The Sarbanes-Oxley Act of 2002 created a powerful quasi-private agency to oversee the auditing of American business, the Public Company Accounting Oversight Board (PCAOB). The PCAOB is responsible for a mountain of red tape, and its broad interpretation of Sarbanes-Oxley’s rules on what constitutes a company’s “internal controls” is costing the U.S. economy billions of dollars every year.
But there is a different yet related reason that the PCAOB is problematic. The structure and method of appointing its members clearly violates the Appointments Clause of the U.S. Constitution. Disregarding the Constitution’s bedrock principle of separation of powers, Congress gave the power to appoint the members of the PCAOB not to the President, but to the five members of the Securities and Exchange Commission. This method of appointment violates the Appointments Clause in numerous ways. The Appointments Clause gives only the President the power to appoint the nation’s principal officers, and allows low-ranking officers to be picked only by the President, a court, or by a single head of a cabinet-level department. The five commissioners of the SEC, as a group, don’t fall under any of these categories.
Recent Supreme Court decisions show that a consensus of both liberal and conservative justices takes Appointments Clause violations very seriously. The Court has ruled that disciplinary actions can be overturned solely because the government body in question was improperly appointed. Based on these precedents, courts can block enforcement of the PCAOB’s rules interpreting portions of Sarbanes-Oxley, such as the onerous “internal control” provisions.
Above all, the authors conclude, the Appointments Clause violation creates a lack of accountability for rules that hurt businesses and don’t help investors. They note that England’s abuses with offices spawning more offices led the Constitution’s Framers to take great care to ensure that the power to appoint was limited to the very top officials of the Executive Branch. “Sarbanes-Oxley violates time-honored principles of democracy and separation of powers by delegating the construction and enforcement of the securities laws to an unaccountable entity,” Bader and Berlau conclude. “The PCAOB is a violation of our Constitution and a threat to the rule of law.”