Peekaboo! I See You…Acting Unconstitutionally

During the next two weeks, the Supreme Court will rule on a case that, if decided correctly, will bring relief to small businesses all over the nation. The details of the case sound arcane, but they get to the heart of how America is governed and what the Founders intended. Should the Justices uphold a challenge to the constitutionality of the Public Company Accounting Oversight Board (PCAOB, often pronounced "Peekaboo"), then entrepreneurs, the Constitution, and the rule of law will win. The losers? Beancounters and bureaucrats.

Facing public anger after the demise of Enron, Congress rushed to pass the Sarbanes-Oxley Act (known as Sarbox), which imposed a ton of new paperwork on businesses in the name of preventing another Enron-like scandal and subsequent bankruptcy. Ironically, many of the new requirements were already present at Enron, and the main beneficiaries of Sarbox were the Big Five accounting firms.

To oversee this huge exercise in ineffective check-box regulation, Sarbanes-Oxley set up a new bureaucracy, the PCAOB. Peekaboo has vast powers, including the ability to fine companies up to $2 million for even inadvertent breaches of its rules, which can go into absurd detail. Auditors must, for example, rule on which low-level employees have access to computer passwords. 

Peekaboo’s clunking fist has fallen the most heavily on small businesses, which find compliance harder. Big businesses, which are the big accounting firms’ main clients, are able to absorb the large cost of the accounting requirements. Small accounting firms that specialized in helping small clients are unable to cope with the workload and are going out of business. A University of Rochester researcher has calculated that Sarbox has hammered the economy with over $1.4 trillion in direct and indirect costs. 

Moreover, Sarbox has kept companies from growing. Company flotations by IPO have almost dried up owing to the added costs of going public which Sarbox imposes. This has constrained businesses’ ability to raise equity financing at a time when debt financing is hard to get. In other words, the PCAOB has been a little-noticed exacerbating factor in the current recession.

The economic damage from Sarbox is bad enough. But the damage doesn’t end there. This hastily enacted legislation has also done the U.S. Constitution wrong. 

PCAOB’s board members are appointed by the Securities and Exchange Commission and enjoy salaries commensurate with their enormous power — and are even paid more than the president. Yet according to that inconvenient document, the Constitution, federal officers are supposed to be appointed by the president and confirmed by the Senate. (The Appointments Clause gives Congress the power to have junior officers appointed by other means, but the courts have held that this is a very limited power, restricted to appointments with limited authority.)

The PCAOB claims it is a private corporation by statute, but again the courts have rejected this sort of temporizing, holding nominally private corporations such as Amtrak to be de facto government agencies, subject to the requirements of the Constitution.

Given Peekaboo’s powers to punish citizens, safeguards against potential abuses are vitally important. The Appointments Clause requires a thorough background check of nominated individuals, ensures that the president is held accountable for his officers’ actions, and insulates the position from the influence of special interests. The current PCAOB appointment process has none of those safeguards.

For the reasons stated above, the Competitive Enterprise Institute, the Free Enterprise Fund, and a small accounting firm whose business was ruined by the new regulations have challenged the constitutionality of the Board. They have also asked the Court to block the Board from creating any new regulations. 

If the Court upholds the challenge, business will be given a deregulatory stimulus at a time when they need it most. Congress will be forced to rethink corporate governance and, rather than hand it off to an unconstitutional agency, might actually take some difficult decisions. For example, it could empower shareholders by pre-empting state laws that prevent them from getting rid of incompetent or unscrupulous managers.

Small businesses everywhere are crying out for some freedom from the PCAOB’s bureaucratic tentacles. If the Supreme Court rules this octopus unconstitutional, it will be a victory for freedom in the spirit of the Founding Fathers — and for the Constitution itself.