Supreme Court to Hear Challenge to Sarbanes-Oxley Accounting Board

Unconstitutional Regulatory Agency Wields Huge Power, Little Accountability

Washington, D.C., May 18, 2009—The Supreme Court today announced it would hear a case brought by the Competitive Enterprise Institute and the Free Enterprise Fund challenging the constitutionality of the Public Company Accounting Oversight Board (PCAOB). 

The Appointments Clause of the Constitution requires that “officers of the United States” be appointed by the president and confirmed by the Senate.  But the officers serving on the PCAOB, with tremendous power to impose criminal and civil penalties on people and companies accused of violating accounting regulations, were not appointed that way.

“The Founding Fathers wanted powerful government officials to be vetted by the President and the Senate, to help ensure agencies remain accountable to elected officials and ultimately the American people,” said Sam Kazman, CEI General Counsel.  “The PCAOB imposes massive regulatory burdens on public companies, under threat of criminal and civil penalties, yet the regulators are completely unaccountable to the people, the President or the Senate.”

“The PCAOB has been very bad for the economy,” said Hans Bader, a CEI attorney.  “The biggest beneficiaries of the law have been the big accounting firms that failed to warn the public about Enron and similar scandals, which are charging record fees to help businesses comply with the mountain of red tape created by the PCAOB.”

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.

The PCAOB’s interpretation of Sarbanes-Oxley’s section 404 has cost public companies more than $35 billion a year, has proved especially burdensome to smaller public companies, and has cost the economy as a whole over a trillion dollars, according to a Brookings-AEI study.  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.

“The decision by the Supreme Court to hear the case is good news for American investors and prospects for economic recovery, since a victory in this case will give the President an added incentive and ability to adopt policies that foster economic growth,” said Bader.

If the President can pick and remove the PCAOB members, as the Appointments Clause requires, he will be on the hook for their policy failures, and thus have an interest in making them develop sound policies that protect investors and don’t stifle economic growth.  He won’t be able to blame the red tape on an unaccountable agency whose officials he doesn’t select or control.

Moreover, giving the President that role promotes even-handed application of the law. A bureaucrat is less likely to abuse individual citizens if he knows he is accountable to their elected representative, the president. And he is more likely to stand up to vested interests that have lobbyists on Capitol Hill if he knows the president selected him and will back him up.

CEI is acting as co-counsel in the case, and Michael Carvin of Jones Day is the lead attorney.

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.