Arguments Begin Thursday Over PCAOB Constitutionality

A federal judge will hear arguments Thursday in a lawsuit that attacks the Public Company Accounting Oversight Board (PCAOB) as unconstitutional.


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The lawsuit, Free Enterprise Fund v. Public Company Accounting Oversight Board, challenges the way PCAOB members are appointed; the board’s ability to perform “executive branch functions”; and delegation of legislative powers to an independent organization. Oral arguments will be heard in the U.S. District Court for the District of Columbia.

The Free Enterprise Fund, whose leaders include conservative Mallory Factor and supply-side economist Arthur Laffer, says PCAOB members should be named by the White House with Senate review. The PCAOB violates separation of powers principles and lacks proper checks and balances, the group contends.

The board, created by Congress under the Sarbanes-Oxley Act (SOX) to oversee the auditing of U.S. business, polices the Big Four accounting firms: KPMG, Deloitte & Touche, Ernst & Young and PricewaterhouseCoopers (PwC). It must issue an annual inspection report for any accounting firm that audits 100 or more public companies.

The group's legal team is led by former U.S. independent counsel Kenneth Starr and Michael Carvin, a partner at the law firm of Jones Day. Starr wrote in Saturday’s Wall Street Journal: “In its rush to ‘do something’ about corporate scandals, Congress overstepped the bounds of its authority. It is time to call Congress back, both to help our economy and reaffirm that our constitutional system imposes clear limits on the government's urgent desire to ‘do something.’ Congress must be reminded that the ‘solution’ is at times worse than the problem.”

Jill "J.R." Labbe, deputy editorial page editor of the Star-Telegram of Fort Worth, said in an opinion piece last month that if the court agrees with Starr, “the entire act could go down because it doesn't have a severability clause.”

She added, “The likelihood of a wholesale scrapping of the act is somewhere between slim and nil — federal lawmakers, like most powerful people, rarely admit to mistakes. But they could save face by admitting that even our nation's founding document has been made stronger by judicious amendments.”

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