Sarbanes-Oxley Under Attack... From the Supreme Court!

Today the Supreme Court agreed to review a case brought by our friends at the Competitive Enterprise Institute that challenges the constitutionality of the Public Company Accounting Oversight Board (PCAOB, pronounced “peek-a-boo”). The constitutional problem with the PCAOB — there are many policy problems — is that its officers are appointed in an unconstitutional manner.

Under the Appointments Clause of Article II, section 2, the president has the exclusive power to appoint and remove government officials. The members of the PCAOB – which enforces the massive regulatory scheme Sarbanes-Oxley imposes on public companies – are appointed by the SEC, however, which then has limited supervisory/removal power. While this structural defect may seem like a minor technicality, what it means is that the awesome power to set accounting standards — not least Sarbox section 404, which has cost the economy over a trillion dollars — impose taxes, and levy criminal and civil penalties is vested in a bunch of unaccountable bureaucrats. Entities with similar authority, even those having a modicum of political independence, such as the IRS Commissioner and Federal Reserve governors, are all vetted by the president and the Senate.

The court below (the D.C. Circuit), however, held that PCAOB members are inferior officers and, as such, Congress “may limit and restrict the power of removal as it deems best for the public interest.” But this gets the Constitution backwards; Congress isn’t allowed to insulate important decisionmakers from political accountability. As CEI’s press release says:

If the President can pick and remove the PCAOB members, as the Appointments
Clause requires, he will be on the hook for their policy failures, and thus have
an interest in making them develop sound policies that protect investors and
don’t stifle economic growth. He won’t be able to blame the red tape on an
unaccountable agency whose officials he doesn’t select or control.

The Court will hear the case, Free Enterprise Fund v. PCAOB — which I previously blogged about here – in late fall.

[Cross-posted at Cato's blog.]