PCAOB & Sarbanes-Oxley Under Fire

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The Public Company Accounting Oversight Board (PCAOB) is being challenged, constitutionally. The complaint was filed last week in U.S. District Court in Washington by the Free Enterprise Fund and the accounting firm of Beckstead & Watts, according to BusinessWeek. The PCAOB was created in 2002 and has since been the target of those saying it wielded too much unchecked power.

The legal team includes Ken Starr, former independent counsel in the Monica Lewinsky investigation in the second Clinton Administration and Viet Dinh, former U.S. assistant attorney general for legal policy during the president's first term. Michael Carvin is the lead attorney. Carvin is currently a partner at Jones Day and a Reagan era Justice Department official. He was also a member of the Bush legal team during the year 2000's presidential vote recount, according to the Seattle Post-Intelligencer.

The Free Market Fund is a free-market advocacy group located in Washington and the firm of Beckstead & Watts is located in Henderson, Nevada. BusinessWeek reports their complaint has two points. One is the claim that the PCAOB exerts wide-ranging governmental powers with little oversight, infringing on the Constitution's separation of powers.

BusinessWeek reports their second point of the lawsuit deals with how the five members of the board are appointed, or more specifically, whether the selection process violates the appointments clause of the U.S. Constitution. This clause requires that top federal officials must be appointed by the president and confirmed by the Senate, while lower-level officials must be appointed by the president, the courts, or a department head. The chairman and four members of the PCAOB are appointed by the Securities & Exchange Commission under Sarbanes-Oxley (SOX).

Free Enterprise Fund chairman Mallory Factor told BusinessWeek, “The PCAOB is an unaccountable, unconstitutional regulatory body. It's the poster child for the dangers of a runaway bureaucracy.” Factor also said that the larger goal of the lawsuit is to force Congress to reopen SOX, the sweeping anti-fraud act that created the PCAOB. Factor said, “The lawsuit puts a gun to [Congress'] head and says ‘you've got to deal with it.'” Accountancy Age reports that Mallory is a merchant banker in New York and a fundraiser for the president.

The process of determining the constitutionality of the PCAOB could take months and even years. BusinessWeek reports that if found to be unconstitutional, Congress would be required to correct the portion of SOX concerning the PCAOB, based on the outcome of the lawsuit. In turn, if Congress did not act to correct SOX, all of SOX could be at risk because it lacks a provision called severability, although standard in most laws. This provision states that a judicial ruling striking down one portion of a statute does not affect the remainder of the law.

Although a juicy prospect for its enemies, legal experts say that much of SOX would survive the wholesale changes that would surely be recommended if it was reopened. BusinessWeek reports that the certification of financial reports by executives, stiff criminal penalties for those found to be in violation of the law, and a ban on company loans to executives would remain as provisions of the act.

Information on the principals in this lawsuit can be found at these links:

• SEC http://www.sec.gov
• PCAOB http://www.pcaob.com
• Free Market Fund http://www.freeenterprisefund.org
• Beckstead & Watts http://www.becksteadwatts.com.

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