Ken Starr to Lead Legal Challenge to the PCAOB

In the latest in a series of attacks on the Sarbanes-Oxley Law of 2002, Kenneth Starr, the former special prosecutor in the Whitewater and Monica Lewinsky investigations, has mounted a lawsuit challenging the authority of the Public Company Accounting Oversight Board (PCAOB) on behalf of the Free Enterprise Fund, a business conservative group. The suit argues that the PCAOB has too much unchecked police power and violates the separation of powers doctrine of the Constitution, JURIST.com reports.


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The PCAOB announced that it would defend itself vigorously.

Starr, now dean at the Pepperdine University School of Law, told the Associated Press that the provision in the Sarbanes-Oxley law giving the PCAOB subpoena power and the authority to discipline accountants “constitutes an excessive delegation of power by the executive branch.” He said he expected the case would eventually reach the Supreme Court.

Starr and colleagues, Viet Dinh, a former Bush Justice Department attorney and Michael Carvin, an attorney for the Bush legal team in the 2000 election, argue that the structure of the PCAOB violates the separation of powers doctrine because the members are not appointed by the president, cannot be removed by them and Congress does not control its budget, the AP says. The five board members are appointed by the Securities and Exchange Commission (SEC); the Board is funded by fees on publicly traded companies.

If any of the sections of the Sarbanes-Oxley law is found to be unconstitutional, the entire law could be invalidated, according to the AP. The PCAOB has until May 15 to say why the Free Enterprise Fund’s suit should be dismissed. Oral arguments will begin June 29 in Federal District Court.

SEC Chairman Christopher Cox, testifying before the Senate Banking Committee last week, addressed the role of the PCAOB in the compliance process. Some business interests and lawmakers have called for exemptions for small companies because maintaining internal controls to meet the requirements of Sarbanes-Oxley is too expensive for these companies.

Cox noted that Section 404 “is just a few lines of text. The implementation through AS 2 is hundreds of pages, and the practice that has developed is another of accounting standards is another {extensive] gloss on the statute,” CFO.com reports. AS 2 is the standard developed by the PCAOB for use by accountants as a guide in evaluating a company’s internal controls. “We are going to be aggressively working on implementation with the PCAOB so we get all the benefits [of 404] without needless costs,” Cox told the senators.

“My goal as chairman is to find a way to make 404 work, Cox said, according to CFO.com. “It should not be a question of whether to apply it to companies of all sizes but how.”

The PCAOB announced last week that in 2006 they will inspect nine firms – eight U.S. and one Canadian – that audit more than 100 public companies. They will continue their three-year cycle of inspections of smaller firms. Public portions of 276 inspection reports from 2004 and 2005 are available on the Board’s Web site, http://www.pcaobus.org/


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