002 following a number of corporate scandals, the legislation was rushed into law, but it has produced costly unintended consequences for publicly traded U.S. businesses, entrepreneurs and capital markets.

“With a recent University of Rochester study concluding that the total effect of Sarbanes-Oxley has reduced the stock value of  American companies by a staggering $1.4 trillion dollars, it is now clear that the costly regulatory burdens imposed by this legislation absolutely outweigh its benefits,” said Mallory Factor, chairman of the Free Enterprise Fund.  “The PCAOB and the Sarbanes-Oxley Act raise unconstitutional barriers to needed liquidity, discourage entrepreneurship and innovation, and hinder U.S. competitiveness by denying access to needed capital.  Further, the high cost of compliance that disproportionately affects smaller public companies is having long-term, exponential negative implications for our economy.” 

“The legal challenge unveiled today shows the PCAOB violates separation of powers principles because the board performs an executive function, yet neither the President nor any entity within the executive branch was given authority to appoint or remove board members,” said Michael Carvin, outside legal counsel to Free Enterprise Fund.  “In brief, the PCAOB is not accountable to any elected official or the citizens subject to PCAOB regulation.”

The PCAOB violates the appointments clause (Article II Section 2) of the U.S. Constitution.  PCAOB members wield significant regulatory powers that bring them squarely within the meaning of Article II and should be appointed by the President with the ‘advice and consent” of the Senate, not the SEC.

“Shifting federal enforcement authority from accountable public officials to a nominally-private entity like PCAOB smells as bad as Enron shifting its liabilities to off-balance-sheet partnerships,” said Hans Bader, CEI legal counsel.  “Justice Louis Brandeis said that sunlight is the best disinfectant, and that’s the premise of many provisions of the securities laws that PCAOB helps enforce.  Yet PCAOB doesn’t live up to that rule itself.”

The two originating plaintiffs in the lawsuit against the PCAOB are the Free Enterprise Fund and the accounting firm Beckstead and Watts, LLP, which has a history of serving small publicly-traded and development-stage companies.  The legal effort, led by the Free Enterprise Fund, will be conducted by a panel of diverse legal experts, including: Kenneth Starr, Pepperdine University; Viet D. Dinh, Professor of Law, Georgetown University; Michael A. Carvin, Partner, Jones Day; and Hans Bader, Counsel, Competitive Enterprise Institute.

“Our accounting firm has served a very important segment of the public market, yet we are a casualty of a government agency run amok,” said Brad Beckstead, managing partner of accounting firm Beckstead and Watts, LLP.  “We can no longer serve the needs of small publicly-traded companies while continually having to focus our time and monetary resources answering to the incessant demands of an unaccountable PCAOB.  The ultimate consequence of the PCAOB actions will be to put small public companies out of business, force them to de-list, or take their public offerings offshore to Europe and Asia.”

“The critical goals of solid internal controls and transparent financial reporting are better achieved by a free and unfettered capital market rather than by burdensome regulation,” said Factor.  “Enforcement efforts should focus on aggressive prosecution of bad actors under existing anti-fraud laws rather than imposing costly and largely ineffective procedural requirements on all public companies.”

For additional information, fact sheets and statistics, or a full copy of the legal challenge, please or