Supreme Court to Hear Challenge to Sarbanes-Oxley Accounting Board

Published August 1, 2009

The U.S. Supreme Court has agreed to hear a case challenging the constitutionality of the Public Company Accounting Oversight Board, whose accounting and reporting rules have cost the U.S. economy $1 trillion, according to one study.

The Sarbanes-Oxley Act of 2002 created the board, giving it authority to set accounting standards, impose its own 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 not vetted by the president or by the Senate; neither of these bodies has a say in who will be appointed.

The board’s five members are appointed for five-year terms by the Securities and Exchange Commission.

Plaintiffs including the Competitive Enterprise Institute, Free Enterprise Fund, and Beckstead and Watts, LLP, which specializes in accounting services for small publicly traded companies, argue the Appointments Clause of the Constitution requires that “officers of the United States” be appointed by the president and confirmed by the Senate. PCAOB officers, with power to impose criminal and civil penalties on people and companies accused of violating accounting regulations, are not appointed that way.

Huge Economic Drain

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 taken from the economy as a whole more than $1 trillion, according to a joint study by the Brookings Institution and American Enterprise Institute.

“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 CEI General Counsel Sam Kazman. “The PCAOB imposes massive regulatory burdens on public companies, under threat of criminal and civil penalties, yet the regulators are 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 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,” Bader added.

Incentive for Sound Policies

If the president can choose and remove PCAOB members, as the Appointments Clause requires, he would be on the hook for their policy failures, and thus would have an interest in making sure they develop sound policies that protect investors and don’t stifle economic growth, according to the plaintiffs.

In addition, giving the president that role promotes evenhanded application of the law, the plaintiffs argue. 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 if he knows the president selected him and will back him up.

Opposition from Obama Administration

The Obama administration has opposed the lawsuit, and Solicitor General Elena Kagan filed a brief in support of the PCAOB, arguing the SEC effectively controls the board.

“The commission enjoys comprehensive control over every aspect of the board and its activities,” said the brief. “Every rule and ethical standard issued by the board, including rules governing the initiation and conduct of board investigations, must be approved in advance by the commission.”

Former U.S. Solicitor General Kenneth Starr and former U.S. Assistant Attorney General Viet Dinh, counsel to the plaintiffs, argued in The Wall Street Journal the PCAOB is unconstitutional and the board’s “lack of an accountable structure has likely contributed to what members of both parties see as its policy failures.”

Christine Hall ([email protected]) is director of communications at the Competitive Enterprise Institute.

For more information …

“The Public Company Accounting Oversight Board: An Unconstitutional Assault on Government Accountability,” by John Berlau and Hans Bader:,04873.cfm