Sarbanes-Oxley Challenged in Court

In 2002, Congress passed the Sarbanes-Oxley Act in response to the Enron scandal, greatly expanding regulation of American business. It sharply increased criminal penalties for securities law violations, and created an extremely broad new cause of action for employees seeking to sue over alleged retaliation. It also set up the Public Company Accounting Oversight Board (PCAOB) to regulate the accounting firms that audit America’s public companies. The PCAOB has generated endless red tape. Its rules micromanaging companies’ internal controls, which require auditors to examine such minute details as which employee has access to which computer password, cost the American economy billions of dollars, contributing to an overall price tag for Sarbanes-Oxley of at least $35 billion a year.

A small accounting firm, assisted by the Competitive Enterprise Institute, recently filed a lawsuit challenging the PCAOB as a violation of the Constitution’s Appointments Clause. The lawsuit points out that PCAOB’s board is neither appointed by the President with the consent of the Senate, as the Appointments Clause requires for the nation’s principal officers, nor is it picked by the head of an executive branch department, as the Clause requires for “inferior” officers. Yet the board exercises significant authority under federal law, including the power to investigate accounting firms and fine them up to $2 million for inadvertent violations of PCAOB rules. One of Sarbanes-Oxley’s sponsors candidly admitted that the PCAOB would effectively wield “massive, unchecked powers.” PCAOB board members are accountable only to the SEC, whose five commissioners, acting as a group, pick them to serve for a period of five years.

The PCAOB has moved to dismiss the lawsuit on procedural grounds, alleging that the constitutional arguments should have been presented first to the SEC rather than the courts, and that the accounting firm and its co-plaintiff, the Free Enterprise Fund, lack standing to challenge the manner in which the PCAOB’s board is appointed. Today, a federal district judge in Washington, D.C., will hear arguments on the PCAOB’s motion to dismiss.

2 Comments

  • Interesting complaint. The allegations of excessive compensation for PCAOB members are laughable. Any senior partner with a major public accounting firm draws a salary that dwarfs what these PCAOB members are earning. For a respected member of the accounting profession to sign onto such allegations (all for the sake of securing standing for the suit) is disingenuous.

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