The case, Free Enterprise Fund v. The Public Company Accounting Oversight Board, was filed in U.S. District Court for the District of Columbia by plaintiffs the Free Action Enterprise Fund and a small accounting firm, Beckstead & Watts, LLP. The 24 page complaint alleges violation of the separation of powers doctrine, the non-delegation doctrine and the appointments clause of the Constitution, because the Public Accounting Oversight Board’s members are neither appointed nor removable by the President.
Some commentators, such as the blawg Overlawyered.com (here), have opined:
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.
On the other hand, the research firm, Glass, Lewis& Co., found that, in 2003, 4 % of all listed U.S. firms restated their reported earnings to correct mistakes. Under Sarbanes-Oxley, which imposed stricter scrutiny, that number increased in 2006 to nearly 12 %. Since then, it has edged down, as companies have improved their internal financial controls. Some argue that’s good for investors and good for management, too, because CEOs make better decisions when they have more accurate financial information to work with.
The Washington Post (here) reports that, if the lawsuit prevails, the entire Act would fall, because it lacks a “severability” clause –if one of its provisions is found to be unconstitutional, the whole law would be stricken.
Update: After doing some further research, it seems the Washington Post article wasn’t entirely clear that the district court case was already decided against plaintiffs on summary judgment.
Although the court found that plaintiffs Beckstead & Watts had standing as to the Motions to Dismiss, it reached the merits on all three constitutional claims.
The memorandum decision is here. The appeal docket is here.
As to the Appointments Clause, the district court concluded that PCAOB members are, in fact, inferior officers and, to the extent that plaintiffs claimed PCAOB members should have been appointed by the SEC Chairman (rather than by the entire Commission), plaintiffs lacked standing.
As to the Separation of Powers doctrine, the court noted that the Supreme Court has never held that the Constitution requires the President to maintain direct removal power over inferior officers and here the President has not been “completely stripped” of his ability to remove PCAOB members, because SEC Commissioners can be removed by the President for cause can be removed by the SEC “for good cause shown”
As to the non-delegation doctrine, the court found that legislative delegation effected by the Act is squarely within the bounds of modern non-delegation doctrine, because the auditing, quality control, and ethics standards the PCAOB applies “must either be ‘required by [the] Act or the rules of the Commission or necessary or appropriate in the public interest or for the protection of investors.” (citing 15 U.S.C. § 7213(a)(1)). The court declared that the foregoing are “intelligible” standards that the Supreme Court has acknowledged in “various statutes authorizing regulation in the public interest.”
Note the entry of appearance by Ken Starr on behalf of the plaintiff-appellants.